A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
Citi strategist Tobias Levkovich published a report outlining the most common questions he’s getting from anxious global portfolio managers.
The biggest concern is that a U.S. recession is approaching, but Mr. Levkovich notes “credit conditions are not deteriorating in a manner consistent with lead indications of a downturn.”
A potential earnings slowdown is the next largest institutional worry. He responds, “bottom-up 2020 sell-side EPS forecasts (of near 10% gains) look high, but few buy siders believe them”.
Peak cycle earnings and profit margins is next, but Mr. Levkovich doesn’t see much change from previous years during the rally., noting: “There is this mistaken notion that EBIT as a percent of sales have hit prior peaks. In addition, worry about labor costs impinging on profitability also seems misplaced, as rising labor compensation generally has been associated with faster earnings increases in the past. However, this issue has been an ongoing debate for years."
The other two portfolio manager questions concern political risk – an Elizabeth Warren presidency in particular – and defensive positioning in fund portfolios.
“@SBarlow_ROB From C's '5 biggest concern of PMs' report” – (research excerpt) Twitter
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TD’s chief Canada strategist Andrew Kelvin is having trouble handicapping the imminent federal election,
“Trudeau’s Liberals have ceded ground to the NDP and Bloc Quebecois, while Conservative support has remained relatively stable. Effectively, this is a coin toss … Following the election, the Governor General will ask PM Trudeau if he is able to command the confidence of the House. In recent history, defeated Prime Ministers have deferred to the opposition, but if Liberal and Conservative seat totals are close Trudeau will have the opportunity to cobble together support from the NDP and Greens. If neither the Liberals nor Conservatives are able to survive a Throne Speech, then the Governor General will call another election, but we think this is a very unlikely outcome”
“@SBarlow_ROB TD's Kelvin having trouble handicapping the imminent Canadian federal election” – (research excerpt) Twitter
“The minority rule: A trader's guide to Canada's tight election” – BNN Bloomberg
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A rather strident warning from Merrill Lynch quantitative strategist Savita Subramanian will likely turn out to be the ‘research read of the day’,
“Whipsaw risk is elevated and imminent. Our US Regime Indicator (p. 56) puts us in month seven of the “Downturn” phase, which has lasted eight months on average. The only way to exit this phase is by moving into “Early Cycle”. And factors that do well during the “Downturn” phase (quality, large caps, low risk, anti-value) are opposite to those that lead during “Early Cycle” (beta, small size, deep value). Institutional investors today have been funneled into growth and momentum stocks and are firmly underweight value and beta… In our view, neutralizing Momentum and tilting toward Value is advisable for this reason as well as those below.”
The summary here is that Ms. Subramanian believes the growth and momentum stocks that are overweight in portfolios now are about to get hit, and under-owned value stocks are set to outperform.
“@SBarlow_ROB Well then. (ML) :” – (research excerpt) Twitter
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Tweet of the Day:
Diversion: I have issues with this essay but it’s food for thought, “ Capitalism is turning us into addicts” – Vox
Column: “ Are equities the better choice over fixed income in Canada?” – Barlow, Inside the Market
Scott Barlow