Globe Investor
 

January 23, 2019

 
Markets are not out of the woods yet, what income investors should buy, and two broken blue chips
Markets are not out of the woods yet, what income investors should buy, and two broken blue chips - A roundup of investment ideas for active investors
 

Scott Barlow

 
Market Strategist
The sharp slide in global equity markets in late 2018, followed by the significant bounce higher this year, has left almost nothing in the way of reliable market trends to guide investors. What trends there are, notably those indicating a global economic slowdown, are not encouraging. On Tuesday, we started to see that play out in markets.

 
From the end of September to Dec. 24, 2018, the MSCI World Index cratered 17.1 per cent and the S&P/TSX Composite Index skidded 11.8 per cent. Since that point, to Monday’s market close, the global benchmark recovered 11.1 per cent of that ground, and the S&P/TSX has rallied 11.8 per cent. Markets suffered a setback to that advance on Tuesday, when the world index declined and the S&P/TSX fell, ending a 12-day long rally.

 
It is certainly important to identify the stocks and sectors that led the domestic market’s 1,574-point recovery from the December low – Toronto-Dominion Bank boosted the index by 104 points on its own and Suncor added 89 – but we’re looking at a potentially reflexive rally from deeply oversold conditions. Tuesday’s market pullback could be a signal that it’s losing momentum.

 
 
 
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December was notable for extreme pessimism among major Wall Street strategists and economists and the same trend has re-emerged this week. Merrill Lynch economist Ethan Harris published a report Tuesday highlighting investor pessimism and slowing capital expenditures across the world. While “there has been a mini-rally in the markets in the past two weeks, the risks to global growth remain skewed to the downside,” it said.

 
Morgan Stanley U.S. equity strategist Michael Wilson was similarly dour in his most recent report. “A rebound off extremes and hope around political headlines have helped move the market higher, but we don’t like the risk-reward of chasing stocks at these levels," he wrote. "Technically, we think the odds of a full or partial retest of the December lows are still relatively high.… The bulk of earnings season is still ahead and we expect further downside in revisions.”

 
Bespoke Investment Group is also concerned about how earnings season, while early, is shaping up. He notes that the revenue beat rate for fourth-quarter earnings is sitting below 50 per cent at the moment while the earnings-per-share beat rate is at 69.5 per cent. The sub-50 per cent revenue beat rate is dramatically lower than the first quarter of 2018, when a record 77 per cent of reporting companies exceeded sales forecasts. “Not good,” it concluded.

 
I can go on. Bank of Montreal reported that China’s economic growth for 2018 was the weakest in almost 30 years. South Korea, a primary global industrial and technological trading hub with much more reliable economic data than China, endured a “collapse” in exports, according to their latest trade statistics. Historically, South Korea’s equity benchmark, the KOSPI, has been closely correlated to global commodity prices.

 
Investors are now confronted with equities markets that have panicked, recovered a lot of ground, and are now looking for direction. Recent portfolio gains can be consolidated if Mr. Wilson from Morgan Stanley is incorrect and the results from U.S. earnings season improve – only about 60 companies in the S&P 500 have reported so far – and show that profit growth can be maintained despite indications of a slowing global growth.

 
Improvement in economic data flows would be an obvious help to investors, dispelling global recession fears. Resolution of the U.S.-China trade dispute would similarly provide markets with a huge lift.

 
Investors have previously had legitimate reason for concern during the rally that began in March, 2009 – the European banking crisis is just one example – and things have turned out okay. That may well be the case this time, but investors should not mistake the year-to-date rally as a sign that we’re out of the woods and market risk is a thing of the past.

 
On Tuesday, we saw just how fragile this market rally is.

 
-- Scott Barlow, Globe and Mail market strategist

 
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Stocks to ponder

 
TMX Group Ltd. (X-T). The steep selloff in the share price may represent a buying opportunity for long-term investors. The stock is trading at a slight discount to its historical multiple and the consensus target price that suggests the stock offers investors a potential one-year total return (including the 3 per cent dividend yield) of over 28 per cent. Toronto-based TMX Group is an exchange operator, providing listing and trading markets as well as clearing facilities through its operation of leading exchange groups such as the Toronto Stock Exchange, TSX Venture Exchange and the Montreal Exchange among others. Jennifer Dowty reports (for subscribers).

 
The Rundown

 
Broken blue chips: Manulife and Power Financial fight to shake off the effects of a crisis

 
Manulife Financial Corp. and Power Financial Corp. have more than a few things in common. But here’s the big one: These former stock-market superstars have done poorly since the eruption of the credit crisis, underperforming other Canadian financial companies by a wide margin and leaving long-term investors exasperated. Low stock valuations are raising hopes among some analysts and investors that Manulife and Power Financial are bargains, poised to regain some affection from the market. Manulife made a couple of lists of top stock picks for 2019. And top executives at both companies believe they have the right strategy for winning back investors. David Berman reports (for subscribers).

 
The blackout: Why this corporate earnings season is so vital for investors and economists alike

 
Economic and financial data have become casualties of the U.S. government shutdown. At a time when financial markets are particularly sensitive to recession risk, a blackout of key indicators is making it harder to take the pulse of the U.S. economy. The closing of several government departments has already delayed the release of data on home sales, trade, construction, factory orders, inventories, durable goods and retail sales. If the shutdown continues, fourth-quarter GDP figures, scheduled for the end of January, could also be put off. The data drought has also crossed the border, with Statistics Canada announcing Thursday that it lacks the U.S. figures needed to release monthly trade data. With investors eager to fill the data gap, corporate earnings season is serving as an alternative source of economic foresight. Tim Shufelt reports (for subscribers).

