Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank strategist Hugo Ste Marie seems pleasantly surprised by profit reports from the major Canadian banks and sees the stocks “doing some catch-up.”
“All major Canadian banks reported earlier this week. While profitability was certainly under pressure, most managed to handily surpass expectations and appeased concerns somewhat on the PCL [provisions for credit losses] front… provisions for credit losses (PCL) as a percentage of gross loans dropped sharply from last quarter, which has historically supported investors’ sentiment and led to multiple expansion. .. The environment certainly remains challenging, but the sector appears well positioned to do some catch-up. Despite its solid outperformance MTD (+10.5% vs. TSX +3.5%), banks are still lagging the TSX by over 700 bp YTD. The economy has started to heal with the job market recovering, Canadians will continue to get financial support from the federal government (positive for income), bond yields have started to rise slowly with the curve steepening, dividend yields are high, and relative valuation has not been this attractive in 20 years. Moreover, we note that the TSX Banks Index broke above a key resistance zone… the index crossed above its 200-d MA and a horizontal line going back to the late 2018 low.”
“@SBarlow_ROB Scotiabank: Canadian bank stocks “take big step in the right direction” – (research excerpt) Twitter
Also see: Canaccord Genuity upgrades CIBC and other analyst actions Friday
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Citi global economists are still bearish (my emphasis),
“There continued to be positive high frequency data news out of the US on housing and durable goods, and global trade volume rose in June. The US and China also had constructive discussions regarding the Phase 1 trade deal … the situation on the ground remains challenged, as Europe and Asia suffer second waves of infections … A closer look at incoming data suggest that long-term economic damage looms … COVID-19 still undermines all three drivers of long-term growth. Labor-markets are being scarred, and weak capex and contracting trade – despite the June uptick – portend a shrinking capital stock and lower productivity growth. A technology-fueled productivity surge could boost long-term growth, which is implied by Citi’s regional GDP projections. We doubt that economies will see a repeat of past productivity gains”
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BMO highlights that the COVID-fighting public spending burden in Canada is falling primarily on the feds, not the provinces,
“At the deep end, Alberta’s shortfall in excess of 8% of GDP is not only the largest in Canada, but the largest ever recorded by any province going back to the early-1980s. At the shallow end, the Atlantic provinces are still tracking at a very manageable 1%-to-2.5% of GDP, with economies hit less severely and spending demands less significant. The bigger theme is that Ottawa is still bearing the majority of the fiscal cost of the pandemic, with the deficit at nearly 16% of GDP (if not higher). And, transfers to the provinces were ramped up by another $2 billion this week.”
“@SBarlow_ROB BMO: “Big Provincial Deficits Still a Fraction of Ottawa’s” – (research excerpt) Twitter
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Bespoke Investment Group provided more details on the dominance of large cap tech stocks so far in 2020,
“So far this year, the 50 largest stocks in the S&P 500 are up an average of 11.3% YTD, and if we were to take an even narrower look at just the ten largest stocks heading into the year, the average YTD gain is over 27%! While the largest stocks are up a lot this year, the next 400 stocks in terms of market cap haven’t fared nearly as well, averaging a decline of 2.0%. .. the 50 smallest stocks are down an average of 15.3% YTD”
“@SBarlow_ROB Bespoke: “the 50 smallest stocks are down an average of 15.3% YTD” – (research excerpt) Twitter
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B of A Securities’ Research Investment Committee is predicting a deflationary environment caused by declining developed world birth rates,
“Secular stagnation is our base case, populist stagflation is our bear case, and “elevation” via productivity-boosting industrial policy is the only sustainable bull case we can see for developed economies. If we think of GDP growth as the growth in population times productivity, any hope for higher growth will probably have to come from the latter. Plunging birthrates across the developed world herald a very disinflationary future. No developed country is having children above the replacement rate of 2.1″
The accompanying chart (link below) shows that G10 inflation rates have closely followed the birthrate with a 25-year lag – CPI is determined by the relative number of 25 year olds basically.
" @SBarlow_ROB BoA: “Demographics is destiny” – (chart) Twitter
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Diversion: “Climbing Mount Everest Has Gotten Easier, Study Finds” – Gizmodo
Tweet of the Day: “@lisaabramowicz1 Jay Powell is walking a tightrope: How to convince markets the Fed has power to juice inflation without long-term borrowing costs rising too much. After Powell’s speech yesterday on letting inflation run hot, long-dated bonds sold off. 30yr yields are the highest since June. " – Twitter
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Scott Barlow