Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
The spread of a new COVID variant has equity futures sharply lower at time of writing.
Citi analyst Dr. Andrew Baum helpfully provided an overview and timeline,
“The scientific, political and economic focus on the Nu variant is well founded despite the limited data. The 30 mutations in the spike and 10 mutations in the RBD have the potential to increase transmissibility vs Delta, diminish sensitivity to many approved antibody therapies, potentially reduce the protection afforded by the current COVID-19 vaccines. The next two weeks with be critical to determine whether Nu will displace delta in countries with high background rates such as UK and Germany … Concern over Nu needs to be balanced against the failure of other concerning variants such as Beta (also first identified in Africa) to out-compete delta. The next two weeks will be critical to: (i) determine whether Nu outcompetes delta in high delta prevalence countries (2-3 weeks), (ii) engineered pseudoviruses for Nu to determine neutralization by serum of vaccination and previously infected patients (2-4 weeks), and (iii) real world data to determine rates of hospitalization and death (c. 6-8 weeks). The implementation of travel restrictions and public health measures may push back some of the above timeline estimates. Novel oral anti-virals should retain activity against Nu but resistance may emerge with time.”
“Citi: “What’s Nu? Implications of a Concerning SARS-CoV-2 Variant” – (research excerpt) Twitter
Scotia analyst Robert Hope recaps the firms’ recent energy infrastructure conference and reiterates his top picks in the sector,
“We recently hosted Scotiabank’s annual Energy Infrastructure Conference, which included participation from 16 power, utility, pipeline, and midstream companies. In terms of sentiment, what a difference a year makes. Last year, energy sentiment was quite dour while this year the midstream management teams were very upbeat. The renewable power companies continue to see significant investor interest, but questions on valuations remain. The utilities look attractive to us on valuation and outlook, but interest is muted from investors. Our favourite names are Keyera in the pipeline and midstream space, AltaGas in the utilities, Northland in the power space and Topaz in the royalty space.”
“Scotia top picks in pipelines and energy infrastructure” – (research excerpt) Twitter
Market volatility has hit high growth/high valuation stocks hardest, as Wells Fargo U.S. equity strategist Christopher Harvey notes,
“The latest increase in nominal and real 10yr UST rates suggests the market expects the Fed to be more aggressive in using the Fed Funds rate to control infation and dampen stagflation fears. As we have discussed before, the direction of real rates has had a huge impact on relative equity pricing in 2021. Nowhere is this more evident than in our Growth-at-Any-Price basket (WFSSGAAP) of high-growth, richly-valued stocks. Since Thursday this portfolio is down 8.1% – far below the [Russell growth index] -1.4%. Even with the recent 18bp spike in reals, at -0.97% the current real rate is only in the historical 3rd percentile (since 1997). We believe that in 2022 real rates will continue to march higher, making it difficult for these “high flyers” to outperform. Our High-Covid Beta portfolio (WFSSCOVD) typically has moved in the opposite direction from high-growth Tech names.”
“Well Fargo: Rising real rates hammer ‘growth at any price’ stocks” – (research excerpt) Twitter
BofA Securities U.S. quantitative strategist Savita Subramanian believes we are already in a late cycle market environment where dividends are even more important to returns,
“In October, our US Regime Indicator moved further into Late Cycle (Exhibit 26), where investors have historically rewarded safer heavens, such as High Quality, Low Risk and Large Caps. High Dividend Yield has also been among the best performing factors in this phase, outperforming the index 75% of the time during Late Cycle phases since 1990 … If inflation remains elevated, which factors could benefit and suffer most? Our work suggests that factors with the most positive “inflation betas” include Risk (High Beta, Low Price, High EPS Estimate Dispersion) and Value (Price/Book, Forward P/E, Price/Sales, EV/EBITDA, Exhibit 2). Small Size was also an inflation beneficiary. Factors typically hurt by inflation include long-term Momentum factors (12-mth Price Return, 11-mth price return, 12-mth Price Return plus 1-mth Reversal), and Quality factors (Return on Capital, Return on Equity, Return on Assets) .. ”
These paragraphs are somewhat contradictory – recommending high quality stocks and low risk stock because of the late cycle backdrop, but also recommending high risk and small caps if inflation pressure continues.
“Contradictory advice from BofA” – (research excerpt) Twitter
Diversion: “It Took an Entire Month to Build This Elaborate Treetop Hot Wheels Track That Includes a Powered Elevator” – Gizmodo
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