Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO equity strategist Brian Belski noted that foreign interest in Canadian equities has all-but disappeared,
"Lack of foreign and even domestic interest in Canadian equities has hit extreme levels, depressing both valuations and relative price performance. However, we believe when (not if) interest returns, Canadian equities are likely to see a strong tailwind, particularly within Financials… "
Mr. Belski also highlighted the recent underperformance of dividend investing strategies but believes these sectors are poised for a comeback,
“Dividend Underperformance Has Been Extreme … With the thirst for yield poised to return, we believe higher yielding sectors with reasonable payout ratios are poised to benefit. This is particularly true for both Communication Services and Financials, which have relatively high yields and among the lowest payouts within the high yield sectors.”
BMO provided a top picks list of North American dividend growth stocks. The list is too long to list all the names, but prominent stocks include BCE Inc., Telus Corp., McDonald’s Corp., PepsiCo Inc., Enbridge Inc., Manulife Financial Corp., Power Corp of Canada , JP Morgan Chase & Co., Royal Bank, Amgen, Gilead Sciences Inc., Merck & Co. Inc., Canadian National Railway Co., Lockheed Martin Corp., Microsoft Corp., Cisco Systems Inc. and Brookfield Infrastructure Partners LP.
“@SBarlow_ROB BMO_NA dividend growth portfolio” – (table) Twitter
Credit Suisse’s prominent global equity strategist Andrew Garthwaite is reducing his overweight recommendation in technology stocks,
“Tech is only modestly expensive if we use the key matrix of FCF [free cash flow] yield versus the market. The biggest tech stocks offer a median 2021 FCF yield of 3.6% … and 3% in 2020 on consensus… tech accounts for 36% of economic value creation compared to a share of market cap of 25% with its share of earnings much more commensurate with its share of market cap than was the case in 1998-2000). Historically, bubbles have re-rated to a P/E of 45x to 72x, and the Nasdaq is currently on 37x… We reduce the size of our overweight: i) More demanding valuation on software … cloud companies trade on 7x 2022 consensus estimates of total addressable market (=33x earnings); ii) Market concentration is extreme (tech+ is the same share of market cap as it was in 2000, and the top five stocks are 26% of US market cap compared to the all-time high of 30% in Japan in 2000); we have also started to see a loss of breadth (which became more extreme in Japan in 1985-90 or in the TMT bubble); iii) Higher regulation risk (especially in the event of a Biden victory) and tax risk.. We like gaming stocks (P/E relative at 2009 lows) such as Activision Blizzard and Frontier Developments and are overweight telecom equipment, where P/E relatives are close to all-time lows and the outlook is particularly strong (Ericsson)”
“@SBarlow_ROB CS reduces OW in tech” – (research excerpt) Twitter
Michael Pettis, finance professor at Peking University, warned that China’s economic recovery is not as good as it looks in a (free to read with registration) column for the Financial Times' Alphaville site,
"[Recent data] ndicate just how lop-sided and vulnerable China’s recovery has been so far. As the graph below shows, before 2020 retail sales had grown slightly faster than industrial production, indicating a slow rebalancing in an economy that urgently needed it. But in 2020 that relationship has inverted, with industrial production now growing so much faster than retail sales that it threatens to reverse the past two to three years of China’s limited rebalancing … Beijing has publicly admitted for over a decade that the real constraint [on GDP growth] is the demand side: specifically domestic consumption, along with the private sector investment driven by said consumption'
“Why China’s recovery is not what it seems” – FT Alphaville
Column: “This TSX sector might be a better way to profit from the global economic recovery” – Barlow, Inside the Market
Diversion: “Will Arnett Teaches You Canadian Slang” - Vanity Fair (video)
Tweet of the Day:
Jim Grant on QE and inflation:— David Hannan (@davidhannan1963) September 16, 2020
“What I missed in 2011 was the technical fact that the dollar bills that the Fed was creating effortlessly were not in circulation in the broad economy . . . but were locked up in the reserve accounts of the banks at the Federal Reserve system."
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