The Globe and Mail’s market strategist offers five thoughts on the research, analysis and ephemera that’s crossed his desk this week.
1. CIBC economists Andrew Grantham and Katherine Judge sifted through provincial data to find that while immigration increases shelter costs, it has little effect on broader inflation. The provinces with the highest percentage increases in population – PEI, Nova Scotia and New Brunswick – have seen the biggest increases in rent costs. But they found the increased availability of labour resulting from immigration limits upward wage pressure, offsetting the inflationary effects of higher demand.
2. RBC Capital Markets real estate analyst Pammi Bir acknowledged the volatility in the REIT sector in a recent report previewing the upcoming earnings season. Mr. Bir listed a number of REITs where he saw their ability to defend current payout levels as “below average.” He emphasized that distribution cuts were not imminent in any of the companies mentioned. However, because of some combination of elevated payout ratios, weak fundamentals, debt composition, high leverage and/or strategic considerations, the analyst believes the following REITs will have more trouble sustaining payouts than others in the sector: Allied Properties REIT, Artis REIT, Chartwell Retirement Residences, Dream Office REIT, European Residential REIT, Extendicare Inc., American Hotel Income Properties REIT, Melcor REIT, Northwest Healthcare Properties REIT, Nexus REIT, Slate Grocery REIT and SmartCentres REIT.
3. BofA Securities equity and quant strategist Savita Subramanian continues to be among Wall Street’s most bullish forecasters. In the most recent S&P 500 Relative Value Cheat Sheet, Ms. Subramanian noted that the equal-weighted S&P 500 is attractively valued on forward and trailing earnings multiples and also price-to-cash flow. The strategist recommends large-cap value stocks from the Russell 1000 Value Index, many of which benefit from low, easily accessible growth expectations, high relative yields and mature, reliable earnings streams. Sector-wise, she likes economically sensitive stocks like communications services and energy. Information technology, staples and real estate companies rank lowest in terms of valuations, momentum and earnings revisions.
4. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, is concerned about the falling demand for U.S. Treasuries at a time when issuance is high to fund a bloated federal budget deficit. She writes, “Growing debt and rising financing costs could ultimately squash growth or unleash higher inflation.” Neither the Federal Reserve, foreign investors or U.S. regional banks are buying as many bonds as they did previously. Ms. Shalett believes investors should add to holdings of real assets such as commodities and gold over time to compensate for the potential of a disorderly bond market.
5. Scotiabank strategist Hugo Ste-Marie detailed a steadily weaker global economic backdrop. Purchasing managers’ surveys of executives in manufacturing and services industries (PMIs) are compiled into indexes where a reading of 50 indicates no change in month-over-month activity. Mr. Ste-Marie notes the European, Australian and Japanese preliminary PMIs were released overnight Tuesday and all came in under 50, indicating contraction. He adds that these readings are historically consistent with recessions. Globally, the latest reading on manufacturing PMI is in contractionary territory at 49. The global services PMI has declined from over 55 to below 51, still indicating expansion but just barely.
6. Goldman Sachs chief U.S. equity strategist David Kostin expects a surge in share buybacks to help offset market volatility. He has created a basket of 50 companies where buybacks are expected. Stocks that are most likely to interest Canadian investors include T-Mobile U.S. Inc., MGM Resorts International, Quest Diagnostics Inc., Salesforce Inc., Apple Inc., F5 Inc., Applied Materials Inc. and Meta Platforms Inc.