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

Bespoke Investment Group helpfully described a potential reason for recent market volatility, and it’s one that investors don’t have to lose sleep over – insurance and pension funds have to re-balance to set weightings in bonds and equities after stocks significantly outperformed bonds,

“The steady rally in bonds over the past week is proving confusing to many given how just a week ago pundits were certain that the bear-steepening of Treasury yields would continue indefinitely. One factor at play is rebalancing…Using total returns of the Barclays Agg index of investment-grade bonds and the S&P 500, we can track how far a 60% stocks, 40% bonds portfolio drifts from its target weightings each quarter. We can then measure how much buying (or selling) of each asset is needed to return the portfolio to its target weight at quarter-end… this process suggests for the most recent quarter that investors need to buy about 4.28% of their current bond exposure and sell about 2.67% of their equity exposure to get the overall target back to 60/40. These numbers are not enormous relative to other recent periods, but they are significant.”

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“@SBarlow_ROB Bespoke re rebalancing causing market volatility” – (research excerpt) Twitter

“Quarter-end rebalancing could present headwinds for Wall Street” - Reuters

***

Axios Capital’s Felix Salmon, in association with J.P. Morgan Wealth Management, used some inflammatory descriptors in his most recent newsletter (my emphasis),

“Never before has the market swung so swiftly from extreme pessimism to extreme optimism. Over the past year the S&P 500 has moved from being at a three-year low, to rallying by an astonishing 76% … There’s not much need to pay a hedge-fund manager or private-equity titan two-and-20 in an attempt to get a 15% return, if an S&P 500 index fund can return 75% in the same timeframe… The bottom line, from Axios’ Dan Primack: “For the time being, the smart money has been rendered irrelevant.” … In Canada … mortgage debt is outpacing house prices. That’s much more dangerous, especially given the Canadian banking system already has twice as much exposure to home loans as American banks do.”

“@SBarlow_ROB From Axios Capital: “In Canada, by contrast, mortgage debt is outpacing house prices. That’s much more dangerous especially given the Canadian banking system already has twice as much exposure to home loans as American banks do.” – (excerpt, chart) Twitter

***

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CIBC analyst Dean Wilkinson published A Glimpse Into A Post-pandemic World for Canadian REITs. The tone is constructive but less bullish than in recent months (my emphasis),

“From an operational perspective, Seniors and Diversified REITs appear to have been most materially impacted by the pandemic (actual 2020 FFO [funds from operations] and estimated 2021 FFO are well below pre-pandemic estimates for each year), followed by Diversified Retail, Canadian Office, Canadian Residential, Concentrated Retail, and finally, Industrial. We compare 2022 FFO estimates (which we would suggest are a fair, albeit modestly under-estimated proxy for a run-rate condition) to 2019A FFO as a means to see how the cash-flow-generating ability within each asset class, once all is said and done (i.e., in a presumably 2022 post-pandemic world), has changed since the pandemic began. The impact to Diversified REITs, Diversified Retail, and Seniors is ultimately modest (sub-10% deterioration in run-rate FFO). Canadian Office, on average, is largely unaffected overall, while Concentrated Retail, Canadian Residential, and Industrial will all have (on average) likely bolstered their cash-flow-generating capacity.”

Inconveniently, Mr. Wilkinson did not indicate favourite picks in the report.

“@sbarlow_ROB CIBC from “A Glimpse Into A Post-pandemic World: Operational And Valuation Outlooks For Canadian REITs” – (research excerpt) Twitter

***

Diversion: " The Truth About Congress’s Facebook, Twitter, Google Hearings” – Gizmodo

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