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Scott Barlow offers four thoughts on the research, analysis and ephemera that’s crossed his desk this week.

  1. A recent report from BMO economist Sal Guatieri contained some excellent detail on the domestic office real estate sector. He begins by noting that “office buildings will remain the most depressed CRE [commercial real estate] segment for some time” as an economic slowdown combines with the adoption of hybrid work. Nationally, the office vacancy rate spiked to a record 17.7 per cent during the first quarter of 2023, up from 10 per cent in 2019. Technology sector layoffs pushed Ottawa’s vacancy rate to 12.3 per cent. Toronto’s rate more than doubled to 17.5 per cent – the highest rate in almost 30 years. In addition, there are 14 more buildings under construction in that city and Shopify Inc. SHOP-T put seven floors of space up for sublease earlier this year. Calgary’s downtown vacancy rate is the highest of major cities at 32 per cent and the provincial government is offering incentives to convert existing space into residential units. Montreal’s vacancy rate has doubled to 16.8 per cent. Vancouver has the healthiest office market with an 8.4 per cent vacancy rate.
  2. The Financial Times’ Alphaville site outlined a growing problem with the decarbonization trend: it’s not profitable for investors. Myles McCormick’s report centres around a recent executive survey by Bain & Co. finding that a limited return on investment is a major hurdle to investment in clean energy. Bain found that executives are looking intently for ways to preserve the planet but are constrained by their fiduciary duties to shareholders. The exception is where governments are offering incentives. U.S. executives intend to raise capital spending levels in new growth areas as a result of the U.S. Inflation Reduction Act which motivates spending on renewable energy. In addition to investment returns, labour was also found to be a problem for renewable power companies. The energy sector needs more turbine technicians, for example, and it has also had difficulty attracting IT professionals.
  3. Investors’ return to megacap U.S. technology stocks as a driver of the S&P 500 has garnered attention in finance circles but the role of Shopify Inc. in pushing the S&P/TSX Composite higher is not getting nearly the attention it should. Year to date (as of May 24), the domestic equity benchmark is higher by 560 points or 2.9 per cent. Shopify on its own is responsible for 256 upside points - 46 per cent of the total move – according to Bloomberg data. The second-biggest contributor to index returns is also a technology stock, Constellation Software Inc. CSU-T, but it is responsible for only 74 index points or 13.2 per cent of returns. The biggest detractors from index returns were Nutrien Ltd. NTR-T (67 points), TD Bank TD-T (48), Bank of Montreal BMO-T (34), Cenovus Energy Inc. CVE-T (34) and Suncor Energy Inc. SU-T (28). As far as Shopify is concerned, when an upside move in market returns is this dependent on one stock, it is a clear sign of a lack of depth and a fragile rally.
  4. The sheer scale of chipmaker NVIDIA Corp.’s NVDA-Q earnings beat was jaw-dropping as AI-related spending ramps up quickly. The stock jumped 30 per cent in premarket trading Thursday after reporting profit 18 per cent ahead of analyst consensus. More importantly, management forecast second-quarter sales of US$11-billion, compared with current analyst expectations of $7.2-billion. Such a revenue jump would represent a 90-per-cent earnings beat (relative to analyst forecast) next quarter, according to Citi analyst Atif Malik. Mr. Malik increased his 2024 fiscal year earnings-per-share estimates by 78 per cent and raised his price target to US$420 from US$360. Stifel analyst Ruben Roy also raised his price target for the stock to US$370, from US$300, but also registered concern about valuations. He noted that the stock is already trading at 42.5 times next year’s earnings, ahead of its historical average of 42.