Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities U.S. quantitative strategy team says buy the TSX over the S&P 500,
“U.S. stocks look frothy, with the S&P 500 trading at 21.4x fwd earnings, the highest level since the Tech Bubble. Our Sell-Side Indicator (report) also suggests euphoric sentiment in the market. Meanwhile, the Canadian equity benchmark (TSX) trades at 17.0x, a two std. dev. discount to the S&P 500 (the steepest since the Tech Bubble). We believe the discount is overdone, especially when the composition of the TSX is much better positioned to benefit from the global economic recovery, which we believe is intact. Historically, when the discount was over one standard deviation below the average, the TSX outperformed the S&P 500 63% of the time by 8.4ppt on average. Accelerating vaccination in Canada also strengthens the economic outlook, where daily vaccinations have reached the peak U.S. level from April. We see favorable opportunities in the largest sectors in the TSX (Financials, Energy, Materials).”
The quant team, led by Savita Subramanian, rarely mentions Canada so this is notable.
“@SBarlow_ROB BoA quant team: Buy TSX - discount to SPX way too high” – (research excerpt) Twitter
Morgan Stanley U.S. equity strategist Michael Wilson reiterated his call for a significant correction in the S&P 500 as markets move from early- to mid-cycle,
“The Fed’s pivot to begin the tightening discussion caught most by surprise, but markets began discounting this inevitable process months ago in our view. It’s exactly what the mid cycle transition is all about, and fits nicely with our narrative for choppier equity markets and a 10-20% correction for the broader indices this year … bigger bulls continue to talk about “pent up demand”. We agree there is pent up demand for services consumption. We also think the degree of overconsumption in goods and the ensuing payback is underappreciated as the positive effects on income from the stimulus checks, and the surge in asset prices (including crypto), fades … The run in cyclicals has been historic, pushing relative price performance well above pre-COVID levels. Our statistical analysis on the macro regimes where cyclicals out/underperform has a clear message: cyclicals tend to underperform when the sequential rate of change is slowing in consumer confidence, GDP growth, inflation, PMIs and yields and that’s exactly the environment we think we’re in for the next quarter or two.”
“@SBarlow_ROB MS’s Wilson continues to worry about the second derivative of growth” – (research excerpt) Twitter
A spike to US$100 oil is rapidly becoming a consensus forecast.
BofA Securities commodity strategist Francisco Blanch published Oil’s All About The Benjamin over the weekend,
“The reported effectiveness of Covid-19 vaccines, coupled with further OPEC+ supply curbs, encouraged us to move our 2Q21 Brent target to $70/bbl in February … What comes next? Petroleum inventories are now below a 5y mean in OECD countries and should support Brent at $68/bbl on average in 2021, but ample OPEC+ spare capacity and a likely return of Iran barrels will likely cap oil prices this year… a combo of factors could push oil to $100/bbl (a “Benjamin”) next year, mostly on three key demand and three key supply factors. First, there is plenty of pent up mobility demand after an 18 month lockdown. Second, mass transit will lag, boosting private car usage for a prolonged period of time. Third, pre-pandemic studies show more remote work could result in more miles driven, as work-from-home turns into work-from-car. On the supply side, we expect government policy pressure in the US and around the world to curb capex over coming quarters to meet Paris goals”
“@SBarlow_ROB BoA: 3 1/2 reasons oil could spike to $100” – (research excerpt) Twitter
Newsletter: “Huge wave of inflows to equities will support markets: Goldman Sachs” – Globe Investor
Diversion: “I’m Scared of the Person TikTok Thinks I Am” – The Atlantic
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