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

Goldman Sachs strategist Ryan Hammond emphasized the negative implications of quickly rising inflation-adjusted (real) rates,

“US interest rates have moved sharply higher during the past two weeks, driven almost entirely by real rates. Since September 14, the nominal 10-year US Treasury yield has increased by 26 bp (1.28% to 1.54% as of this morning) and the real 10-year US Treasury yield has increased by 20 bp (-1.05% to -0.85%) … The current move in nominal rates represents a +1.4 standard deviation event and the move in real rates represents a +1.7 standard deviation event … S&P 500 returns have historically been below-average when rates rise by 1-2 standard deviations in a given month and negative when rates rise by 2+ standard deviations (Exhibit 2). The S&P 500 is particularly sensitive to real rate shocks today as the growing weight of technology has increased the implied duration of the index.”

Mr. Hammond went on to highlight that Fed-driven rises in real rates, as are happening now, are more harmful to the equity market than when real rates climb due to accelerating economic growth.

The inverse correlation between real rates and technology stock price to earnings ratios is a theme I’ve covered before and it’s one I will probably revisit shortly.

“@SBarlow_ROB GS: Not a great time for jumps in real rates” – (research excerpt) Twitter


Scotiabank analyst Mario Saric’s The REIT Stuff periodical warned investors in the sector that volatility is likely to climb as interest rates rise, but also that it should provide lucrative buying opportunities,

“The word ‘taper’ brings back instant harsh memories of 2013 for REIT investors … From peak to trough, Canadian REITs fell 18% in 2013, materially lagging the TSX and Financials Index, making it the worst-performing asset class on the TSX … Thus far, the 2021 ‘Taper Tantrum’ has proved much more pleasant for REITs, although it is still early days. In this monthly edition of The REIT Stuff, we compare today with 2013, ultimately concluding that the current situation should not be nearly as bad, but if it gets anywhere close to 2013, time to load up! … First, we think REIT price to NAV is more reasonable coming into the 2021 tapering … (NAV parity [now] versus almost double-digit premium [in 2013] … "

Mr. Saric did not provide top picks – the report implies that it would be the unit prices most hard hit that investors to research – but he currently has outperform ratings on Brookfield Asset Management , Interrent REIT, Allied Properties REIT, Crombie REIT, Northwest Healthcare Properties REIT and Tricon Residential Inc.

“@SBarlow_ROB BNS: taper might bring buying opportunities in REITs” – (research excerpt) Twitter


Also from Scotiabank, strategist Huge Ste-Marie forecasted big jumps in energy stock profits,

“Both WTI and natural gas prices have been rallying strongly of late. The reopening trade is boosting demand, while the supply is probably tighter than-expected after a few hurricanes offset part of OPEC+’s higher output on global markets. U.S. oil inventories are not only standing below their 5-year average, but they’re pushing towards the bottom-end of their 5-year range, which is supporting prices. … If the $75 level is overcome (for at least a few days), we believe the technical road map would point towards much higher levels. The good news is that the sell-side consensus is using much lower commodity prices to derive EPS/CFPS [cash flow per share] forecasts. For instance, consensus pegs the Q4/21 average WTI price at US$69/bbl, Q1/22 at US$67/bbl, and Q2/22 at US$66/bbl. … Natural gas prices (US$6.15/mmbtu; blue line) are also much higher than the sell-side consensus over the next few quarters (US$3.34/mmbtu in Q4, US$3.50/mmbtu in Q1/22, and US$3.15/mmbtu in Q2). If the current upswing is more than just a blip, analysts will soon have to adjust their commodity price deck higher (leading to positive revisions to EPS/CFPS forecasts).”

“@SBarlow_ROB BNS on energy: ‘the sell-side consensus is using much lower commodity prices to derive EPS/CFPS forecasts” – (research excerpt) Twitter


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