A market strategist offers five thoughts on the research, analysis and ephemera that’s crossed his desk this week.
1. Barclays analyst John Aiken downgraded the Canadian bank sector from overweight to negative in a Tuesday research report titled The Last Hurrah Ahead of a Potential Recession?
Investors might have expected a rosier outlook because the banks have underperformed the S&P/TSX Composite Index by almost 10 per cent over the past year, which has left valuations well below 2021 peaks.
Mr. Aiken expects that the banks’ imminent second-quarter profit reports will see healthy trailing results but also problems on the horizon. These include higher provisions for loan losses because of higher interest rates and a slowing economy, moderating loan growth and a lack of share buybacks. The analyst does, however, still expect dividend hikes.
2. BofA Securities’ Research Investment Committee is predicting a “third bull market for uranium” as a new nuclear power boom echoes the sector’s expansion in the late 1970s and the commodity price surge in the 2000s.
The demand for nuclear power will be driven not only by decarbonization, but also a global desire for energy security – European countries and others have learned natural-gas-related lessons after Russia’s invasion of Ukraine.
BofA analyst Michael Widmer forecasts uranium price upside of between 20 and 40 per cent as uranium supply fails to keep pace with demand. A higher commodity price would boost profit growth for Saskatchewan’s Cameco Corp. CCO-T which is listed in the report as a primary beneficiary of the trend.
Other stocks that would benefit include BWX Technologies Inc., Vistra Corp. and Constellation Energy Corp. For investors looking for a diversified approach, the U.S.-traded Global X Uranium ETF is suggested.
3. Both of China’s major purchasing manager surveys, for services and manufacturing, showed a decline for April when the economic reopening as COVID-19 has eased was expected to produce stronger results. In addition, the Financial Times reported that China’s import volume declined 7.9 per cent, year over year, in April, the largest decline in 12 months.
Capital Economics senior market economist Oliver Allen believes China’s economic growth has already peaked. He also notes that President Xi Jinping’s consolidation of power has led to a China “less friendly to private business; more risky to foreign investors; more authoritarian; more at risk of erratic policymaking; and more likely to slow economically.”
Industrial metals prices are dependent on Chinese demand to a significant extent. The weaker economic data has sent iron ore, for instance, to a five-month low.
4. SEC chair Gary Gensler warned that congressional failure to lift the U.S. government debt limit could be a cataclysmic event, as reported by the Financial Times’ Alphaville site (free with registration).
Mr. Gensler, who had earlier in his remarks noted that the Securities Act of 1933 was signed the same day as the Chicago World’s Fair opened, said “If the U.S. Treasury as an issuer were actually to default, it would have very significant, hard to predict, and likely lasting effects on investors, issuers, and markets alike. In a word, it would make the Cyclone Roller Coaster at the 1933 Chicago World’s Fair look like a kiddie ride.”
There are measures the Treasury Department can make to attempt to avoid default. But the potential for a government shutdown, even a short one, could easily cause a U.S. recession that will slow demand for Canadian goods.
5. In a Tuesday speech at the Sohn Investment Conference, famed investor and trader Stanley Druckenmiller touted the investment opportunities arising from the “very, very real” trend of artificial intelligence (AI). Mr. Druckenmiller owns Nvidia Corp. in his portfolio, a stock that BofA Securities called “picks and shovels leader in the AI gold rush” in a Thursday report.
BofA analyst Vivek Arya believes that AI-related data centre spending could add between US$200-million and US$300-million to Nvidia’s quarterly sales. Total data centre sales growth for the semiconductor provider is expected to come in between 9 and 15 per cent, year over year. The analyst expects that the market for AI-related equipment will rise from marginal levels in 2022 to US$50-billion by 2027.
Mr. Arya expects fierce competition, but notes Nvidia’s leadership position in necessary GPUs (graphic processor units) and the company’s honed AI business plan. The stock is not cheap, trading near 64 times forward earnings, but BofA believes that growth opportunities will push the stock price from about US$285 recently to US$340 in the next 12 months.