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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

BMO analyst David Cheng sees an opportunity for index-tracking Canadian ETFs,

“Over the past three years, S&P/TSX 60 futures have consistently traded cheap , allowing futures holders to outperform the index by an average of 29bps per year while investors of the top S&P/TSX 60 ETF experienced 15bps of underperformance due to management fees. The persistent cheapness is unique to the Canadian market as futures benchmarked to the S&P 500 have consistently traded rich and cost more to hold for investors than ETFs. In our view, the main differentiating factor between the Canadian and U.S. futures market s is the rule that allows for tax deductibility of certain Canadian dividends. As of January 1, 2024, amendments to the Canadian Income Tax Act have now eliminated these types of deductions on received dividends for financial institutions … The new rule is likely to have a significant impact on the structural cheapness of S&P/TSX 60 futures , as sellers may lose some incentives to price futures as aggressively as before. With evidence of S&P/TSX 60 futures starting to turn rich, we believe 2024 might offer new index -tracking opportunities if the richness of S&P/TSX 60 futures continues to rise. For passive investors, monitoring the upcoming rolls could yield additional cost -saving benefits by considering different options between ETFs and futures … We encourage investors to engage with ETF market makers to get the latest data on S&P/TSX 60 futures and ETFs”


Scotiabank strategist Hugo Ste-Marie reported on the ongoing underperformance of Canadian dividend strategies,

“Canadian dividend strategies continue to struggle this year. We track four Canadian dividend-focused ETFs, not only are all of them underperforming the TSX Composite YTD, but two are posting negative total return performance so far. Traditional income-generating sectors (Banks, Utilities, Communications, Real estate, and Pipelines) are performing poorly mainly due to elevated/rising bond yields and strong risk-appetite. Banks’ fiscal Q2 reporting season starts today, but we believe it will provide little help: expectations are modest, but it’s hard to envision earnings massively beating in the current context (modest loan growth, likely rising PCLs, and soft capital market activity). While that may be cold comfort to Canadian dividend investors, they’re not reeling alone. Out of 10 U.S. dividend-focused ETFs we track, four are down YTD and all 10 are trailing the S&P 500 by a distant margin after less than two months (their average gain is +1.4%/median +1.5%). In the U.S., the problem is compounded by a concentrated mega-cap Tech leadership. Again, lower bond yields (and firmer EPS growth relative to other sectors) might be needed to propel dividend strategies in the driver’s seat. Despite the rough stretch, keep in mind that dividends matter over time as they account for the lion’s share of long-run returns”


Citi chief U.S. equity strategist Scott Chronert made one change to his large-cap recommended list, removing Deere & Co. for Delta Air Lines Inc.

The list is now T-Mobile U.S., Inc., Walmart inc., Constellations Brands Inc., Schlumberger NV, Bank of New York Mellon, LPL Financial Holdings Inc., HCA Healthcare, Intuitive Surgical Inc., Merck & Co., Union Pacific Co., Quanta Services Inc., Rockwell Automation, Lockheed Martin Corp., Applied Materials Inc., Microsoft, Micron Technology, CRH PLC, Prologis Inc. and Edison International.

Mr. Chronert also removed lithium producer Albermarle from his mid-cap stock list.


BofA Securities U.S. quantitative strategist Savita Subramanian believes the S&P 500 is cheaper than it appears,

“the S&P 500 is statistically expensive on 19 of 20 metrics and is trading at a 95th percentile price to trailing earnings ratio based on data back to 1900. Does this portend a market collapse? Statistical valuation models matter in the long-term and suggest lower returns over the next decade … at a basic level, we question the validity of comparing an index to its younger selves, especially today’s S&P 500 … The S&P 500 is half as levered, is higher quality and has lower earnings volatility than prior decades. The index gradually shifted from 70% asset-intensive manufacturing, financials and real estate companies in 1980 to 50% asset-light Tech & Health Care … Our base case is that normalized earnings are unlikely to plummet from current levels assuming no hard landing and near peak Fed funds rates; encouragingly, earnings and GDP growth have positively surprised in recent quarters”


Diversion: “And the biggest album of 2023 was…NOT by Taylor Swift” – A Journal of Musical Things

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