Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Royal Bank CEO Dave McKay urged Ottawa to curb housing prices in an interview with BNN Bloomberg,
”I do think we have a supply-demand imbalance that’s causing a very strong, heated marketplace,” RBC chief executive officer Dave McKay said in an interview. “I do believe… that we do need to start invoking some policy change in the short-term.” Some of these policies McKay pointed to include the B-20 residential mortgage rule that the Office of the Superintendent of Financial Institutions (OSFI) introduced in 2012. Revised in 2016, the current guidelines urge lenders to implement a stress test on prospective borrowers by verifying employment status and income history. These measures were put in place to ensure that borrowers would be able to pay their mortgage, which McKay applauded. “The B-20 rules that we implemented a number of years ago were effective in suppressing demand and cooling things in the short-term,” he said. “Therefore, the infrastructure is already there, we can make tweaks to that policy…””
Mr. McKay also noted concern with the extremely high savings rate for Canadians. He noted there is C$200-billion is savings right now and it might over-stimulate the economy if spent all at once.
“Housing policy must cool market imbalance: RBC CEO” – BNN Bloomberg (includes video)
Morgan Stanley U.S. equity strategist Michael Wilson believes the easy, early-cycle money for investors might be behind us,
“There has been a noticeable shift in leadership that could be telling us something about the reopening that may not be obvious. Small caps and cyclicals have started to underperform the broader indices. We think this could be an early warning sign on margin pressure from supply shortages and higher costs. Meanwhile, weakness in both IPOs and SPACs could be a sign that new issue supply is outstripping demand and the rate of change on liquidity has peaked… Consensus currently projects 24.4% earnings growth on 6.3% sales growth. Financials, with their lapping of reserve builds, contribute over 40% of overall index earnings growth y/y while Airlines and Hotels/Restaurants are the biggest net drags. We expect another earnings season of strong “beats” that are already priced and expect investors will be more focused on guidance, specifically margins/costs.. Peaking earnings revisions breadth amid rising cost pressures could accelerate the rotation toward Quality”
“@SBarlow_ROB MS: “Peaking earnings revisions breadth amid rising cost pressures could accelerate the rotation toward Quality” – (research excerpt) Twitter
See also: “@SBarlow_ROB Citi: ‘Only four out of 11 S&P 500 sectors have shown EPS revisions to the upside thus far in April, as the percent of overall upward revisions slipped to 67.0%’ – (research excerpt) Twitter
Like Mr. Wilson, B of A Securities U.S. quantitative strategist Savita Subramanian sees headwinds for profit growth,
“Despite a strong near-term outlook, we see a number of secular headwinds for earnings. A fiscal boost is likely to wane from here, and further spending is likely accompanied by funding measures (i.e. higher taxes). Higher taxes as penned today would translate to a 7% hit to 2022 earnings, bringing next year’s growth to just 3%... President Biden’s push to narrow income inequality points to higher wages … Consumer Discretionary would be hit hardest by higher wages based on our labor intensity measures. And re-shoring trends pose risks, where close to half of margin expansion over the past two decades was driven by globalization … Euphoric sentiment suggests strong earnings are priced in … Beats underperformed during 4Q earnings season, suggesting the market was already pricing in blowout earnings last quarter. But stick with Value until profits growth peaks (by our numbers, 4Q21)”
“@SBarlow_ROB BoA raised US EPS forecast but notes mid-term headwinds for earnings growth” – (research excerpt) Twitter
Diversion: " What’s Making You So Gassy? This Gadget Aims to Find Out” – Wired
Tweet of the Day: “@lindayueh Drop in tax rates worldwide: 1979 to 2002 via @FT” – Twitter
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.