B of A Securities (formerly Merrill Lynch) global quantitative strategist Nigel Tupper’s proprietary Global Wave model predicts a massive surge in global profit growth which will boost equity markets, economic activity and cyclical market sectors. The forecast is particularly positive for Canadian investors.
There are seven broad components of Mr. Tupper’s model, all global in scope: industrial confidence, consumer confidence, capacity utilization, employment, producer prices, credit spreads, and the earnings revision ratio (the percentage of stocks seeing upwards moves in forward profit estimates).
All of these factors pointed to higher profits in October, and that was before news of a potential COVID-19 vaccine this week. The strategist also noted that industrial confidence improved in 90 per cent of companies last month and consumer confidence improved in 60 per cent of all countries.
The biggest beneficiaries of the rising tide of profit growth are a group of stocks Mr. Tupper terms boosters. These companies have lower quality balance sheets, earnings growth sensitive to the global economy, high beta (move more in percentage terms than benchmarks in both directions), smaller market capitalization, and their stock prices tend to move in the opposite direction of bond yields.
B of A’s current list of 30 favoured booster stocks includes three Canadian companies - Lundin Mining Corp., Teck Resources Ltd. and Blackberry Ltd. The European and developing world-based stocks on the list are unlikely to be of interest to many Canadian investors but it also includes seven U.S. names: MGM Resorts International, Diamondback Energy Inc., Sarepta Therapeutics Inc. and industrial firm XPO Logistics Inc.
The biggest losers in this profit resurgence scenario are likely to be dividend stocks in defensive sectors like utilities. Rising bond yields are part of this reflation trade and they make dividend yields less attractive.
The specifics of the current economic environment – which features the ongoing second wave of coronavirus infections in the Western world – means that investors shouldn’t be in a huge hurry to reposition their portfolios for a cyclical rebound. Mr. Tupper’s booster stock list – which he emphasizes is a basis for further research, not a recommended portfolio – provides ample food for thought for investors when the negative economic effects of the pandemic fade.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
European Residential Real Estate Investment Trust (ERE-UN-T) This REIT has provided investors with low price volatility and steady income with an attractive current annualized yield of 3.9 per cent. It owns a portfolio of 137 multi-residential properties located in the Netherlands, one office property in Germany, and one office property located in Belgium. It has a strong partnership with Canada’s largest residential landlord and has strong market fundamentals. Jennifer Dowty has a profile of the stock. (for subscribers)
Cargojet Inc. (CJT-T) Shares in the company are down sharply from their record high on Monday after Air Canada signalled plans to expand its cargo business. Analysts say Cargojet’s stock also tapered off alongside other names that benefitted from a surge in e-commerce during the pandemic, amid rising hopes for a COVID-19 vaccine. But some contend that Cargojet’s fundamentals and corporate growth are very much intact. Brenda Bouw reports. (for subscribers)
Chorus Aviation Inc. (CHR-T) When it comes to COVID-19, we are not out of the woods yet, with a vaccine still at least several months away and coronavirus cases on the rise. As a result, airline stocks will likely see "back and fill' action where gains are not linear, says Jennifer Dowty. Expect to see rallies and pullbacks with the overall trend rising for these stocks. Consequently, do not be a buyer when these stocks pop but wait for the stocks to retreat and slowly accumulate positions if you have a longer-term time horizon as the economics for these companies will take time to improve. Chorus Aviation is a case in point. Jennifer profiles that stock here. (for subscribers)
Pfizer’s promising COVID-19 vaccine is a potential game changer for the economy and how to invest
It was a giant leap forward Monday with the Pfizer announcement on the efficacy of its Phase 3 COVID-19 vaccine trial. Markets are already pricing in that inoculations will begin by the end of the first quarter of 2021, David Rosenberg notes. That means no first-quarter U.S. GDP contraction and it means a likely second-quarter economic boom. He shares more thoughts on what the potential medical breakthrough may mean for markets, investing decisions, and the economy. (for subscribers)
Beware of whiplash in ‘normality trade’
The mere glimpse of economic and political ‘normality’ returning with last week’s U.S. election results and COVID-19 vaccine breakthrough prompted a scramble for burnt-out ‘value’ stocks, bonds and currencies and away from lockdown winners, safe-havens and anti-globalisation plays. But reversing investment course either sectorally or geographically may not make sense for long, as Mike Dolan of Reuters tells us. (for subscribers)
Read this if you think hot stock markets mean savings accounts are for suckers
This is a most bizarre year for watching investors manage the eternal tension between greed and fear. On one hand, there’s a global pandemic that seems unconquerable without a vaccine. On the other, stock markets have been spectacular since a March crash triggered by that same pandemic. The stock markets have sloughed off the pandemic and investors are getting cocky about risk. Rob Carrick shares some examples. (for subscribers)
Fear on the wild frontier as riskier stock markets left trailing
Frontier stocks have trailed bigger emerging markets in recovering from the coronavirus-induced crash as liquidity has dried up and investors beat a hasty retreat. BMO Global Asset Management is among companies winding up frontier markets' funds. Money managers say assets under management in dedicated frontier funds have tumbled to close to US$4 billion from around $15 billion in 2014, when from Nigeria to Lebanon, markets once seen as too risky saw an influx of money, with investors betting on fast-growing economies and idiosyncratic investment stories. Tom Arnold of Reuters tells us more. (for subscribers)
Others (for subscribers)
Tuesday’s Insider Report: Company leaders are buying this depressed large-cap stock that jumped 12% on Monday
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Q&A: Investing in a volatile market
Join personal finance columnist Rob Carrick and his guest Naheed Gilani, founder of Founder of Conscious Wealth, this Friday at 12 p.m. ET (9 a.m. PT) for a live webcast where they will discuss strategies, tactics, and what to be mindful of when investing in a volatile market. This is a Globe and Mail subscriber exclusive webcast. Subscribers can register here.
Ask Globe Investor
Question: I have owned Brookfield Renewable Partners LP for more than 10 years. When BEP.UN has distributed return of capital (ROC) in the past, I have deducted the ROC from my adjusted cost base, as required. If I now deduct the fair market value of the recently issued Brookfield Renewable Corp. shares from the cost base of my BEP.UN units, my cost base will be negative. How do I handle this for tax purposes?
Answer: In general, once the adjusted cost base (ACB) of an investment reaches zero, any further return of capital distributions are reported as capital gains in the current year. The ACB of the investment is therefore deemed to be zero for the purposes of calculating the capital gain when the investment is eventually sold.
This is consistent with the explanation provided in the prospectus for BEP.UN’s special distribution of BEPC units. If the ACB of a Canadian resident investor’s interest in BEP.UN is negative, “the absolute value of such amount is generally deemed to be a capital gain realized by the resident holder and the … adjusted cost base of the resident holder’s interest in [BEP.UN] will be reset to nil,” the prospectus states. Get professional tax advice if you are unsure of how to proceed.
What’s up in the days ahead
Thinking about using the services of a robo-adviser for your investments? Then you won’t want to miss Rob Carrick’s annual guide comparing the digital portfolio platforms, coming this Friday to Globe Investor.
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Compiled by Globe Investor Staff