Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Morgan Stanley resource analyst Martijn Rats wrote the firm’s Sunday Start report usually reserved for equity strategists. The title was What on Earth is Going On with Commodities? ,
“Global coal consumption peaked back in 2013, yet the price of thermal coal is currently close to its all-time high, having more than doubled in the last few months to ~US$180/tonne. The same has happened to liquefied natural gas (LNG), which has rallied from ~US$7 to ~US$20/mmbtu over the last few months – also an all-time high … Aluminum prices have soared, from US$2,000/tonne at the start of the year to US$2,900/tonne today … A common set of factors ties these rallies together. As often happens, the story starts in China… Most of China’s electricity is produced from coal, but domestic coal production is increasingly struggling to keep up – the result of regulatory reforms, under-investment and more stringent HSE inspections. Another important source of electricity generation in China is hydropower, but because of droughts in key parts of the country, hydropower has failed to grow this year too … China’s domestic coal shortage compelled it to turn to the seaborne market. However, coal production elsewhere has also had its issues – e.g., heavy rains and staff shortages in Indonesia, railway disruptions in Russia and unrest in South Africa. As the seaborne coal market tightened, global coal prices rallied. The same factors drove up China’s demand for LNG”
For Mr. Rats, the situation highlights the thin margin of safety for global energy production, and how difficult the re-tooling towards renewables will be.
“@SBarlow_ROB MS, from “What on Earth is Going on in Commodities?’’ – (research excerpt) Twitter
BofA Securities strategist Haim Israel attempted to forecast the next 14 biggest waves and investing opportunities in technology in a 152 page report entitled To the Moon(shots)! - Future Tech Primer ,
“The pace at which themes are transforming businesses is blistering, but the adoption of many technologies – like smartphones or renewable energy – have surpassed experts’ forecasts by decades, because we often think linearly but progress occurs exponentially. And we haven’t seen anything yet: a paradigm shift in the explosion of data (we are generating 2.5 quintillion bytes of data every day which is doubling every 2-3Y), faster processing power (>1 trillion-fold increase since Apollo 11), and the rise of AI (already same IQ as a 6 year old) would bring about the fastest rollout of disruptive tech in history”
Of the 14 themes, the ones Mr. Israel believes will be investable first are 6G (data volume expansion), human brain connectivity to computers (tests already underway), AI/human emotion interface, synthetic biology (the world’s first artificial cornea will be implanted this year), and holograms.
“@SBarlow_ROB BofA: the next 14 potential technology ‘moonshots’ – (table, brief description) Twitter
Also from BofA, U.S. quantitative strategist Savita Subramanian sees negative forward 10-year returns for the S&P 500 and likes energy as the best way to generate income [in the U.S],
“And in the year to date, the S&P 500 has risen 19%, led by stronger-than-expected EPS (fwd EPS +29% YTD). However, we see both cyclical and secular risks ahead for earnings: (1) margin pressure from inflation (see our report entitled When good inflation goes bad), (2) peak globalization, where globalization has been a big driver of margin expansion over the last few decades, and (3) potential for corporate tax hikes, which could wipe out much of earnings growth next year. The market is statistically overvalued vs. history on 15 out of the 20 metrics we track, and our long-term valuation model (r-sq: 80%) is suggesting negative 10-yr returns for the S&P 500 for the first time since 1999. The only valuation reads that favor stocks are relative to bonds, and relative to long-term growth expectations (which are at risk). TINA (”there is no alternative”) remains a compelling argument for income-investors to buy stocks, especially amid rising inflation where bonds offer no inflation protection… If the Fed is intent on keep rates low despite above-trend inflation, buy what’s scarce: inflation-protected yield. S&P 500 Energy currently offers 2.2% in real dividend yield, far greater than one can get from TIPS (-1.0%), and offers the near record real Free-Cash-Flow yield vs. TIPS - a remarkable 500bps (Exhibit 2). Energy remained #1 in our tactical quant framework for the third straight month, despite price momentum falling to the bottom.”
“@SBarlow_ROB BofA: “Energy vs. TIPS never looked better for inflation hedge” – (research excerpt) Twitter
Diversion: “10 of the best films from TIFF — and when you can watch them” – CBC
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