Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
TD Economist Marc Ercolao notes that Canadians’ standard of living is falling behind developed world nations.
“Canada has lagged behind the U.S. and other advanced economies in terms of standard of living performance (or real GDP per capita). This underperformance accelerated after the 2014-15 oil price shock and has continued in the wake of the pandemic. What’s more, little turnaround appears to be on the horizon. There may be a tendency to pin the blame for Canada’s sagging per-capita showing on the country’s rapidly growing population base given that it has inflated the denominator of the calculation. However, at the crux of the problem is insufficient growth in the numerator, which in turn is tied to longstanding productivity issues. Regionally, commodity-based economies (Alberta, Saskatchewan, and Newfoundland & Labrador) continue to record the highest per-capita GDP levels, but their status as leaders has come under some pressure over the past decade. Post pandemic, only British Columbia and PEI have managed to recover back to 2019 GDP per capita levels”
Mr. Ercolao blames a lack of investment in nonresidential structures, machinery and equipment and intellectual property, a decline in research and development and a general concentration in small businesses for the productivity shortfall.
“Mind the Gap: Canada is Falling Behind the Standard-of-Living Curve” – TD Economics
***
BMO chief investment strategist Brian Belski has increasing confidence in Canadian equities.
“We believe confidence in earnings will be an essential catalyst for the TSX to regain price momentum in the second half. As such, earnings revisions trends and reversals are one of the primary variables we are examining from an investment strategy perspective in Canada as the year continues to unfold. Yes, the more cyclical areas of the market (Technology and now Consumer Discretionary) have already started to see an improvement in revision trends, while some of the more classically defensive areas have seen revision trends turn negative (E.g., Consumer Staples). However, the big three sectors (Energy, Financials and Materials) are approaching key revision inflection points, according to our models. For instance, revisions within the resource sectors appear to be bottoming, with the breadth of positive changes starting to improve over the last few months. Meanwhile Financials have seen a sharp drop in breadth of revisions and are now flagging a strong contrarian positive. Overall, we continue to believe 2H23 will be defined by a combination platter of stabilizing revision trends and improving longer-term earnings outlooks, thereby ultimately generating newfound investor confidence.”
***
BofA Securities U.S. quantitative strategist Savita Subramanian addressed the severe degree of market concentration in the S&P 500.
“Seven stocks, making up close to 11tn in market capitalization today, contributed 73% of returns of the S&P 500 in the first half of 2023 … What are the important catalysts to watch for? A: (1) Ownership: most funds own these stocks, the closer we get to 100%, the fewer funds are left to buy. (2) companies can change pole position, take or cede share (e.g., MSFT and cyber, ADBE and AI) and our analysts’ views are paramount. (3) 2024 campaign season could reintroduce regulation risk. (4) Higher rates hurt long duration stocks. And (5)the Tech capex pull-forward during COVID was similar to Y2K, after which Tech capex collapsed … How should equity investors position for the 2H? A: We expect opportunities to broaden: valuations for the S&P 500 ex-7 sit at ~15x EPS vs. 40x for the Top 7; returns based on price objectives are higher for the eq-wtd S&P 500. But earnings expectations for the Top 7 far exceed those of the average S&P 500 stock. We would avoid crowded, expensive Tech companies losing share. But mega cap Tech companies that are market share leaders should be considered core holdings”
***
Diversion: “Doctor Who Livestreamed Surgeries on TikTok Has License Yanked, Thank God” – Gizmodo
Tweet of the Day: “Banks have been less willing to lend to consumers, which typically coincides with recessions” – Twitter
Scott Barlow