Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Citi economists Andrew Hollenhorst and Veronica Clark think the inflation genie might be out of the bottle,
“We have argued since early this year that above-target inflation was likely to be more persistent than Fed officials and markets expected. This is now clearly the case as longer-lasting supply-chain issues have led to a continuation of swift increases in goods prices. Our focus is now shifting to the potential for wage increases associated with tight labor markets to boost services inflation and become embedded in expectations. We forecast 2.5%YoY core PCE at the end of 2022, with risks still balanced to the upside. After a decade where markets focused on central banks’ inability to generate sufficient inflation, the regime is shifting to one where central banks will need to maintain credibility in being willing and able to head-off higher inflation scenarios. We see the risk of a 1970s type wage-price spiral in the US as at the most elevated since that time.”
“Citi: “Inflation – Is the genie out of the bottle? " – (research excerpt) Twitter
***
BofA quantitative strategist Savita Subramanian predicts modest returns for U.S. stocks in 2022 but the context surrounding this forecast is not reassuring,
“What will we say when we look back at today? Probably similar comments to 2000 hindsight: lofty expectations, Wall St. stock allocations up ~20ppt, retail/democratized markets, frenzied IPO activity; first Fed hike into an overvalued market. And acceptance of the unthinkable: a negative cost of equity in ‘00, negative real rates today. But the last sign of a bubble – excessive corporate/ consumer leverage – has been transferred to the government. And bubbles can produce great stocks: 1 of 4 IPOs in 1999 are blue chips today. Where does that leave us? Selective: commodities > cash > stocks > bonds, real inflation > asset inflation; small > large, value (free cash flow) > growth (long duration) … Free cash flow, Inflation protected yield, Quality Late Cycle sees uses of cash increase (capex, cost of financing and COGS[cost of goods sold]/labor) and free cash flow growth scarce. Amid higher debt costs, use enterprise value (EV) not equity value. Inflation-protected yield favors Energy, Financials and Real Estate.”
“BofA: “What will we say when we look back at today?” – (research excerpt) Twitter
***
BMO economist Shelly Kaushik marveled at the sheer scale of government financial support during the pandemic,
“Know that the federal government footed the lion’s share of the pandemic bill, but the extent of their support (red portion of the bar graph) is staggering. The feds took up almost 85% of the total $325.5 bln tab, while provincial, territorial, and local governments (blue bar) claimed the rest. Over two-thirds of the latter category’s deficits were shouldered by Alberta and Ontario, two provinces that struggled with weak energy prices and stringent lockdowns, respectively. Going forward, we expect general government deficits to return to normal, though the pace of the decline will depend on the timeline for ending key federal support programs. "
“BMO: “We know that the federal government footed the lion’s share of the pandemic bill, but the extent of their support ... is staggering” – (research excerpt) Twitter
***
BofA’s preview of Canadian bank earnings features an upgrade for Toronto-Dominion Bank a downgrade for Royal Bank of Canada, and Bank of Montreal listed as top pick,
" Group valuation at 11.2x/10.8x 2022/23e EPS and 1.6x YE22e P/Book in reasonable territory ahead of a pick-up in customer activity, rising interest rates, start of a new dividend hike cycle and buybacks … The current situation is ideal for TD to outperform given the optionally from rising interest rates (Schwab offers an added kicker), rebounding credit card balances and excess capital. Moreover, we believe that the recent reshuffle in leadership ranks could energize strategy execution (significant market share opportunity in the US, capital markets). We also consider TD as well positioned to strike a potential bank M&A deal in the US … we view RBC-RY as a best-in-class franchise and one that is particularly well positioned for an increasingly digital banking world, we see the lack of idiosyncratic catalysts combined with a premium valuation as limiting the potential for stock outperformance … BMO continues to offer an attractive risk/reward given the potential for superior top line revenue/loan growth and management’s laser focus on ROE optimization. We think BMO is also likely to announce among the larger dividend increases given a low payout ratio (33% of FY21e EPS) vs management’s approx. 45% target… …LatAm concerns mostly baked into Scotia-BNS”
“BofA’s top picks in Canadian banks” – (research excerpt) Twitter
***
Newsletter: “The difference between a good and great investor” – Globe Investor
Diversion: “Rolls-Royce Claims Its All-Electric Plane With the Clunky Name Is the World’s Fastest” - Gizmodo
Tweet of the Day:
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.