Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Morgan Stanley strategists are on a roll, with accurate bullish forecasts and also presenting ways in which investors can easily follow market trends.
The firm’s U.S. equity strategist Michael Wilson continues this pattern in his “Weekly Warmup” report, highlighting a divergence in the performance of utilities and bank stocks that will be resolved by long term bond yields,
“The Fed has signed on to higher inflation targets as a commitment to its primary goal of full employment. However, they did not commit to pinning rates at the back end via yield curve control or yield caps suggesting back end rates can rise with inflation expectations… Utilities and Banks foretelling a different outcome. Which one is Right? Utilities underperformance suggest rates are moving much higher while banks underperformance say the opposite. We believe this sets up a very good risk reward trade to own banks/financials either outright or with Utilities as a long on the other side.’
The short version: if Morgan Stanley is right and long bond yields climb, banks will outperform utilities. The relative performance of these two sectors will provide ongoing indicators of the trend. The pattern is likely to be cross-border in my estimation.
“@SBarlow_ROB MS: “Utilities and Banks foretelling a different outcome. Which one is Right?” – (research excerpt) Twitter
Citi U.S. equity strategist (and Montreal-born) Tobias Levkovich published a useful summary of the investment trends he believes will be sustainable as the pandemic eases,
“Many believed that cruising would suffer permanently, but early bookings for 2021 suggest that people are getting over that hurdle. In contrast, the accelerated rise of telemedicine has longer-term implications. Business travel also should see a 10%-20% structural reduction as corporates learned over the last six months how to engage internally and externally via virtual video meetings … The “stigma” of not coming to the office has fallen away, and a significant number of employees may choose to work remotely with the blessing of their bosses. Reverse urbanization should translate into increased housing activity given the ability to get more space for the money versus high rents in major city apartments … Income inequality and even larger wealth differentials now generate greater populist policies, with some negative societal implications that ultimately will result in higher taxation and more pushback on immigration and imports.”
These observations are negative for major city landlords, airlines and hotels, and positive for leisure travel.
BofA Securities sees a strong snapback for the Canadian economy,
“GDP showed a nice rebound in June at 6.5% qoq saar [annualized]. Despite the rebound, 2Q had a record fall at -38.7% qoq saar. Given virus containment and fiscal stimulus, we expect a 42% qoq saar rebound in 3Q and update 2020 to -5.7% from-6.5%. Further fiscal stimulus is likely on 23 September to keep supporting the recovery, and the fiscal deficit could near 20%... Our view has been that containment of the virus in Canada will be reflected in better performance during the recovery compared to the US. So we expect a strong rebound in 3Q. With above-expectations growth in March and the extension of fiscal stimulus, we believe that 3Q could rebound even more than what we previously expected and hence we raise our 3Q GDP growth forecast to 42% from 38%. We also improve our forecast for year end. We now expect GDP to fall 5.7% in 2020 instead of our previous forecasts of a 6.5% fall
“@SBarlow_ROB BoA: “very strong rebound in 3Q 2020 [ for Canadian economy]” – (research excerpt) Twitter
Also from Citi, Global strategist Robert Buckland raised his forecasts for global profits but warned that analysts are still too bullish,
“We now expect global EPS to contract 30% in 2020, more bullish than our previous -50% forecast but still more bearish than the analyst consensus (-18%). This earnings upgrade, along with continued central bank support, means we now target 705 on the MSCI AC World benchmark to mid-2021, up 4% from current levels. That would imply global equities trading on 23x 2021 EPS, well above the 15x long-term average.. The bottom-up analyst consensus expects an 18% global EPS contraction in 2020 and a 28% rebound in 2021. This implies regaining the previous peak by the end of next year, which looks too optimistic.”
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