Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
CIBC analyst Sid Mokhtari found signs that the rally in commodity prices might be at risk,
“Year-to-date, many of the commodities (and related sectors) are up nicely, particularly in the energy space. The relative-strength rotation in commodities has also been followed by positive leadership from the defensive GICS sectors - Staples, Utilities, and Telcos, which is often a late to down-cycle footprint (not good for commodities). The latest rapid strength of the USD may also be perceived as a defensive technical condition – after all, commodities are still priced in USD, and the weakening purchasing power of the cross-currencies may dampen the strength of the commodities… It also merits highlighting that the recent price action in commodity stocks is beginning to diverge negatively relative to their underlying commodities. Base metal- and gold-stocks have already sharply corrected relative to copper and gold commodities, respectively, and the breadth in the energy sector has also begun to roll over. Historically, commodity stocks tend to lead their underlying commodities, and the recent price action may be yet another warning signal that commodities are at risk. "
The most interesting point for me here is that equity investors already seem to be discounting lower commodity prices.
“CIBC: “Commodities Maybe At Risk”” – (research excerpt) Twitter
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Scotiabank REIT analyst Mario Saric noted that a stagflationary environment would not be good for his sector,
“We tackle the most popular discussion topic from our last round of marketing, namely how to think about Canadian REIT allocations if stagflation/recession becomes a reality (it is worth noting neither is forecast by Scotia Economics through 2023) … Need to revisit the 1970s/early 1980s to discuss stagflation . REIT total return lagged the broader benchmark by a modest average ~200bp [basis points] during the 3 periods we identified. We think stagflation = NAVPU [ net asset value per unit] erosion = poor CAD REIT total return. Lower forecast NOI [net operating income] may = higher private market cap rates given the 10YR GOC yield is +209bp since 2020 (vs. 14bp private market cap rate decline). That’s not a good combo for our NAVs and total returns given high reliance of REIT unit prices on NAVPU growth over the past 15+ years… REITs and recessions don’t get along; before and after is fine. On average, REITs perform in line with broader benchmark heading into the 6 identified recessions since 1970 (they did lag into the GFC and COVID recessions), but then under-perform during the recession (including the last two). Notable out-performance (+5%) typically starts 6 months post recession completion and grows over the following 12 months to +24%. Go more defensive if you believe a recession is coming in 2022 … "
Mr. Saric’s top picks for growth oriented REITs are Brookfield Asset Management Inc., Granite REIT, Interrent REIT, Flagship Communities REIT, Summitt Industrial Income REIT, Storagevault Canada Inc., and Tricon Capital Group. For value investors his selections are Canadian Apartment Properties REIT, Brookfield AM, Chartwell Retirement Residences, Dream Industrial REIT, European Residential REIT, Interrent and Riocan REIT. For straight Income, he likes Automotive Properties REIT, Crombie REIT, CT REIT, and Northwest Healthcare Properties.
“Scotiabank on REITs: “Go more defensive if you believe a recession is coming in 2022″” – (research excerpt) Twitter
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BMO senior economist Sal Guatieri noted some concerning trade data form the U.S. which dovetails a bit with CIBC’s caution on the commodity rally in that signs of slowing economic growth are increasingly apparent,
“The advance report on U.S. goods trade for March was a stunner, showing both the biggest deterioration and largest deficit on record (back to 1948). Both imports and exports surged, partly due to higher prices (notably oil), but imports rose faster (11.7% versus 7.7%). The report suggests a downside risk to our estimate for Q1 real GDP growth of 1.5% annualized, which is out Thursday. There is even some chatter of a negative number due to big hits from trade and inventories. On the plus side, domestic demand still looks strong, as goods import receipts leaped 43% annualized in the quarter, while goods import prices rose a lesser 17%. No recession there.”
“BMO: “The advance report on U.S. goods trade for March was a stunner “” – (research excerpt) Twitter
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Diversion: “Canada’s working-age population is older than ever, StatsCan says” – CBC
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Scott Barlow