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Daily roundup of research and analysis from the The Globe and Mail’s market strategist Scott Barlow

The Financial Times described the trend of “fallen angels” – corporate bonds downgraded from investment grade to junk status – which is a much bigger threat to Canadian equities portfolios than many investors see,

“Some [institutional] investors are bound by requirements to hold only higher rated debt, as exemplified by Western Asset, one of the biggest bond managers in the US. Western has sought to avoid a fire sale by requesting more time to sell bonds issued by Occidental Petroleum, after the oil company was cut to junk last month … A record $90bn of debt fell to junk status in March, according to Deutsche Bank analysts. BofA warns that the total for the year could reach $200bn … Finding buyers for fallen angels could be challenging. The $6.7tn investment-grade bond market is far larger than the $1.2tn high-yield bond market, as measured by indices produced by Ice Data Services.”

The major risk here is that forced sales of junk bonds into illiquid markets causes a disorderly decline in prices. This implies sharply higher borrowing costs for junk-rated companies, and, if they are struggling with profit margins, potential default and bankruptcy.

I posted a table of the highest yielding stocks on the TSX Monday, which included current credit ratings. There are numerous cases where downgrades to junk are possible (although companies at risk can suspend dividends to protect credit ratings).

“Downgrades flood junk bond market with ‘fallen angels’” – Financial Times (paywall)

“The highest yielding stocks on the TSX, plus risk data’ – Barlow, Inside the Market


Morgan Stanley U.S. equity strategist is very bullish,

“We think this is the end of a cyclical bear market that began 2 years ago in the context of a secular bull market that began in 2011.”

Mr. Wilson expects a sharp V-shaped recovery in U.S. GDP - to 8 per cent in 2021.

The strategist presented a number of stocks screens providing investment options for clients. The list of stock that have historically outperformed as the market recovers from 25 per cent index corrections include Nike Inc.,, Ross Stores Inc., Autozone Inc., Lowe’s Co.s, Walmart Inc., Deere and Co., Microsoft Corp., Western Digital Corp., and Freeport McMoran Inc.

Mr. Wilson also posted his ‘Fresh Money Buy List” of top, high quality stock ideas. There are ten names on the list –, Walt Disney Co., Humana Inc., Johnson & Johnson, Linde PLC, MasterCard Inc., Microsoft, Proctor and Gamble co., S&P Global Inc., and T-Mobile U.S. Inc.

“@SBarlow_ROB MS' Wilson definitively in the 'V-shaped recovery' camp” – (chart) Twitter

“@SBarlow_ROB MS "Fresh money buy list"” – (table) Twitter

“ @SBarlow_ROB MS: Stocks that OP after 25 % SPX corrections” “ – (table) Twitter


BofA Securities analyst Vivek Arya continues to pound the table on semiconductor stocks as capital expenditure from cloud computing providers defies the economic slowdown,

“We estimate the demand on [Amazon, Google, Microsoft, Facebook, Alibaba, Tencent, Baidu] streaming/social/e-commerce/video/ messaging/gaming offerings can still drive a robust ~13% YoY growth in CY20 capex … The top chipmakers directly levered to secular computing/bandwidth/gaming trends include INTC, AVGO, NVDA, AMD, MRVL, and IPHI… ver the last five years, Amazon Web Services, Google Cloud, and Microsoft Azure sales have cumulatively grown at a compounded 60% rate, over 3x faster than the rest of the combined companies sales.”

“@SBarlow_ROB BoA: "Over the last five years, Amazon Web Services, Google Cloud, and Microsoft Azure sales have cumulatively grown at a compounded 60% rate, over 3x faster than the rest of the combined companies sales"” – (research excerpt) Twitter


Newsletter: “Strategists’ forecasts are all over the place, why bad news is losing its bite in markets, and the latest ETF Buyer’s Guide” – Globe Investor

Diversion: “The Secret Cruelty of T. S. Eliot” – The Atlantic

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