Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank strategist Hugo Ste-Marie warned clients that the Canadian yield curve carries bad news for domestic REIT returns,
“Broadening lockdowns due to the surge in COVID cases are once again putting pressure on the real estate sector… the TSX Real Estate index is underperforming the TSX by 187bp. With city centers still resembling ghost towns and WFH trends likely to continue long after the end of the pandemic, concerns over the sustainability of current payout ratios/dividends are rising, especially after RioCan REIT announced last month a 33% cut to its annual distributions. Not only are office towers empty, but apartment rents are still declining. According to the latest report from PadMapper, December rent prices for a two-bedroom apartment are down 11.6% YOY in Vancouver and off around 15.5% in both Toronto and Montreal. To be fair, rent prices are still rising in several cities and not all rental categories are equal (downtown condos are likely faring worse for example). On top of COVID-related uncertainty, the steepening of the yield curve should also continue to mount a challenge to the sector’s relative performance. As illustrated in our Chart of the Day, the TSX REIT ratio usually tracks the yield curve. Hence, our scenario of further steepening could come with prolonged underperformance.”
“@SBarlow_ROB Yield curve carries bad news for Cdn REITs (BNS)’ – (research excerpt, chart) Twitter
BofA Securities strategist Jill Carey Hall details how the firm’s U.S. clients are pulling assets from technology stocks(my emphasis) ,
“Clients were again big net sellers of US equities ($2.4B) following last week’s near-record outflow. While clients have been net sellers of single stocks and US equities in aggregate for three weeks, they’ve been net buyers of equity ETFs for five weeks. All three client groups (institutions, hedge funds, private clients) were net sellers, led by private clients, where net selling was at a nine-week high … Flows suggest clients may be cautious to add more equity exposure given index highs and extended valuations; we also see near-term risks skewed to the downside. ... Clients sold stocks in eight of 11 sectors, with the largest sales in Growth-oriented Tech, Cons. Disc., and Health Care. Outflows out of Tech - which we recently moved to marketweight amid regulatory and tax headwinds from a Democrat-controlled White House and Congress - were the second highest in our post-2007 data history, driven by Institutional and retail clients. Hedge funds, meanwhile, were small net buyers. Bond-proxies Real Estate and Utilities saw the largest inflows.”
“@SBarlow_ROB BoA: “Outflows out of Tech ... were the second highest in our post-2007 data history” – (research excerpt) Twitter
Also from Scotiabank, analyst Meny Grauman takes a look at the capital position for Canadian banks and sees ‘an embarrassment of riches’,
“Despite initially dipping lower at the start of the pandemic, capital level for the Big 6 Canadian banks increased 62bps through F2020, closing out the year at a record high aggregate CET1 ratio [equity capital and disclosed reserves divided by total risk-weighted assets] of 12.31% … Typically, banks have four distinct avenues to deploy excess capital: (1) organic growth; (2) M&A; (3) dividends; and (4) share buybacks. And although OSFI has prohibited banks from buying back shares or raising dividends since March 13, we believe that share buybacks will in fact be the banks’ preferred method to deploy excess capital… the Canadian banks have the capacity to buy back 4.6% of all outstanding shares at current prices. Among the individual banks, TD would be at top of the list with a capacity to repurchase 5.7% of all outstanding shares, followed by CM at 4.4%. We are not arguing that we will see all of this excess capital funneled into buybacks, but we do see the stage set for above average buyback activity in the second half of F2021 and F2022.”
Scotia’s top picks in the sector are Canadian Imperial Bank of Commerce, National Bank and Royal Bank of Canada.
“@SBarlow_ROB BNS’s assessment of Canadian bank capital positions - “an embarrassment of riches” – (research excerpt) Twitter
Diversion: “The Internet’s Biggest Darknet Just Got Taken Down” – Gizmodo
Tweet of the Day:
Money Supply vs #Gold! There is only a loose relationship between money supply growth and gold prices. Velocity of money and translation into higher #inflation are of importance as well. pic.twitter.com/6ZiiiesXfw— jeroen blokland (@jsblokland) January 13, 2021
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