A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
The strategy team at Scotiabank updated their quantitatively-driven “SQore 30″ list of top domestic stock picks,
“Weak economic data and Powell’s ‘higher for longer’ speech killed the nascent Quality recovery. Value (ex CDA banks), Growth, and Momentum outperformed as pre-summer trends reasserted themselves. In our view, expensive Quality is likely to keep suffering from rising rates despite investors preparing for the worst and rising default risk . Overall, Value leadership is starting to run into serious trouble as the macro cycle turns [ towards slowdown]. As such, screening for growing Quality at an affordable price for list of names) would make sense. SQoRE Canada Top 30 Additions/Deletions: TFII [TFI International], CLS [Celestica Inc.], and AAV [Advantage Oil and Gas] replace STLC [Stelco Holdings Inc.], MX [Methanex Corp] , and PXT [Parex resources Inc]. Energy dominates the list. Materials continue to be cleaned out while a rare Tech name appears. Industrials, Staples, Discretionary, and Utilities are the other major sectors.”
The other stocks in the top 30 list are Birchcliff Energy, MEG Energy, Tourmaline Oil, Enerplus, Crescent Point Energy, Whitecap Resources, Nutrien, West Fraser Timber, Winpak, Canfor, Russel Metals, Mullen Group, Ritchie Brothers Auctioneers, Exchange Income Corp., Westshore Terminals, Dollarama, Spin Master, BRP, Gildan Activewear, Loblaw Co., George Weston, Empire, Alimentation Couche-Tard, Fairfax Financial, Capital Power, Boralex, and Altagas.
“SCotiabank’s - SQoRE Canada Top 30 picks” – (table) Twitter
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BofA Securities chief investment strategist Michael Hartnett has been really and correctly bearish of late. His most recent weekly report of investment flows included a warning about Aussie and Canadian banks among other cautionary notes,
“Aussie house prices in Aug fall by fastest rate in 30-years ; consumer stocks in H1 correctly discounted global house price correction in next 12mos; next shoe to drop will be Canada/Aussie banks (good short vs say Brazil) … Jackson Hole marked end of ‘Mission Accomplished’ summer trade of peak CPI, peak yields, Fed cuts in 2023; rally unwound because inflation unlikely to fall below 4% by ‘24 thus 10-year yields & Fed funds likely to exceed 4% by ‘24; … [U.S.] housing only sector showing sinister trends right now … Recession coming: deflation in Asia, stagflation in Europe, and once US tips from inflation to recession global EPS turns sharply negative (Q1′23)…why consensus fave barbell of long Exxon-long Apple now under pressure”
Mr. Hartnett’s notes are in bullet point form and readers often have to bring their own context. In this case, Australian housing has seen a similar multi-decade bull market as Canada. Brazilian home prices were almost completely flat between 2015 and the pandemic but have appreciated about 10 per cent since 2020. Mr. Hartnett clearly believes that the combination of higher global borrowing costs and slower economic growth will end the domestic housing bubble and this will become enough of a hurdle for bank profit growth that shorting them against beaten up global counterparts will be profitable.
“BofA’s Hartnett: “Next shoe to drop will be Canada/Aussie banks”” – (chart) Twitter
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The global strategy team at Citi advised clients to be cautious about risk assets,
“Central banks hike until the labour market breaks — Risk assets will struggle until the Fed decides to pivot. A deep recession is probably needed to get inflation decidedly lower. The Fed wants lower job openings but the issue is research suggests this doesn’t happen without a prolonged surge in unemployment. This should see lower EPS, which means that equities will revisit the June lows (and possibly beyond) before the Fed pivots. The USD still exhibits a negative correlation to equities, and in a world where central banks are raising rates (negative for fixed income) to induce recession (negative for equities), the USD becomes one of the few places to hide. The Q2 trade is back: sell risk, sell govvies, buy USD. We were proved wrong in our long 30y UST position as UST yields have been dragged higher by nat-gas induced sell-off in Gilts and Bunds”
“Citi: “Central banks hike until the labour market breaks”” – (research excerpt) Twitter
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Diversion: “Discovery of dinosaur fossil with skin in southern Alberta excites paleontologists” – CBC
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Scott Barlow