Daily roundup of research and analysis by The Globe and Mail’s market strategist Scott Barlow
Morgan Stanley U.S. equity strategist has been among the most (correctly) bullish pundits in New York but is now changing his tune, at least for the short term (my emphasis),
“[The recent correction] coincided with disappointing progress on the passage of CARES 2 [U.S. fiscal spending legislation] and a very clear message from the Fed that it does not plan to enact yield curve control as they implement average inflation targeting … The market is now faced with two potential outcomes: 1) Congress fails to pass the bill and the recovery stalls, or 2) Congress does pass CARES 2, which is good for the recovery but bad for the long end of the bond market. The equity market appears to have been looking past near-term risk on CARES 2 passage as it tilted in favor of cyclicals. However, the unexpected death of Supreme Court Justice Ginsburg adds another element of risk to the timing of the outcome, and could weigh on the market overall in the near term. The technical picture has deteriorated, especially for the Nasdaq 100”
The problem with rising longer-term bond yields is that U.S. price to earnings ratios have been climbing to the extent that inflation-adjusted ten-year bond yields have fallen.
“@SBarlow_ROB MS’s Wilson turns less bullish on short term” – (research excerpt) Twitter
BofA Securities analyst Timna Tanners raised their target on Teck Resources Ltd. and Freeport McMoran Inc. based on a strong outlook for copper prices,
“Copper prices have surged higher, driven by sharply stronger demand in China and restocking. We see further upside into 2021E, supporting our positive view on Freeport, and benefitting TECK. While met coal prices remain still relatively depressed, we see potential for a squeeze higher … Given this coal momentum and copper upside, we raise our PO [price objective] for TECK to US$16 (C$22) from a prior $11.50 (C$16), now using 5x 2021E EV/EBITDA [enterprise value to earnings before interest, taxation, depreciation and amortization] and 1.4x NPV [net present value] , vs a prior 4x and 1x NPV. A greater proportion of EBITDA coming from copper, up to 27% in 2020E from 2019′s 21%, merits the higher multiple, in our view, up from its 4x avg in recent years as copper stocks trade at higher multiples. We raise FCX’s PO [price objective] to $19 from $17 to reflect Cu price momentum, greater visibility with Grasberg’s underground transition nearly complete, and further growth project potential.”
"@SBarlow_ROB B of A increases price target for TECK, FCX " – (research excerpt) Twitter
Also from Morgan Stanley, chief economist Chetan Ahya is wondering when emerging markets equities will join the global reflation trade.
This issue is more important for Canadian investors realize – the MSCI Emerging Markets Index has been very closely correlated with the S&P/TSX Composite once currency effects are taken into account, thanks to the high weighting in resources for the domestic benchmark,
“The V-shaped recovery has played out even faster than we initially expected…The area where the pace of recovery has remained weak is the emerging economies outside China (EMXC) … we think that the cyclical outlook for the group will improve from 1H21, aided by multiple factors … The external demand picture for EMXC economies (which are more dependent on global trade) has brightened significantly. The new orders-to-inventories ratio for our global manufacturing purchasing managers' index … recorded its strongest reading since 2011 in August … Our chief China economist Robin Xing expects China’s GDP growth to accelerate to potential growth of 6%Y by the end of this year.”
“@SBarlow_ROB MS bullish on EM (Chetan Ahya)” – (research excerpt) Twitter
Diversion: “The Winners and Losers of the 2020 Emmy Awards” – The Ringer
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