A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO economist Benjamin Reitzes is very concerned about domestic food inflation,
“Canadian inflation hit a fresh multi-decade high of 6.8% year-over-year in April. Food prices have been a key contributor to the rapid run-up in inflation, rising 8.8% y/y, the fastest pace since the early 1980s. Price increases have been broad-based, with staples such as cereal (+15% y/y), bread (+12.2% y/y), milk (+7.9% y/y) and condiments (+18.7% y/y) seeing big gains. Restaurant prices also jumped 6.6% y/y, so there’s no respite when dining out. Food is a part of everyday life and therefore has a big influence on inflation expectations. Unfortunately, with grain and energy prices pushing higher, we likely haven’t seen peak food inflation yet. Combined with the surge in gasoline prices, there’s a real risk that inflation expectations become unanchored. Accordingly, there’s no reason to expect the BoC to back off its hawkish rhetoric any time soon.”
“BMO on Canadian food inflation: “there’s a real risk that inflation expectations become unanchored” – (research excerpt) Twitter
Also from BMO, chief strategist Brian Belski reiterated his favouritism for domestic stocks over the S&P 500 while also reporting changes in his top market sector picks,
“As we have stated several times, including but not limited to in our 2022 Market Outlook, Canadian equities face similar challenges to the US as earnings momentum fades as part of the broader “transition to normalcy.” However, there are several key advantages to Canadian stocks that we believe make our price target much more achievable as 2022 progresses. Indeed, Canada’s strong relative value position, multiples broadly below historical average and significant exposure to commodity prices place Canada in a very attractive position to weather the volatility that is part and parcel of the overall transition process. To be clear, we continue to believe Canada will track US performance longer term, but also represents a timely and increasingly attractive value market that offers stability, cash flow, equity income and valuation support during these periods of heightened volatility… Sector Changes = Modest Reduction in Expensive Cyclical Exposure. Downgrading Industrials to Market Weight From Overweight. Maintaining Overweight in Financials, Materials, and Consumer Discretionary. Maintaining Market Weight in Energy”
The strategist also noted that communications services stocks are still his top pick for yield investors. His year-end TSX price target is 24,000, with an EPS target of $1,500.
Morgan Stanley analysts believe the U.S. energy sector will continue to outperform with a three-part rationale that also applies to Canadian oil producers,
“A New FCF-Driven Value Proposition. The Covid-driven price collapse in 2020 marked the start of a new era, one defined by pervasive capital discipline, rising free cash flow and an emphasis on growing shareholder returns instead of production. 2) Attractive valuations. E&Ps are trading at a 60-65% discount to the S&P 1500, 1.5x the 10-year average and wider than nearly any time in the past decade. 3) Constructive macro & commodity backdrop. Despite the recent volatility in the oil & gas markets, subdued supply & recovering demand should continue to support prices in 2022.”
“MS: “Three Pillars Underpin Our Attractive Industry View For E&P and Integrated Energy”” – (research excerpt) Twitter
Citi analyst Sathish Sivakumar detailed the ongoing issues with global freight congestion,
“On the US West Coast, port congestion has increased. The seven-day moving average of vessel capacity at port/anchorage for this week has increased to 0.74m TEU [twenty foot equivalent unit] compared to last week’s 0.71m TEU. On the US East Coast the seven-day moving average has decreased this week to 0.82m TEU from 0.83m TEU last week.
“Further, according to the Marine Exchange of Southern California, the number of container ships at the ports of Los Angeles and Long Beach waiting for berth, has marginally increased to 37 from 35 last week, with highs of 109 ships earlier this year (Jan 9th).
“Also this week we have seen an increase in cancelled sailings to c.8% from c.6%, but remains at elevated levels compared to c.4% a year ago. We see cancelled sailings as a near-term capacity management mechanism by liners to negate the pressure on congestion and freight rates.”
Newsletter: “Five reasons there’s even more pain yet to come in equity markets” – Globe Investor
Diversion: “First Patient Dosed With Experimental Cancer-Killing Virus in New Trial” – Gizmodo
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