Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities analyst Ebrahim Poonawala has been among the more bearish observers of Canadian banks in recent months but is now much more optimistic on the outlook (my emphasis),
“Our meetings with the CFOs of the big five banks indicates a relatively low risk for a major credit hiccup … the pledge for continued fiscal stimulus from the Trudeau govt. should temper credit defaults. While low interest rates are likely to pressure revenue growth and ROEs [return on equity valuations] for the foreseeable future, we came away with the sense that the normalization in credit losses (PCLs) is likely occur at a faster timeline vs. previous economic cycles. We are revising our 2021 EPS estimates higher by an average of 3.2 % … We believe that adding exposure to some of the YTD laggards is needed in order to generate alpha over the coming months. We upgrade Scotiabank-BNS to a Buy from Neutral as we see current valuation (1.1x P/Book; 6.5% dividend yield) combined with the outlook for a gradual EPS recovery as offering an attractive risk/reward. We also upgrade BMO to Neutral as the de-rating in the stock reasonably reflects our cautious view on credit coming into the downturn.”
“@SBarlow_ROB BoA turns more bullish on Cdn banks” – (research excerpt) Twitter
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Scotia strategist Jean Ste-Marie noted that it’s not just Canadian office REITs struggling for revenue (my emphasis again),
“We recently highlighted the disconnect between the very strong housing market, where activity and prices are surging, and the weakness in the residential rental market (apartments). The latter suffering from a supply-demand distortion due to COVID-19. Issues facing the commercial rental market are better-known, but we note that the segment is also losing steam fast. Commercial rental price indices compiled by Statistics Canada highlight a 2.8% drop in Q2/20 among all categories ... This is the largest YOY drop since at least the financial crisis. Rent cuts are broadly distributed across sectors, although office buildings are suffering much more (-4.1% QoQ) than industrial ones (-1.8%). Given work at home trends that are unlikely to fully reverse, office building rent could remain under pressure for some time until the pandemic ends and a new equilibrium between staff at home vs. staff in the office emerges”
"@SBarlow_ROB BNS: “[Canadian] Commercial Rents Also Under Pressure” – (research excerpt) Twitter
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BMO chief investment strategist Brian Belski likes Canadian industrials, but only specific ones,
“The more cyclically oriented Industrials sector was the best performing sector in the third quarter… our work suggests Industrials remain one of the best positioned sectors for the recovery, even if there is another round of shutdowns. In fact, while Industrials are now approaching record level valuations relative to currently depressed earnings, profitability has remained broadly strong, cash flow generation is still high, and earnings growth expectations have started to rebound… although we remain Market Weight the sector, we believe investors should be highly selective and focus on the rails, select manufacturers, and waste companies – especially those leveraged to the US.”
Mr. Belski’s top picks in the sector are Canadian National Railway Co., Canadian Pacific Railway Ltd., and Waste Connections Inc.
"@SBarlow_ROB BMO: “our work suggests [Cdn] Industrials remain one of the best positioned sectors for the recovery” – (research excerpt) Twitter
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Citi U.S. investment strategist Tobias Levkovich sees fund managers beginning to prepare for a Democratic sweep in the upcoming U.S. election,
"With recent data showing a wide lead for Joe Biden over Donald Trump and the seeming Street consensus shifting from a contested election probability in a month’s time to a clear sweep by the Democrats, investors appear to be making some calls on likely outcomes with portfolio positioning shifts … Infrastructure spending can help economically sensitive names … we are hearing clients getting worried about higher taxation affecting the IT sector more than others, especially if there is a minimum corporate tax. Plus, the possibility of Biden lifting capital gains tax rates could hurt Tech to a greater extent. "
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Diversion: “America is Having a Moral Convulsion” – The Atlantic
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Scott Barlow