Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
I wrote about BMO senior economist Robert Kavcic’s lack of faith in real estate investing (under current conditions) for the most recent Globe Investor newsletter last week.
Mr. Kavcic presented his fully fleshed out view on the topic late Friday in Real Estate Investment: The Good, the Bad and the Implications,
“[Housing market speculation] is a double-edged sword. On the one hand, outright speculation adds to market froth, stretching valuations and affordability. At the same time, investors help bring new projects to construction and much-needed rental units to the market … Leverage is a big equalizer in real estate. After all, you typically don’t buy a $1 million equity portfolio with 20 per cent down. Steady long-term gains in real estate, along with persistently declining mortgage rates, have made leverage a powerful force juicing real estate … the long-term performance of real estate in Canada has been impressive. Going back to 1990, we estimate total annualized returns from a simple Toronto rental apartment would have run at about 7 per cent annualized … real estate has a proven record of inflation protection … The current environment suggests that investors are backing away from real estate, largely because the cash flow arithmetic doesn’t compute, and robust price gains are far less certain. Anecdotally, pre-sales are under pressure and some new construction projects are being shelved. According to Urbanation, new unsold Toronto inventory is near 20-year highs … a dearth of investment demand would weigh on new construction in the years ahead”
“Real Estate Investment: The Good, the Bad and the Implications” – BMO Economics
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Scotiabank analyst Meny Grauman seems indifferent about the upcoming earnings reports for Canadian banks,
“Given all that, it is probably not surprising that we take a conservative approach to numbers heading into another reporting season, and as a result we come in below the Street for pretty much every name we cover. We are not predicting anything dramatic this earnings season but just a combination of slower revenue growth and higher loan loss provisions. Although we are not above the Street for any of our names, we have a relatively more favourable view of CM and BMO given the underperformance of the shares heading into earnings, while NA looks relatively more vulnerable, as does CWB among the smaller banks. Bigger picture, we highlight that results will likely take a back seat to macro data (and rate expectations) for the foreseeable future”
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RBC analyst Geoffrey Kwan sees reasons for the housing market to avoid a serious downturn,
“On one hand, there are multiple risks both near-term (e.g., high interest/mortgage rates, weak/severe housing affordability issues) and medium-term (e.g., potentially substantial mortgage renewals in 2025/2026). On the other hand, there are mitigating factors such as the Canadian Government’s plan for substantially higher immigration over the next few years coupled with current elevated levels of international students and temporary foreign workers driving housing demand with little evidence suggesting there is a credible plan to substantially increase housing supply, which has failed to keep up with demand for arguably decades. As such, we think it’s possible the Canadian housing market could potentially avoid a severe housing downturn”
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Goldman Sachs chief U.S. equity strategist David Kostin sees more room for actively managed funds to add equity exposure,
“The primary positioning story this year has been investors’ sharp increase in equity exposure … Both hedge funds and mutual funds have room to increase their equity exposures further if the market environment continues to improve. Although hedge funds have lifted net exposures this year, net leverage currently stands below the average level of the last 5 years, suggesting there is room for funds to increase their equity length in the event that a soft landing continues to materialize. Similarly, mutual fund cash allocations remain 50 bp above their all-time low of 1.5% in December 2021. If mutual funds cut their cash exposures to the 2021 low, that would represent an additional $49 billion of equity demand.
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Diversion: “Microsoft AI suggests food bank as a ‘cannot miss’ tourist spot in Canada” - Ars Technica
Scott Barlow