A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank chief foreign exchange strategist Shaun Osborne published “CAD Faces Headwinds on a Number of Fronts” on Wednesday,
“While we think there were strong grounds for a constructive outlook on the CAD earlier this year—resilient growth, positive terms of trade and a hawkish central bank—those factors are less compelling these days and other challenges have emerged since mid-year to keep the CAD tone defensive … we failed to see the CAD outlook being so closely tied to the risk backdrop … our correlation screens show the CAD is currently the most tightly correlated with the S&P 500 in a number of years on a rolling 22-day (+90%) and a rolling 100-day study (+70%) of daily returns … While much of the CAD’s intraday volatility seems to be shaped by stock market trends, we note a number of other challenges are perhaps developing for the CAD. Firstly, CAD-positive yield differentials earlier this year have evaporated at the short end of the curve and now stand healthily in the USD’s favour … Secondly, commodity prices have been softening since mid-year as global growth expectations weaken … Thirdly, Canada’ economic data surprises have tended to disappoint since mid-year, whereas US data outcomes have tended surprise positively, giving the USD another edge.”
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RBC Capital Markets analyst Pammi Bir published a massive 154 page research report on the domestic REIT sector that included a list of top picks.
“Amid higher rates and a slowing economy, we remain overweight names where we see more resilient fundamentals, particularly in multi-family, industrial, and defensive retail. Outperforms include: Allied, Boardwalk, BSR, CAPREIT, Chartwell, Dream Industrial, European Residential, First Capital, Granite, InterRent, Killam, Minto, Morguard N.A. Residential, RioCan, SmartCentres, & StorageVault… The tone across equity markets weakened further in Q3/22 and Canadian listed real estate was no exception. The TSX REIT Index registered a total return of -8%, driving its 9M/22 total return to -24%, on pace for its second worst year on record … Restrictive central bank policies and hawkish commentary, rising interest rates across the curve, heated inflation, shaky geopolitics, and growing calls for recessions across geographies – no shortage of reasons for investors to dial back equity exposure. For listed real estate, concerns over declining asset values from cap rate expansion and lower NOI [net operating income] have weighed heavy. Our NAVPU [net asset value per unit] estimates are down ~5% through 9M/22, marking only the fourth year of erosion since 1996. With cap rate spreads to debt costs negative across multiple property types, further downside is entirely possible, particularly if rental inflation does not materialize.”
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Citi’s global strategy team are sounding increasingly bearish.
“The global economy this year has been hit with a series of severe supply shocks that have lowered our growth forecasts and worsened our inflation outlook. Adding to these challenges, central banks have been left with few options but to aggressively tighten policy. Recent developments in the UK highlight that the global environment remains highly uncertain and more challenges may still emerge. With this in mind, we consider several scenarios for global growth and equity markets over the next five quarters. Our base case—which envisions a series of rolling country-level recessions but not a synchronized global downturn—implies that bottom-up consensus EPS forecasts are still 11% too high. Our hard landing scenario looks for a sharp and broad-based fall in global growth and implies EPS downgrades of 24%. The risks of a hard landing have been growing, while a soft landing looks to be moving increasingly out of reach.”
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Diversion: “The best books to hit the shelves in 2022 so far” – Five Books
Tweet of the Day: “Freefall for supplier deliveries components within both ISM Manufacturing and Services as of September … manufacturing at lowest since December 2019; services at lowest since February 2020″ – Twitter
Scott Barlow