Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief strategist Brian Belski detailed a shift to value in the Canadian equity market while warning about potential volatility into year end (my emphasis),
“The S&P/TSX posted its first monthly decline of the year in September; however, there was a clear shift toward value during the month. In fact, all seven of our value factors outperformed the market this month and four of the factors posted positive returns. Forward PE was easily the top performing factor during the month, gaining a solid 8% versus the 2.2% decline in the TSX. No doubt the heavy weight toward Energy played a significant role in this outperformance; however, we have seen the weight in value factors shift away from Energy toward Materials over the last several months. While our forward earnings growth category posted an average return in line with our valuation category, only three of the six individual growth factors outperformed. Indeed, only companies with strong positive revision trends during the month outperformed, while companies with high growth expectations underperformed on average. Overall, while we continue to have a constructive outlook for 2021 as we transition back to normalcy, we do believe the market will struggle with the transition, which could see fundamental factors underperform and resurgence in more “risk-off” factors.”
The outperform rated stocks in Mr. Belski’s list of low price to forward earnings stocks are Canfor Corp., Crescent Point Energy Corp., Enerplus Corp., Fortuna Silver Mines Inc., Interfor Corp., Linamar Corp., MEG Energy Corp., Manulife Financial Corp., New Gold Inc., Parex Resources Inc., Stelco Holdings Inc., Teck Resources Ltd., Torex Gold Resources Inc. and West Fraser Timber Co.
“@SBarlow_ROB BMO’s low price/Fwd earnings stocks for TSX” – (table ) Twitter
Morgan Stanley chief U.S. equity strategist Michael Wilson flat-out predicted a correction greater than 10 per cent for the S&P 500,
“We are now calling for Fire AND Ice. We have been calling for a mid-cycle correction to happen one of two ways. Fire: tightening financial conditions as the Fed signals tapering is coming. Ice: growth disappointment particularly on the earnings side. We think it’s increasingly likely these scenarios happen together and we get a >10% correction. The Fed will likely announce its taper plans at its next FOMC meeting just as we expect a disappointment in earnings to materialize. Earnings Trouble Ahead. A number of companies have flagged serious supply chain issues in off-cycle earnings reports over the past month. Both forward earnings estimates and price de-rated after many of these reports. We think this will be a pervasive dynamic during 3Q reporting season and expect it to trigger downside in earnings revisions at the index level-a headwind for price. Beyond 3Q, we think the earnings risk comes more from (1) the inability of companies to pass on pricing (2) margin risk related more to higher wages and (3) a reversion (lower) in goods consumption.”
Mr. Wilson is overweight on the U.S. financials, health care and consumer staples sectors.
" @SBarlow_ROB MS’s Wilson is ... not bullish” – (research excerpt) Twitter
See also: “@SBarlow_ROB MS: “Cyclical/Defensive Ratio and Rates Have Paused” " – (research excerpt) Twitter
BofA quantitative strategist Savita Subramanian highlighted the cross currents in today’s market environment while passing on the interesting fact that the relative performance of growth versus value strategies have been dependent on COVID new cases,
“Macro cross currents abound, suggesting that a tilt to Value and small caps over Growth and large caps isn’t as clear cut. Our US Regime Indicator officially entered its Late Cycle phase, which would normally favor Growth and large caps over Value and small caps. But for the last few quarters, rising and falling COVID case counts have been a bigger determinant of style rotations than anything else and if case counts subside from here, this would favor the opposite bias – small caps, Value and risk … We would thus maintain a Value bias for the near term, assuming that case counts subside over the next several months. But the methods for valuing stocks during Late Cycle shift from earnings-based measures to free cash flow based measures (more below). In the unfortunate event that COVID case counts rise, we would shift our style allocation to Growth/Large Caps and a more defensive bias.”
“@SBarlow_ROB BofA’s Subramanian: ‘rising and falling COVID case counts have been a bigger determinant of style rotations than anything else’” - (research excerpt) Twitter
Diversion: “A Tale of Two Sundays: The Outsized Impact of Experience” – Collaborative Fund
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