Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities chief investment strategist Michael Hartnett’s bearishness remains succinct and eminently quotable:
“US equities as % MSCI World Index @ new all-time high 66%; Tesla market cap same as entire European banking sector (~$750bn); regime change from Globalization to Isolationism = EM disinvestment + FX devaluation in “weak links” (Sri Lanka -45%, Argy -30%, Turkey -29%, Pakistan -25%, Hungary -24%, Egypt - 19% YTD all despite big rates hikes ); trade of ‘23 is buy EM humiliation, sell US hubris… so tempting to be contrarian bull (bonds have crashed, US stocks trading 15X forward earnings, everyone bearish; we know yield curve says recession and yield curve always correct (see 13 of past 13 inversions; only question for investors is hard landing or soft landing in 2023; we say hard landing.”
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BMO chief strategist Brian Belski believes that a peak in the U.S. dollar will signal a period of Canadian equity outperformance:
“Despite the strong value and fundamental position of the TSX, Canadian equities have not been immune to the flight to US trade over the last few weeks and months. In fact, net foreign equity flows hit a record low in June 2022 with momentum slowing sharply throughout the year. Furthermore, the strong appreciation of the USD has seen the Canadian dollar hit the lowest level on a relative basis since 2020. While the safety trade to the US could certainly persist for many more months or quarters, we believe when, not if a trough in both the currency and net equity flows occurs that it will become a strong tailwind for Canadian stocks. In fact, our work shows troughs in the Canadian dollar and foreign flows are often a strong contrarian indicator, with the TSX posting double-digit returns on average 12 months after such extremes. As such, despite continued elevated volatility and negative sentiment, we believe Canadian-centric investors should remain broadly more cyclical while focusing on areas with strong relative value and income growth.”
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Also from BofA, equity and quantitative strategist Ohsung Kwon argued that the TSX is better positioned for returns than the S&P 500,
“The TSX is pricing in a much higher chance of a recession (80%) vs. just 5% for the S&P 500. The TSX is also seeing better earnings trends (bigger 2Q beat & better revisions). The TSX’s historically higher earnings volatility suggests potentially a bigger downside risk in earnings, but the market is largely discounting the risk, in our view. .. The BoC has front-loaded hikes more so than the Fed, and our economists expect the BoC to slow the pace of hikes starting in October … They expect the terminal rate at 4.5% in Canada vs. 5.0% in the US, with activity remaining more resilient in Canada than in the U.S. A lower discount rate and better economic growth should translate to the TSX outperforming the S&P 500… The 2020s mark a secular regime shift: higher inflation/rates/commodity prices and de-globalization, all of which are more supportive for the TSX vs. SPX. Historically, the relative performance of the TSX vs. S&P 500 has closely followed inflation and commodity cycles, and the 2020s’ expected inflation and commodity cycle should translate to the TSX outperforming over the next decade”
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Diversion: “Boston Dynamics *really* does not want you to add weapons to its robots” – Gizmodo
Tweet of the Day: “Of the 6 different types of [U.S.] economic data that we get (as categorized by Bloomberg), it’s the labor market that’s most consistently been surprising to the upside. Housing the worst. " – Twitter
Scott Barlow