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Investment Ideas Real estate vs. equities, utility stocks analysts love, and five charts for predicting where markets go next

Over the past five years, the Teranet-National Bank Housing Index increased 38.7 per cent and the S&P/TSX Composite Index climbed 30.6 per cent but the relative merits of real estate versus equity investment is a far more complicated question than these simple numbers tell.

Over the long term, housing prices should increase in accordance with the supply and demand balance (population and new construction) and national wealth as measured by gross domestic product per capita.

Interest rates are the biggest swing factor in home valuation over shorter periods – low mortgage rates put significant upward pressure on real estate prices. It is unlikely that domestic rates will climb substantially in the near future, but Canadians planning for the long term should note that borrowing costs have been declining for 35 years – boosting home prices – and don’t have much room to decline.

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Ben Carlson, director of institutional research at New York-based Ritholtz Wealth Management, recently published a column on the historic comparison between real estate and equity investment performance. Mr. Carlson quotes a study by the San Francisco Federal Reserve concluding that globally, from 1870 to 2015, real estate produced inflation-adjusted annual returns of 6.9 per cent compared to 6.7 per cent for equities. The study also noted lower volatility for real estate prices.

Mr. Carlson took issue with the latter claim,

“There’s no way you can definitively say real estate has experienced lower volatility than the stock market for the simple fact that stocks are liquid and houses are illiquid… There are benefits to the fact that there’s not a tradable market for your home five days a week for six-and-a-half-hours a day. The price fluctuations would drive people insane … But just because you can’t see the price changes doesn’t mean your asset is any less volatile.”

The author then broached the important subject of diversification, “In no way does owning one, two, or even 10 homes give you broad enough diversification in residential real estate to make an apt comparison to the overall market.”

The column deals with global and U.S. findings. Applying the same logic to Canada specifically carries important implications. The domestic equity market is commodity-heavy and lacks anything like the S&P 500’s degree of sector diversification. This makes Canadian equities far more volatile, and the odds of real estate outperforming equities in risk-adjusted terms is far higher than south of the border.

I don’t think we’ll ever get to a final answer in the housing or equity debate. For one, the more popular one option becomes, the less likely it is to outperform the other – if everyone sold equities to buy real estate, stocks would become dirt cheap and houses so expensive they’d have little potential upside. There’s also the important point that everyone has to live somewhere and some of the money saved by not buying a home goes to rent.

It seems unfair that the financial outcome of most important investment decision the majority of people make – how much house to buy and when, if at all – depends on timing and luck, the course of interest rates, and population growth relative to equity market appreciation. But that appears to be the case, and why the debate between asset classes will always be around.

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-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Berkshire Hathaway (BRK-B-N). Contra Guys Benj Gallander and Ben Stadelmann are major fans of Warren Buffett and his long-time partner Charlie Munger, who are surely two of the best investors in history. The two men have been remarkably disciplined on how they have measured Berkshire’s success with book value being at the heart of the valuation for over half a century. Reading Warren’s annual letters year after year, this key metric of assessment has been the same. But last year that all changed with the designated evaluation becoming the stock price. This does not make sense to Benj. (For subscribers).

Héroux-Devtek Inc. (HRX-T). This stock appears on the positive breakouts list (stocks with positive price momentum). The stock has been in an uptrend since the beginning of 2009, briefly breaching this uptrend in the fourth quarter of 2018 with the market meltdown. Year-to-date, the share price has increased 27 per cent and has positive earnings revisions and a unanimous buy recommendation from seven analysts. Longueuil, Que.-based Héroux-Devtek is involved in the design, development, manufacturing, and repair of landing gear systems and aerospace components. The company is an industry leader as the third largest landing gear company in the world. Jennifer Dowty reports (for subscribers).

The Rundown

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What’s next for markets? These five charts will show you the way

Investors fled equity markets in late 2018 in fear that rising interest rates and inflation pressures would threaten stock valuations and profit margins. This year, markets have recovered strongly after the Federal Reserve and the Bank of Canada, in part as a recognition of market volatility, backed off on their intentions to tighten monetary policy. The S&P/TSX Composite and S&P 500 have almost recovered all of the lost ground from their respective 2018 peaks with central banks in a cautious, wait-and-see position for the foreseeable future. So what’s next for investors? Scott Barlow takes a look at five key charts that help decipher where markets are headed. (For subscribers)

Take comfort investors: The recession-warning inverted yield curve is gone for now

The U.S. bond market is no longer signalling economic trouble ahead, bolstering the view held by a number of economists and central bankers that last month’s yield curve inversion – the first of its kind in more than a decade – was likely a brief blip rather than an omen. “As a signal, just the fact that it goes there is not sufficient. It has to persist there for some time,” Michael Gregory, deputy chief economist at BMO Nesbitt Burns, said. David Berman reports (for subscribers).

Three utility and power stocks that analysts love

Looking for stocks with attractive dividend yields and the ability to raise their payouts? Consider putting utilities and power producers on your shopping list. After a rough 2018 when the S&P/TSX Capped Utilities Index posted a total return of negative 7.7 per cent (including dividends), the sector has staged a strong rebound in 2019 as fears of rising interest rates – a key headwind for power and utilities stocks – have abated. For the year through March 31, the utilities index – which also includes independent power producers – posted a total return of 16.1 per cent. With government bond yields down sharply and central banks expected to hold rates steady for the rest of the year, or possibly cut them if the economy continues to sputter, analysts say the sector could see further gains. John Heinzl takes a look at three power and utilities stocks (for subscribers).

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Others (for subscribers)

Canada ranked among world’s least attractive markets

Twelve Canadian companies showing what steady earnings growth look like

Why these five tech stocks may be much cheaper than you think

Thursday’s Insider Report: CEOs are buying shares of these two dividend stocks

Thursday’s analyst upgrades and downgrades

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Thursday’s small-cap stocks to watch

Wednesday’s Insider Report: CEOs are buying these two beaten-down dividend stocks

Wednesday’s analyst upgrades and downgrades

Others (for everyone)

AGF roundtable: Why income investing is for everyone

IPWhoa: What to know before joining this year’s IPO parade

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What’s up in the days ahead

Yield inversions might predict recessions, but it’s quite another thing when it comes to market timing. Norman Rothery will tell us why.

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Compiled by Gillian Livingston

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