A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
CIBC real estate analyst Dean Wilkinson attempted to assess the effects of higher borrowing costs on his sector,
“With rates on the rise, we’ve observed a looming fear that the music may stop, and that rising debt costs may be the harbinger of doom. The profitability, and ultimately the valuation of companies comes to question given the naturally levered nature of the industry. Although a valid concern, this is not something new for the space. REITs have long been in the business of managing debt, and a changing interest rate environment (even rapidly) is nothing more than part of the natural ebb and flow of their business cycle … Distributable cash flow (i.e., AFFO[ adjusted funds from operations]), and ultimately profitability will be, we believe, immaterially affected by the increasing borrowing rates (even if they were to, say, double) … Valuations are currently trading at a ~24% discount to NAV, well below the historical average of 5%. Based on our Economic team’s forecast of a 2.4% long-term GoC yield (2023F), and assuming some level of mean reversion (towards which we tend to lean), this suggests healthy double-digit upside in the sector from this point”
Mr. Wilkinson has outperform-equivalent ratings on Dream Residential REIT, Brookfield Asset Management, Smartcentres REIT, Dream Unlimited Corp., Tricon Residential Inc., BSR REIT, RioCan REIT, Morguard Corp., Killam Apartment REIT, Minto Apartment REIT, First Capital REIT, European Residential REIT and Morguard North American Residential REIT.
“CIBC: Rising rates ‘immaterial’ for real estate sector profitability” – (research excerpt) Twitter
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BofA Securities global equity derivatives analyst Abhinandan Deb notes a “critical stress signal” from his risk measurement model,
“Critical Stress Signal (link here: CSS) triggered ‘Risk-off’ as of 13-Jun-22, with 12 (out of 43) sub-components rising by more than 0.5 standard deviations in a 10-day period. The CSS was designed in 2011 to identify tipping points in cross-asset risk – when stress momentum kept building and risk-assets incurred greater losses … Given a lack of clear evidence that US inflation has peaked from last Friday’s surprise CPI print, we see little reason for the Fed to step in tomorrow as they have done in the past around similar levels of stress … US IG credit spreads are already wider than where the Fed has pivoted dovishly in the past.”
The risk model incorporates implied volatility levels for prominent foreign exchange crosses, equity benchmarks, and credit spreads.
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Scotiabank strategist Simone Arel emphasized how expensive the U.S. equity market remains relative to the rest of the world in a Tuesday morning report,
“The S&P 500 has dropped about 10% in the last four trading sessions, pushing the benchmark into bear market territory [Monday] (-22% since its January high of 4,797)… the S&P 500 12M Fwd P/E ratio has compressed by 32% so far, similar to what we saw during the pandemic’s valuation compression phase. Looking back at the last 35 years, the benchmark’s fwd P/E compressed further only during three episodes: 1987 (-36%), 2002 (-37%), and 2008 (-42%). Despite the steep pullback, the S&P 500 (15.7x) still trades modestly above its long run average of 15.5x. However, ex-USA valuations have dropped to much lower levels. The forward P/E ratio of most major countries has dropped significantly below their long run averages… the TSX, UK, Germany, Japan, and certain EM markets are both significantly cheaper than the U.S. and stand near the low end of their usual range. At this point, we believe that to get another big wave of selling, the “E” needs to come down. While earnings expectations have remained extremely resilient for now, earnings revisions ratios have started to decline (something that requires monitoring).”
“Scotiabank: “TSX, UK, Germany, Japan, and certain EM markets are both significantly cheaper than the U.S. and stand near the low end of their usual range " – (research excerpt) Twitter
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Diversion: “13,000-Year-Old Tusk Reveals Life of ‘Fred,’ a Mastodon Who Died in Battle” – Gizmodo
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Scott Barlow