A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO analyst Jenny Ma turned far more cautious on the domestic REIT sector.
“With dramatic changes having taken shape in the market year-to-date, we are pivoting our previously constructive Canadian REIT outlook for 2022 to a much more conservative view, reflecting our expectation of upward pressure on cap rates and downward pressure on cash flows from higher interest expense and a tempered expectation for internal and external growth. Consequently, we have lowered our NAV/unit estimates, resulting in lower target prices and the re-calibration of several ratings. In this report, we are upgrading BEI.UN and NWH.UN to Outperform (from Market Perform), and downgrading AX.UN, APR.UN, and SGR.U to Market Perform (from Outperform). These rating changes more reflect shifts in expected returns, rather than material changes in our investment theses…
Taking into account myriad new risks that have emerged, in our view investors should take a bottom-up approach to investing in Canadian REITs in the second half of 2022. Pecking order for asset classes: Within our Canadian REIT coverage universe, we prefer (in order) diversified commercial, multifamily, and retail. Our top picks for individual REITs are: HR.UN, BEI.UN, IIP.UN, MI.UN, CRR.UN, and REI.UN”
Citi energy analyst Alastair Syme details the problems with natural gas investment to combat Russian dependence.
“In response to G7 (=Europe’s) dependency on Russian gas, the group has changed its position on funding gas investment. This essentially means there is now a willingness to promote international LNG in order to allow Europe – medium term – to wean itself off Russian pipeline supply. But this about-face clearly still sits uncomfortably within the organization, as evidenced by substantial caveats that try to align to the group’s continued framework of a climate policy. Notably gas will only be funded if it is “temporary” in nature and can be backfilled by low-carbon and renewable hydrogen. There are unlikely to be many LNG developers that agree to invest on the basis of their project being a short-term solution. A look at greenfield US LNG development shows that base-case payback (a gas price of $7/MMBtu is roughly the 10Y average for Europe) is 12 years, presumably a period that would not be seen as temporary. Achieving a 5-7 year payback would look to require G7 buyers to be prepared to pay prices almost double long-run averages; that would be a fairly expensive insurance policy.”
“Desired G7 LNG investment problematic (Citi)” – (research excerpt) Twitter
Credit Suisse global strategist Andrew Garthwaite published Bond yields: probably seen their peak for now and implications. Here’s an excerpt,
“Bond yields rise if short rate expectations rise, we think a 3.5-4% peak Fed Funds (3.8% currently priced in) is the appropriate level because: i) a 4% Fed Funds rate on our model gives us the appropriately tight monetary conditions given the degree to which the economy is operating above full capacity; ii) our lead indicators are consistent with 0% GDP growth. We look at the collapse in housing affordability, the weakness of corporate confidence (which leads capex) and the weakness of ISM employment; iii) financial conditions are now modestly tight, but on a 4% Fed Funds rate would likely be very tight. Bonds have decoupled from falling PMIs by the largest amount in the past 30 years.”
“”Bonds have decoupled from falling PMIs by the largest amount in the past 30 years.” (CS)” – (research excerpt) Twitter
Diversion: “12 Award-Winning Nature Photos to Remind You That Outside Exists” – Gizmodo
Tweet of the Day: " Global price and supply pressures are easing, according to our Manufacturing #PMIs, with reports of supply #shortages at a 17-month low. Price pressures softened to the weakest in 1.5 years (1/2) http://ow.ly/FlxN50JNBBg " – Twitter
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