Daily roundup of research and analysis from the The Globe and Mail’s market strategist Scott Barlow
BMO chief economist Doug Porter highlighted Canadian investors’ current enthusiasm for foreign equities,
“Seems like there is something besides domestic real estate that Canadians are enthusiastically buying — foreign equities. Net purchases of such hit $16.7 billion in September, compared with a ‘normal’ monthly outflow of around $2 billion. More impressively, over the past 12 months, these purchases have reached a towering $126.5 billion, easily reaching an all-time high. Just prior to the pandemic, flows into foreign equities were barely positive, before jumping to a solid $42 billion in 2020. But they have really gathered momentum this year; to put it in perspective, the outflow in the past year is more than double the $60 billion outflow in 2000, at the very peak of the prior tech boom (boom/bubble). On the flip side, non-residents have also been snapping up a lot of Canadian stocks. But at a net inflow of $40 billion, it’s not quite in the same postal code and well below prior peaks”.
This is interesting on a few fronts. For one, the outflow of loonies helps explain why the domestic currency is undervalued (as I covered yesterday). Also, there are distinct advantages to Canadian equity markets in periods of inflation – the high commodity exposure particularly.
" BMO: Canadians being up foreign equities at a record pace” – (research excerpt) Twitter
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Morgan Stanley’s U.S. oil analyst Devin McDermott believes there’s more upside ahead for the sector despite a strong 2021,
“Despite a volatile start to November, [U.S.] E&Ps have risen ~90% so far in 2021, the best performance since the inception of the S&P1500 E&P index in 1995. This strength has been supported not only by rallying commodity prices but by pervasive capital discipline across the sector. The combination of rising margins and lower spending has led to the industry’s best FCF [free cash flow] in decades, underpinning a wave of new cash return commitments to shareholders. Looking ahead, we think this shift in capital allocation away from growth toward FCF is structural, a dynamic which should support a re-rating in currently discounted valuations and higher medium-term oil & gas prices … At our base case of price deck of $70 WTI in 2022, our oil-focused E&P coverage offers a median FCF/equity yield of 17%, 3x the S&P 500. This would rise to 21% at $80, but also still remain fairly attractive should oil move lower (13% median at $60 WTI). OW [overweight] rated OVV, FANG & COP offer compelling combinations of FCF yield, valuation, leverage and cash returns”
“More upside for U.S. oils in 2022 (MS)” – (research excerpt) Twitter
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Credit Suisse U.S. quantitative strategist Patrick Palfrey identifies sectors conforming to the top performing investment strategies,
“Price Momentum and Sales Momentum stocks have performed particularly well over the past 5 months, outperforming by 7.7% and 5.4%. Given the challenging environment for active managers in 2021, many investors expect a performance chase into year end, driving further upside in these names.”
The U.S. sectors with the highest price momentum are energy, retailing, autos and components, and semiconductors. Strongest sales momentum is found in energy, transportation, consumer services, and REITs. Importantly, this is a shorter term trading strategy, not a longer term set of investment recommendations.
“CS: U.S. sectors with the strongest price and sales momentum” – (table) Twitter
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Diversion: “Why did southern Italy lag behind?” – Marginal Revolution
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Scott Barlow