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Richard Bernstein has an interesting perspective on whether investors should be buying growth or value stocks – he says it’s not going to matter.

Mr. Bernstein is the former chief quantitative strategist at Merrill Lynch and founder of New York-based RB Advisors. In his most recent research report, “Profits not Politics”, he argued that U.S. stocks – and by extension most of the world’s markets – are in the midst of a profit slowdown that began in 2018.

Mr. Bernstein notes that year over year GAAP earnings growth at the end of last year was 20 per cent while profits for 2019 are expected at between zero and five per cent. At this stage of the cycle, the distinction between growth and value indices and their future performance is not a question worth asking,

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“The current discussion of growth versus value seems to miss the point. Growth universes are generally dominated by Technology. Value universes are generally dominated by Financials. Tech is the 3rd worst performing sector historically when profits cycles decelerate, and Financials are the 2nd worst.”

A sector-oriented perspective is far more productive in the strategists’ mind. I’ve posted a chart from Mr. Bernstein’s report on social media that shows the average sector returns during profit slowdowns.

Health-care returns were best, averaging 28 per cent, with consumer staples, utilities and telecommunications close behind. Worst performing sectors were, in order, materials, financials and information technology.

Translating this analysis to Canadian equities is tricky because of the S&P/TSX Composite’s lack of diversification. The domestic health-care sector is dominated by two cannabis stocks (which don’t trade similarly to broader health care sector) and one very volatile company – Bausch Health Co.s Inc. (the former Valeant).

Unlike the S&P 500, there are no health-care equipment companies, global pharmaceutical giants, orthopedics providers or health insurers in the Canadian subindex. So, we can’t expect the performance characteristics of the U.S. health care index during a profit slowdown to be matched here.

Similarly, the biggest weighting in the S&P/TSX Consumer Staples index, Alimentation Couche-Tard Inc., generates 87 per cent of its revenue for the U.S. and Europe. This creates a benchmark less reflective of domestic conditions.

The year-to-date returns for Canadian utilities and materials stocks does appear to support Mr. Bernstein’s profit slowdown thesis. Utility stocks have easily outperformed the benchmark – 20.2 per cent versus 13.2 per cent – and materials have underperformed the S&P/TSX Composite by seven per cent.

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Canadian utilities and U.S. health care stocks appear a solid bet for investors for as long as Mr. Bernstein’s scenario of slowing profits play out.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stock to ponder

Redishred Capital Corp. (KUT-X): Mississauga-based Redishred provides recycling and destruction services - shredding information sensitive documents through its corporate and franchise locations across the U.S. There are two analysts covering this micro-cap stock with a market capitalization of just $61-million, and both analysts have “buy” recommendations. They are predicting significant gains over the next 12 months. Jennifer Dowty profiles the stock. (for subscribers).

Indigo Books and Music (IDG-T): At the end of May, Indigo Books & Music Inc. announced a loss of almost $37-million for the year ended March of 2019, and the stock promptly tanked 20 per cent on heavy volume. Chief executive officer Heather Reisman said the company had incurred significant expenses associated with store renovations and relocations, compounded by the Canada Post strike. Same-store sales were down 1.1 per cent, and the sole U.S. location is “going to do okay, but it is not knocking it out of the park.” The company’s strategy will not be a renewed emphasis on the book business but rather a refocus on general merchandise. Robert Tattersall looks at whether the stock may be the next candidate to go private.

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The Rundown

Pension funds tout rewards of active investing

The active investing approach used by the Canada Pension Plan Investment Board appears to be paying off, adding nearly $50-billion to the fund’s asset base over the past 12 years, according to an analysis by the Parliamentary Budget Office (PBO). Since shifting away from a passive indexing strategy in 2006, the CPPIB has since invested heavily in alternative markets and private equity, building up large stakes in things such as office towers, toll highways and shopping centres around the world. The CPPIB’s own reporting suggests those kinds of assets are delivering higher long-term returns than can be found in public securities − a conclusion supported by the PBO report. Tim Shufelt reports (for subscribers)

Three stocks poised to benefit from the revolt against plastics

There are real opportunities for investors wanting to marry their interest in improving environmental outcomes with returns, primarily by looking to companies that have found novel solutions by turning plastic waste into highly beneficial products, as well as in those companies that provide essential waste services. Here are three stocks that stand to benefit from our shift to using less plastic, according to an AGF fund manager.

Others (for subscribers)

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Three profitable companies leading the way toward a green economy

Wednesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: CEO invests $600,000 in this plummeting dividend stock

Wednesday’s small-cap stocks to watch

Others (for everyone)

Analysts split on Tesla’s delivery promises for 2019

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Globe Advisor

Complex planning needed for grandparents helping grandchildren

For many couples, diverging views on investing run deep

Are you a financial advisor? Register to Globe Advisor ( for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation – a powerful tool to help you manage your clients’ portfolios.

Ask Globe Investor

Question: I wanted to make an in-kind withdrawal of $30,000 of shares from my RRSP to my non-registered account. I knew there would be withholding tax of 30 per cent, but when I asked my broker to take the withholding tax out of funds in my non-registered account they refused. They said the withholding tax would have to come from my RRSP, but I don’t have enough cash there. Why would the Canada Revenue Agency care where the withholding tax comes from as long as they get their 30 per cent?

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Answer: First, some background.

When you make an RRSP withdrawal, there are two amounts to consider: the gross amount of the withdrawal, and the net amount. The gross amount is the dollar value that actually leaves your RRSP; the net amount is how much you end up with after your financial institution deducts withholding tax from the gross amount. Withholding tax rates are 10 per cent for gross RRSP withdrawals up to $5,000; 20 per cent for amounts from $5,001 to $15,000; and 30 per cent for amounts over $15,000. (Withholding rates are different in Quebec).

With cash withdrawals, it’s all pretty straightforward. If you were to withdraw $30,000 gross in cash from your RRSP, for example, the financial institution would remit 30 per cent, or $9,000, of withholding tax to the government and hand you a net $21,000. The gross withdrawal of $30,000 would be added to your income, and the $9,000 of tax withheld would be credited toward your taxes payable for the year. (You could end up paying more tax, or less, on the withdrawal depending on your total income and other factors.)

With in-kind withdrawals, however, it’s a bit more complicated. Withdrawing $30,000 of shares from your RRSP would actually constitute a net withdrawal of $30,000, because you would be transferring $30,000 of value to your non-registered account. To calculate the gross amount of the withdrawal, you would need to determine the dollar value which, after deducting 30 per cent, would equal $30,000. This “grossed-up” amount works out to $42,857 ($30,000/0.7), which is the amount that would be added to your income for the year. The difference of $12,857 between the gross and net withdrawals represents the withholding tax that your financial institution would remit to the government.

When making an in-kind RRSP withdrawal, therefore, you must have sufficient cash in your RRSP to cover the withholding tax. Why couldn’t the financial institution just take the withholding tax from your non-registered account? Canada’s income-tax regulations don’t allow it. “The rule is that the withholding tax must be deducted from the payment coming out of the registered account,” Dorothy Kelt, who runs, said in an interview. If the reader doesn’t have sufficient cash in his RRSP, “his only choice is to sell something so he has the money to pay the tax,” she said.

--John Heinzl

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

Is the meatless trend really worth investing in? Ian McGugan will have a detailed analysis this weekend.

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

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Click here share your view of our newsletter and give us your suggestions.

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Roma Luciw and Darcy Keith

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