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

Copper inventories are low worldwide, demand is recovering as Chinese manufacturing accelerates and the metal is a key component of decarbonization efforts. Citi analyst Alexander Hacking published a research recommending how investors can play this bullish outlook (my emphasis),

“Investor interest in the red metal is booming driven by anticipated demand from electrification and de-carbonization. Long awaited deficits … and dare we say $10,000/ton [current US$8010] … may finally be looming. We compare and contrast the largest and most liquid copper miners – FCX, FM, SCCO and ANTO – on factors including asset quality, growth valuation and ESG. Our relative preference is FM but each has pros and cons. Investors can effectively choose between lower risk (SCCO, ANTO) and higher potential reward (FCX, FM). Equities are discounting close to spot copper of $8,000/ton based on NAV and FCF analysis; with ~40% upside to the cyclical bull case of $10,000/ton (and equivalent downside to $6,000/ton). Equity Alternatives: Non pure-play alternatives include Grupo Mexico, Teck and Glencore. Teck is the most intriguing of these but likely needs corporate restructuring to unlock full value of copper.”

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“@SBarlow_ROB Citi: Best ways to play the bullish outlook for copper” – (research excerpt) Twitter

***

There is a lot of inflation talk in financial circles lately, with adamant opinions on both sides. Morgan Stanley is arguably the most confident Wall Street firm in the “yes we’ll have inflation” camp. U.S. equity strategist Michael Wilson explains,

“The reflation trade got another boost last week from President-elect Biden’s Covid relief plan. In that plan, he proposes to spend an incremental $1.9T to help bridge the economy from its current state to when it can fully reopen later this year. Combined with the $900B bill passed last month, this amounts to roughly 15% of GDP. That’s a lot of money chasing fewer goods and services that aren’t even available yet. The end game is higher growth and inflation. Such an outcome is getting priced in equity and other markets most affected (commodities, etc.). The rotation to cyclicals is well advanced at this point and may take a break if rates don’t start to adjust to this new reality. We think the answer lies in between with rates moving higher and PEs moving lower. The offset is earnings estimates which means the speed of the move in rates will determine how much equity valuations and prices decline, if at all”

“@SBarlow_ROB MS: “That’s a lot of money chasing fewer goods and services that aren’t even available yet”” – (research excerpt) Twitter

" Higher inflation is coming and it will hit bondholders” – Financial Times (paywall)

“@mattyglesias Inflation truthers are wrong — what’s true is that relative price shifts (not inflation!) have gone in a direction that’s bad for society, making entertainment cheaper but child-rearing much more costly” – (chart) Twitter

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Scotiabank research’s quarterly survey of fund managers produced some interesting results, notably regarding bonds (my emphasis),

“According to our poll, global institutional investors are relatively upbeat about 2021 macro and equity prospects. However, there remains fewer potential buyers of equities (20%) as in last quarter (32%). Most investors (64%) indicated their current equity positioning is appropriate. Equity vs. bonds divide. While investors still like equities, bonds are being shunned with a vast majority see further upside to bond yields … About 11% of investors are rotating towards Value, although

11% also see Growth’s recent underperformance as a buying opportunity. 44% have finished their Value rotation … We have rarely seen such unanimous agreement between investors. If something unexpected were to happen, we face the risk that a lot of investors will head for the exit at the same time”

“@SBarlow_ROB BNS’ quarterly fund manager poll produced interesting results " – (research excerpt) Twitter

***

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Newsletter: “Massive consumer spending binge ahead” – Globe Investor

Diversion: “A wristband that tells your boss if you are unhappy” – BBC

Tweet of the Day: “@jsblokland Boosting the real economy. Social benefit payments impact the real economy. We are looking at an old-school recovery with #commodity demand and #inflation” – Twitter

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