Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
National Bank chief economist and strategist Stéfane Marion sees volatility ahead in North American equities,
“We believe further weakness is ahead for the S&P 500 as we remain skeptical of the soft landing thesis and continue to see the economy in a three-quarter technical recession starting at the turn of 2024. Historically, the U.S. economy enters a recession 5 to 16 months after the yield curve inverts. It has now been 10 months since the current inversion. Adding to our concerns, the S&P 500 continues to trade at a rich valuation of just over 18 times forward earnings, a ratio that has never been this high when the U.S. yield curve is this inverted … The S&P/TSX is struggling in Q3, with all sectors except consumer staples and energy down. Materials have been hit particularly hard by the headwinds for gold stocks from the recent strengthening of the USD and the rise in real interest rates. Banks and consumer discretionary stocks are also notable underperformers. The weakness is due to concerns about the exposure of Canadian households to higher interest rates, as well as the fact that the Chinese economy is slowing rapidly… Canadian bank valuations are being driven by concerns that an impending payment shock could cause a number of homeowners to default and weaken the mark-to-market value of the mortgages held by the banks. This is not our baseline scenario at this point”
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Canaccord analyst Martin Roberge summarized the earnings reports so far for Canadian banks,
“Still early in the loan-loss provision cycle. RBC (beat) and TD (miss) kickstarted banks’ earnings season last week. Growth in loan originations has moderated from year-ago levels while higher staffing costs are driving banks’ expenses higher. BMO (miss) and BNS (small miss) provided similar insights on the state of the banking business in Canada. As for credit risks, RBC Chief Risk Officer Graeme Hepworth said the bank expects credit trends in retail to weaken as the labour market softens and higher rates impact more clients. In fact, the four banks have set aside $2.7-billion in loan loss provisions this quarter. Assuming flat revenue growth over the next year, we estimate loan loss provisions still need to increase $15-billion for the top six Canadian banks to match peak levels seen during the pandemic. There are offsets, mainly tied to cost-cutting activities. Case in point, RBC disclosed that the number of full-time equivalent employees has been reduced by 1 per cent quarter-over-quarter with another 1-per-cent to 2-per-cent reduction expected next quarter. But we think cost-cutting alone is unlikely to trigger a sustained upturn in profits. Thus, we feel it is probably too early to upgrade banks, but stay neutral given the group’s increasingly appealing dividend yield proposition”
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The Financial Times reports that foreign investors are fleeing China,
“Foreign investors sold a record $12-billion worth of Chinese stocks in August as piecemeal support measures from Beijing failed to assuage concerns over slowing growth in the world’s second-largest economy and a worsening crisis in the country’s property sector … The unprecedented outflows come as figures on Thursday showed China’s manufacturing sector contracted for a fifth consecutive month … “Investors are quite worried about GDP and whether [policymakers] can even hit that 5 per cent growth target,” said Stephen Innes, managing partner at SPI Asset Management. “That’s directly attributable to the property market because the hit to GDP from that could be 1 percentage point or more.””
“Foreign investors sell China shares at record pace in August” – Financial Times (paywall)
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Diversion: “Why India’s soaring food inflation is a global problem” – BBC
Scott Barlow