Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank real estate analyst Mario Saric is recommending a shift to value in the REIT sector.
“Sector recovery to NAV implies unit price growth needs NAVPU/AFFOPU [net asset value per unit/adjusted funds form operations per unit] growth… CAD REITs have recovered to an ~2% NAV premium, which historically has led to an avg. 6-month total return [TR] of ~5% (vs. an avg. 15%+ TR when trading at a 10%+ discount to NAV). That said, our ~7% NTM [next 12 months] AVPU growth forecast + 4%-5% distribution yield still supports a 10%-12% NTM total return, which we think is achievable under positive economic momentum. We continue to recommend a slight short-term tactical shift into Value at current relative valuations to Growth.
Top Value Picks = Allied properties REIT, Chartwell Retirement Residences, Dream industrial REIT, European Residential REIT, Northwest Healthcare Properties REIT, Riocan REIT ;Top Growth Picks = Brookfield Asset Management, Crombie REIT, Granite REIT, BSR REIT, InterRent REIT, Summit Industrial income REIT, StorageVault Canada Inc., Tricon Residential REIT; Top Income = Automotive Properties REIT, CT REIT; all rated Sector Outperform”
Morgan Stanley U.S. equity strategist Michael Wilson noted that his expectations for inflation pressures and higher bond yields are taking shape. He has now turned his attention to the potential for a global economic slowdown.
“With inflation running hot in both consumer and corporate channels, the Fed is expected to formally announce its tapering schedule at this week’s meeting, with perhaps a more hawkish tone to convince markets that it isn’t falling too far behind the curve… (higher rates driven by a less accommodative Fed spurring multiple compression) is clearly under way … we shift our focus to … the ongoing macro growth slowdown – and when we can expect it to bottom and reverse course… 3Q economic growth forecasts having come down sharply before last week’s disappointing outcome. While its estimates of 4Q GDP have also declined, the consensus expects growth to reaccelerate sharply from here… we’re not as sure about that assumption, mainly because we think the more important driver of the slowdown has been a mid-cycle transition from an extreme post-recession peak, an adjustment that is not yet finished … we think the earnings growth slowdown will be worse and last longer than expected as the payback in demand arrives early next year with a sharp year-over-year decline in personal disposable income. While many have argued that the large increase in personal savings will keep consumption well above trend, it looks to us as if personal savings have already been depleted to pre-COVID-19 levels”
“@SBarlow_ROB MS (Wilson): ‘we think the earnings growth slowdown will be worse and last longer than expected’” – (research excerpt) Twitter
Following this slowdown theme, Citi economist Xiangrong Yu highlights weakening data from China, the country responsible for 20 per cent of global GDP growth over the past two decades,
“Behind the deeper Mfg PMI contraction in October, the production index weakened sharply, while producer price refreshed the record high. As a result of power rationing and related supply constraints, the features of ‘stagflation’ have become more evident and would limit near-term policy options… Mfg PMI contraction deepened in October. The headline print declined by -0.4pp from September to 49.2, well below market consensus but in line with our forecast (Citi/Mkt: 49.1/49.7). PMI edged down by -0.1pp to 50.3 for large enterprises and dropped by -1.1pp to 48.6 for medium-sized ones. It was flat at 47.5% for small enterprises, contractionary for the sixth consecutive month. Production lost a sizable -1.1pp to 48.4, the lowest since the COVID-19 outbreak. Continued power rationing and elevated cost pressures limited industrial production. New orders dropped by a smaller -0.5pp to 48.8, in which new export orders managed to recover 0.4pp to a still-low 46.6. Imports rebounded by 0.7pp to 47.5 as well. Domestic demand appeared to be weakening faster than trade, likely related to the property downturn. Producer price jumped by 4.7pp to the record high 61.1 (since 2016) as firms passed on higher energy and raw material costs. Indeed, purchasing price also surged by 8.6pp to 72.1.”
“@SBarlow_ROB China Stagflation’ Becomes More Evident as PMI Slides Further’ – (research excerpt) Twitter
Citi strategist Scott Chronert is now the firm’s chief U.S. equity strategist after the tragic passing of Tobias Levkovich. Mr. Chronert expressed concerns about earnings revisions in his latest report,
“Thus far in October, upward earnings revisions plunged to 68.3% from 78.0% in September and versus a peak of 82.3% in August. Peaking of revision momentum could be a catalyst for market weakness”
“@SBarlow_ROB Citi: “Peaking of revision momentum could be a catalyst for market weakness” – (research excerpt) Twitter
Diversion: “17 Holiday Gifts for Your Stressed Best Friend” – Wired
Tweet of the Day: “@lisaabramowicz1 Expectations for 5-year inflation in the U.S. have surged to near the highest in decades on an absolute basis, and relative to 10-year inflation rates, as per breakevens.” – Twitter
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