A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO economists continue to track the weakening domestic housing market. Shelly Kaushik writes,
“It’s no surprise that the psychology around Canada’s housing market has shifted since the Bank of Canada started raising rates in March. April’s retail sales report gave us another example with a 4.3% drop in building materials, garden equipment, and supplies... sales in this category still have a long way to go from still-elevated levels—juiced by demand for housing and renovations during the pandemic. Still, it looks like a more aggressive tightening path by the Bank in April helped cool some of that demand as sales of building materials fell for the first time this year. Looking ahead, another drop in home sales in May and the potential for even more aggressiveness from the BoC should cool the housing market further in the coming months.”
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Scotiabank analyst Mario Saric sees REIT prices tied to the domestic economy,
“Higher rates and recession fears still dominate REIT unit prices, which have lagged the TSX by 9% year-to-date (-19% vs -10%), including 3% in June … We believe a 2022 recession = another 10% downside … That could =20%-30% lower REIT NAVPUs [net asset value per unit] , transforming our current 20% trading discount (i.e., heavy ‘buy’ territory’) closer to ‘sell territory’ (i.e., 10%+ premium to NAV); We think no recession through 2023 (i.e., Scotia Economics revised 2022E/2023E Real GDP of 3.8%/2.6% plays out; … Our current NAVPU estimates are reasonable = 20%+ total return upside. We think a 2023 recession = something in-between (i.e. 10% total return)… "
Mr. Saric did not list his top picks in the sector in this report but did in a June 13 report, “Our Top Growth Picks = BAM, GRT, IIP, SMU, SVI, and TCN. Our Top Value Picks = AP, BAM, CAR, CSH, DIR, ERE, IIP, REI, and TCN. Our Top Income Picks = APR, CRR, CRT and NWH.”
“Higher rates and recession fears still dominate REIT unit prices” – Scotiabank” – (research excerpt) Twitter
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Morgan Stanley energy analyst Devin McDermott is sounding more cautious on the sector according to the firm’s daily summary of top research reports,
“MS Research Analyst Devin McDermott highlights that Energy led the market lower last week in a broad-based sell off that saw every sector finish in the red, as investors contend with rising interest rates and increasing odds of a recession. Looking historically, he notes that the performance of Energy during recessions is mixed, and hinges heavily on the magnitude of demand impacts. Based on the correlation between short-term oil prices and energy equities since the start of 2021, Devin estimates that last week’s sharp move lower was equivalent to the impact of a nearly $30/bbl decline in oil prices - far outpacing the ~$10 decline that actually occurred in front-month WTI. As a result, he estimates that the sector is now pricing in an incremental $20/bbl decline in crude - a move that would put prices back around $90, in-line with levels pre the Russia/Ukraine crisis. While Devin believes the move last week was overdone relative to commodity prices, he retains his defensive positioning bias. In a more uncertain macro environment, he prefers names with scale, strong balance sheets, and buyback capacity including XOM (OW, $107 PT) within the Majors, COP (OW, $118 PT) and FANG (OW, $178 PT) within E&Ps, and SU (SU CT OW, C$61 PT) in Canada.”
“MS sounding a bit more cautious on energy” – (research summary excerpt) Twitter
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Diversion: “Alphabet is spending billions to become a force in health care” – The Economist
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Scott Barlow