Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
The strategy team at Scotiabank noted that Canadian banks are better positioned than U.S. counterparts, but they are not fully out of the way of financial turmoil,
“While U.S. bank deposit balances are falling after surging during the pandemic, Canadian bank deposits continue to grow. There are a number of reasons for this divergence, but most importantly is the difference in the structure of both countries’ money markets. This difference should continue to provide upside support to deposits in Canada. That is good news from a risk perspective given the turmoil caused by deposit flight in the U.S.. However, it won’t help protect Canadian bank profitability as Canadian deposit balances increasingly shift to higher yielding accounts… In Canada, funds are recycled from ‘cheap’ checkable accounts to more expensive term deposits through money markets. However, in the U.S., money market pull funds out of the banking system and parked them at the Fed through repos.”
The shift from deposits to money market funds will happen in Canada. The short version of Scotiabank’s report is that unlike the U.S., domestic money market funds recycle assets back into the banking system. Borrowing costs for Canadian banks will climb, however term deposits have higher interest rates than deposits and this will crimp profits.
***
BofA Securities’ weekly roundup of important research included quantitative strategist Savita Subramanian warning clients not to underestimate corporate America,
“Goodbye cost-cutting, hello productivity Margin expansion from globalization and cheap financing is behind us, but productivity gains could be the next multi-year bull case for margins and multiples. This quarter is rife with evidence: “efficiency” mentions jumped 27 per cent year-over-year, tight labor has spawned automation spend, AI spend accelerated and could add more than 1ppt to productivity. It is dangerous to underestimate Corporate America’s margin preservation skills”
Inflation was supposed to push margins lower because of wage costs, but BofA is suggesting the opposite. This sentiment is also bullish for companies, like Rockwell Automation Inc. and Microsoft Corp., in industries related to productivity.
“BofA: “It is dangerous to underestimate Corporate America’s margin preservation skills”” – (research excerpt) Twitter
***
Morgan Stanley chief U.S. equity strategist Michael Wilson is still bearish, but he seems to be hedging his bets a bit more,
“The overall market’s 1Q EPS beat rate remains solid (mid-single digit range) with strong results coming from several mega cap Tech bellwethers despite the challenging macro backdrop. Further, companies broadly reaffirmed out quarter expectations for an EPS growth recovery—a better guidance outcome than we expected … Consensus continues to expect a 2H EPS growth inflection driven by margin expansion. Note that the expected trough quarter from an EPS growth standpoint has now been shifted out to 2Q from 1Q. This is a result of the strong 1Q beat rate. Nonetheless, consensus still expects a snap back to +8.5% in 4Q… From a sector standpoint, Communication Services, Tech, Consumer Staples and Utilities are expected to see the largest 4Q ‘23rebound in Y/Y EPS growth… Many earnings reports have qualified that the ‘23growth recovery is contingent on the macro improving … As we discussed last week, many of the leading macro data points that we focus on have fallen in recent weeks and are not pointing to a similar run rate in terms of strength looking forward over the next several months. Exhibit 5helps to illustrate this trend by showing that the ISM tends to lead rolling earnings surprise for the S&P 500 by 6 months,and is pointing to EPS surprise downside. With that said, should the leading data improve, the likelihood of the 2H EPS recovery consensus expects would rise”
“MS’s Wilson still bearish, but hedging his bets” – (research excerpt) Twitter
***
Diversion: “Mob Justice” – The Atlantic
Tweet of the Day:
Scott Barlow