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The research team at BofA Securities has produced a report that helpfully outlines the dominant three global themes they expect will affect investing portfolios for the remainder of 2021. What these trends will mean for Canadian equities is mixed, and in an interesting way.

The first theme involves a strengthening global economy thanks to ongoing vaccination programs in Asia and Brazil, combined with a developed world consumer shift from buying goods to buying services and experiences after months cooped up in their homes.

The commodity-heavy TSX benefits from a recovering global economy because of the resource-intensive growth profile of developing economies - they use more commodities for each unit of GDP growth than G-10 economies, which lean more heavily on services industries.

However, the switch from goods – gaming consoles, furniture and lumber for renovations and the like - to buying services like restaurant meals, and vacationing, is less conducive to TSX outperformance. More air and ground travel will boost oil consumption but Canadian mining companies and other materials providers don’t benefit as much from global consumer services spending as they do from goods orders.

The second major theme - and I’ve been waiting on someone to emphasize this - is China’s ongoing efforts to curb debt growth. The country’s incredible growth has previously been funded primarily through bank lending to infrastructure constructors and real estate developers.

The economy has reached the point where extensive debt growth is required for any incremental growth, and regulators are looking to curb lending. The current pace of credit growth is in the 30th percentile relative to the historical average.

As a rule of thumb, China consumes about half of the world’s major commodity production. Slowing Chinese lending and investment is thus a clear negative for Canadian commodity producers, and that includes the energy sector this time. “Couple [this trend] with the spending move away from goods to services,” BofA writes, “and the current consensus bullish views on cyclicals/commodities would be put to the test”

The third theme involves central banks, specifically the possibility that the Federal Reserve will announce a reduction in open market bond purchases (quantitative easing). BofA’s view on this is straightforward.

They note that stock prices are affected by combined asset purchases by all of the major central banks – the Fed, the European Central Bank, the People’s Bank of China and the Bank of Japan – and rarely the actions of one bank alone. Because the total asset purchases by all banks is expected to climb by an additional US$1.6-trillion, even if the Federal Reserve reduces buying amounts, they do not believe equities will suffer from this theme in 2021.

My overall takeaway from the report is that markets have entered a transition stage. The easy money on stocks most sensitive to the global economic recovery has been made already and investors will have to be more selective about which market sectors are likely to outperform. The rising tide of recovering global economic growth will no longer lift all equity boats.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Alaris Equity Partners Income Trust (AD-UN-T) The average one-year target price among analysts for this trust implies a potential price return of 26 per cent over the next year - and that doesn’t even include the attractive 7 per cent yield. The trust has multiple potential catalysts, which may lift the unit price back to pre-COVID levels. Another encouraging sign: the trust’s payout ratio is nearing a historical low. Jennifer Dowty provides a profile of the trust.

The Rundown

Looking for some defensive stocks for your portfolio? Try defence stocks

There is a corner of this exuberant stock market where it is still possible to buy shares in outstanding companies at reasonable valuations: the U.S. defence industry. The sector has a long history of delivering big rewards for shareholders. For some reason, though, investors seem curiously unexcited by its potential. Ian McGugan looks at the investment case.

Gordon Pape’s TSX outlook for the second half of 2021

The first half of 2021 is over, and it was an extremely positive one for the stock markets. All the major North American indexes were up by double digits as the economy roared back from the slowdowns imposed by the pandemic - and the biggest winner was our own TSX. So, what’s in store for the rest of the year? Gordon Pape offers his predictions for the Canadian stock market, including an expectation that financials will continue to perform well.

With limitations of remote work becoming more evident, REITs will be among biggest beneficiaries

Sorry, telecommuters. Obituaries for the office were premature. As vaccination levels soar and the limitations of remote work become more evident, a growing number of companies are planning at least partial returns to cubicle land. Investors should pay attention. Some of the most direct beneficiaries of a return to the office would be real estate investment trusts, such as Allied Properties REIT, which lease prime office space in downtown cores. More retail-oriented landlords, such as RioCan REIT, would also stand to gain if the return of office workers helps to re-energize downtown shops and restaurants and spur more demand for storefront spaces. Ian McGugan looks at whether now’s the time to get back into these REITs.

Also see: Boardwalk REIT insiders accumulate units

Investors eye high-dividend stocks as Treasury yields languish

Expectations that Treasury yields may stay tame in the second half of the year are pushing some investors to take a second look at companies whose dividend payouts beat those offered on U.S. government bonds. The ProShares S&P Dividend Aristocrats ETF - a measure of companies that have increased their dividends annually for the last 25 years or more - is up 14.3% this year, compared to a 15.8% rise for the benchmark S&P 500. Some investors believe these stocks may be a good bet in coming months, however, as a more hawkish tone from the Federal Reserve and signs of peaking growth dent expectations that Treasury yields will resume a surge that began in the first quarter but has more recently died down. David Randall of Reuters reports.

Others (for subscribers)

The most oversold and overbought stocks on the TSX

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: Mining billionaire invests $2-million in this stock that’s doubled in value in 2021

John Heinzl’s model dividend growth portfolio as of June 30, 2021

Globe Advisor

The Financial Times: Record Skew Index shows nagging investor nerves on U.S. stocks rally

The Financial Times: Emerging markets diverge from playbook

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Ask Globe Investor

Question: I purchased the TD Nasdaq Index Fund (Investor Series) for my tax-free savings account through an adviser at a TD Canada Trust branch. My understanding is that the fund is subject to U.S. withholding tax, but the bank denies this. Can you settle this?

Answer: Any Canadian mutual fund or Canadian exchange-traded fund that invests in U.S. equities is generally subject to a 15-per-cent U.S. withholding tax on the underlying dividends, regardless of the account type in which the fund is held. The only way to avoid withholding tax on U.S. dividends is to: a) invest in a U.S.-listed ETF or U.S. stocks directly, and b), hold that investment in a registered retirement account. A TFSA does not qualify for the exemption.

But here’s the thing: Nobody buys the Nasdaq-100 Index (which your mutual fund tracks) for the dividends; they buy it for growth. The tech-heavy index yields just 0.7 per cent which, at a 15-per-cent withholding rate, works out to an annual tax hit of just 0.105 per cent.

Now, compare that with your mutual fund’s management expense ratio, which is 1 per cent – or nearly 10 times higher. The MER alone is more than enough to wipe out the 0.7-per-cent dividend yield from the stocks in the index, which explains why the TD Nasdaq Index Fund has paid zero distributions over the past five years (which is as far back as the data go in the most recent Annual Management Report of Fund Performance.)

So withholding tax is not your biggest enemy here.

There are cheaper ways to invest in the Nasdaq, including TD’s own e-series Nasdaq Index Fund, which has an MER of 0.5 per cent. You could cut your costs even further by opening a self-directed discount brokerage account and investing in ETFs.

If you’re more comfortable working with an adviser, you could certainly do worse than paying an MER of 1 per cent. So I’m not suggesting you urgently need to shake things up. But I wouldn’t spend another minute worrying about a tiny amount of withholding tax on a growth-focused mutual fund.

--John Heinzl

What’s up in the days ahead

This weekend, get ready for an indepth look at what investors may face in the second half of 2021.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff