TSX poised for ‘strongest earnings rebound since tech bubble’

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

BofA Securities analyst Ben Rangol finds “no cause for optimism" for the Canadian dollar where foreign inflows are concerned (my emphasis),

"CAD portfolio flows – No source for optimism … Canada’s net portfolio investment (PI) balance with the rest of the world (RoW) rebounded to a surplus of C$9.8bn (C$11.1bn debt, -C$1.4bn equity) in August vs. -C$9.8bn (-C$8.1bn debt, -C$1.7bn equity) in July. This was driven by renewed RoW appetite for Canadian debt, particularly from US investors into government bonds. On a 3M (June-August) basis, net flows remained negative at -C$24.9bn vs. -C$25.8bn previously … The rebound in debt inflows into Canada is welcome, amid a persistently-negative equity flow balance and following sharp curtailment of BoC asset purchases. Still, we remain concerned about Canada’s external financing prospects looking forward, particularly on a bilateral basis vs. the US. While flows from the US into Canada have increased, flows from Canada into the US (particularly into US equities) have increased by much more. Given Canada’s persistent, sizable structural deficit produced by deficits in the current account and net direct investment, net PI inflows are consistently needed. Accordingly, USD/CAD and CAD TWI [trade weighted index] adjustment risks remain elevated, in our view.

"@SBarlow_ROB BoA on CAD: “No cause for optimism” – (research excerpt) Twitter

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Scotiabank strategist Hugo Ste-Marie forecasts the strongest rebound for S&P/TSX Composite profits since the technology bubble,

“Strongest earnings rebound since tech bubble. Bottom-up consensus pegs TSX Q3/20 EPS at C$207 (+33% quarter over quarter [q/q], -24% year over year [y/y], and 55% above Q1/20 lows). We believe there is a strong macro and commodity tailwind supporting this recovery. Miners' bottom-line is forecast to be up 104% in aggregate since Q1/20, contributing to 18% of the total rebound (banks contribute 35% and insurance 25%). Positive surprise risks in financials and industrials. Sell-side estimates have been slow to adjust to rapid macro swings, and consensus dispersion is high. In our view, surprises should skew to the upside, especially in industrials and financials. Look to banks and miners for positive earning revisions”

Bullishness on mining stocks is slowly becoming consensus which, since the loonie has been tracking the copper price, contradicts BofA’s bearish position on the Canadian dollar mentioned above.

"@SBarlow_ROB BNS on TSX earnings season: “Strongest earnings rebound since tech bubble” – (research excerpt) Twitter

Also see: What investors need to brace for as TSX earnings season gets underway

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Also from Bank of America, U.S. quantitative strategist Savita Subramanian notes that surprisingly, earnings growth for value stocks is set to exceed growth stocks (my emphasis),

"Consistent with our preference of Value over Growth, our tactical quantitative framework also remains bullish on Value (i.e. cyclicals). Household Durables (i.e. Homebuilders) screen as an opportunity for the third consecutive month, along with Autos, Media, Multiline Retail, and Metals & Mining, which remained as Opportunities for the second straight month (Table 14). Semis have now screened as an Opportunity for 11 months in a row and outperformed the S&P 500 by 28ppt so far. At a sector level, Industrials, Health Care and Consumer Discretionary rank the highest, while Real Estate and Utilities screen the weakest. Amid depressed earnings this year and a nascent economic recovery expected into next year, analysts now assign higher growth rates for Value stocks over the next two years than for Growth stocks (Chart 1). Absent a brief period in 2017, this hasn’t happened since the financial crisis and has only happened 16% of the time since 1994. We believe Value stocks' improving growth outlook in the midst of widening valuation gap vs. Growth (z-score of 1.3 in Growth’s fwd P/E relative to Value) indicates dislocation in the market and presents opportunities for Value investors.

"@SBarlow_ROB BoA: “analysts now assign higher growth rates for Value stocks over the next two years than for Growth stocks (Chart 1). Absent a brief period in 2017, this hasn’t happened since the financial crisis” – (research excerpt, chart) Twitter

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Newsletter: “Market risks ‘arguably the highest’ in decades. Plus, the best ETFs for retirement income and what pot stocks look like two years after legalization” – Globe Investor

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