Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
The term TINA – There is No Alternative – has been bandied about in financial media lately, inferring that while equities are expensive, bonds are even moreso. There’s nowhere to invest that makes more sense than stocks according to this perspective.
CIBC’s outlook for 2021 reflects a TINA point of view,
“Our 2021 Equity Outlook can be succinctly summarized like this – equities are expensive but, frankly, we see no alternative… we believe investors are best served by focusing on companies that can generate respectable returns even through a bumpy recovery. Dividends, in this low rate environment, look even more attractive than normal… Our sector recommendations reflect this. We are overweight Financials, Materials and Utilities. We believe Canadian Banks have demonstrated an ability to earn through this crisis, and specifically note Financials actually should benefit from margin expansion as rates rise … We foresee a high probability of positive earnings revisions over the course of 2021, supporting an argument for continued upside in Financials. This could be a particularly powerful force for companies that were most affected by the economic impacts of COVID-19. Companies that we like on this theme include TD, BMO and MFC. We also believe that ONEX and BBU may have torque to the upside if the momentum in equity markets continues.”
" @SBarlow_ROB CM like TD, BMO and MFC for 2021″ – (research excerpt) Twitter
“@SBarlow_ROB CIBC: ‘FCF [free cash flow] Yield Forecasts For Materials Sector Top Picks”’ – (chart) Twitter
BofA Securities sees value stocks continuing to rally, but the S&P 500 as a whole struggling (my emphasis),
“A lot of optimism is baked into stocks, along with rich valuations on most metrics (except FCF and relative to bonds), and we remain cautious in the near-term… The Russell 1000 Value index has outperformed Growth by 7ppt over the last three months, a 2 standard deviation move relative to history... Our tactical quantitative framework, which has favored Value since August, says there’s more value leadership ahead and ranks Financials - the largest overweight in the Value benchmark, and our top pick for 2021 - as #1, whereas Tech fell to the bottom… extreme valuations and entrenched positioning suggest we are in the early innings of a Value cycle. The relative discount for Value stocks remains nearly two standard deviations below average … But value is not necessarily bullish for the S&P 500 Why? S&P 500 valuation dispersion (the coefficient of variation of forward P/Es) is just off its peak. If dispersion among stocks simply narrowed to the long-term median, the S&P 500 could fall by 10%, all else equal, given the de-rating of growth stocks which are, on average, much larger”
The last part is a bit confusing. It means that market leadership in the S&P 500 narrowed to a few, now-expensive stocks. Value stocks outperforming will broaden breadth, at the expense of the few expensive tech stocks that led before.
“@SBarlow_ROB BoA: ‘Why Value has legs (and why the S&P 500 might not)” – (research excerpt) Twitter
Citi credit strategist Matt King is one of my favourite thinkers on markets. I posted a chart from his most recent slide deck on social media and it made some people really, really mad (link below).
The chart compares survey results of national satisfaction with government and COVID-19 deaths per million people. The clear trend is that the more people don’t trust government in any country, the more COVID deaths there’s been.
It’s interesting in its own right, but, for investors specifically, it means not to expect rapid containment of the pandemic – and sustainable economic recoveries - in countries where people don’t feel leadership is helping them. Spain, the U.S., Brazil, Mexico and France are among them.
“@SBarlow_ROB From City’s Matt King. A chart to think about. COVID response and trust in government” – (chart) Twitter
Diversion: “Cybersecurity Firm FireEye Says It Was Hacked By a Nation-State That Rhymes With Frussia” – Gizmodo
Tweet of the Day:
With ultra-low bond #yields I do not expect #debt sustainability to become a market driver any time soon, but somewhere over the next 2 to 4 years, it definitely will be, unless we have significant #GDP growth and #inflation. pic.twitter.com/Ncs2zVOQM4— jeroen blokland (@jsblokland) December 9, 2020
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