 
Yes, the economy is slowing – but the smart money is betting on a modest downshift

 
Global economic growth is slowing under the weight of feuding politicians, growing trade tensions and rising interest rates. Last week, China injected US$84-billion into its banking system in an attempt to boost lending in its decelerating economy. Germany revealed its output barely grew in the fourth quarter of last year, Britain stumbled through yet more Brexit-related chaos and the U.S. government remained largely shuttered as President Donald Trump continued to butt heads with Congress. Broad measures of what lies ahead for the global economy paint a downbeat picture. A gauge of leading indicators maintained by the Organization for Economic Co-operation and Development has slid to its lowest level since 2012, suggesting even more weakness is likely over the next few months. Meanwhile, 60 per cent of money managers surveyed by Bank of America Merrill Lynch expect growth across the world to weaken this year, the most pessimistic such reading since 2008. Ian McGugan reports (for subscribers).

 
CIBC Wood Gundy changes compensation structure for advisers

 
Canadian Imperial Bank of Commerce’s brokerage arm has changed its compensation scheme after employees complained it influenced some advisers to push clients into accounts with fixed annual fees. CIBC Wood Gundy is reinstating restricted share options for transactional advisers who charge clients commissions for every trade. Until recently, the bonus shares were paid only to advisers on the so-called fee-based model, in which their clients pay an annual fee, usually about 1 per cent of assets. But some CIBC employees complained to the bank that the structure overly influenced investment advisers to push customers into fee-based accounts, even in situations where the client would be better served by remaining in a commission-type account. In late 2018, CIBC changed its practices, according to confidential CIBC documents obtained by The Globe and Mail. Clare O’Hara reports (for subscribers).

 
It’s time for income investors to get defensive. Here’s what they should be looking to buy

 
Income investors should always take a conservative approach when it comes to portfolio building. This is the time of life when cash flow and asset preservation are the top priorities. Capital gains are nice, but they should not take precedence. Especially now. As we have witnessed in the past two months, stock markets have become highly volatile. We’ve seen several swings of more than 500 points a day in the Dow Jones Industrial Average, and on Dec. 26 the index posted a record one-day jump of 1,086 points after hitting a low for the year on the day before Christmas. Now that’s volatility! As an income investor, that’s not a game you want to play. Gordon Pape outlines the actions he recommends to put your portfolio on the defensive. (for subscribers).

 
Why Buffett’s wide-moat theory works for investors

 
Warren Buffett likes firms with simple businesses that are hard for competitors to take on. They’re like giant castles with big moats around them. The wider the moat the better. Mr. Buffett turned his passion for moats into a great fortune. Financial research firm Morningstar (MORN) adopted the moat concept and ran with it early this century. Their team of analysts rate the strength of a company’s moat, which encapsulates their view of the firm’s sustainable competitive advantage. The idea being that the firms with wide moats can foil the competition and earn high returns on capital for many years. Those with narrow moats or no moats aren’t as strong. Norman Rothery takes a look at how moats can affect a company’s performance (for subscribers).

 
The smartest places to invest your money at 30 and 60

 
Call it a question for the ages. Whether it’s at 30 or 60, Canadians often want to know – what’s the best way to handle the money you save? The choices can seem daunting, whether you have money that’s burning a hole in your pocket or you simply have a hole in your pocket, but nothing to burn. The answers are often different, depending on your age and goals. David Israelson reports on the issues.

 
Our tool has been updated for 2019: Here’s how much your TFSA could be worth

 
Others (for subscribers)

 
Merrill Lynch’s biggest fear is becoming reality

 
These 27 ‘idiosyncratic growth’ stocks are set to outperform: Goldman Sachs

 
These 14 TSX value stocks surfaced using sharia-investing screen

 
As China’s economy falters, fund managers look to bonds

 
The shareholder puzzle facing European airlines after Brexit

 
The stock market’s on-again, off-again relationship with Trump

 
The Globe’s stars and dogs for last week

 
Monday’s Insider Report: Insider invests over $4-million in this cyclical stock

 
Tuesday’s Insider Report: In reaction to a rally, CEO and CFO cash out over $3-million in this stock

 
Tuesday’s analyst upgrades and downgrades

 
Monday’s analyst upgrades and downgrades

 
Others (for everyone)

 
Seven ways to up your investing game

 
40 years after his ‘folly,’ Bogle’s index funds reign

 
Asset managers brace for more job cuts amid market turbulence

 
Ask Globe Investor

 
Question: When holding several investment accounts – for example, non-registered, tax-free savings account, registered retirement savings plan – do I consider the totality of the assets in allocating across sectors or do I view each account as a separate entity and try to diversify across sectors within each individual account?

 
Answer: Diversifying each account is fine, but it may not always be practical. For example, if you’re investing in individual stocks and some of your accounts are relatively small, it may be difficult to achieve adequate diversification without buying very small chunks of each stock – and driving up your commission costs in the process. One solution is to use exchange-traded funds or low-cost index mutual funds to achieve diversification in smaller accounts. Also keep in mind that your preferred asset mix may vary across different accounts. In my kids’ registered education savings plan, for example, I have a higher weighting of cash and guaranteed investment certificates than I do in my RRSP because I’ll likely be tapping the RESP sooner and I’m not comfortable taking as much risk.

 
But, while fine-tuning the asset mix of each account can be helpful, it’s really the big picture that matters most. I recommend that you consolidate all of your accounts – non-registered, TFSA, RRSP etc. – on one spreadsheet or online portfolio tool so that you can monitor the weighting of each security as a percentage of your total holdings. The rough rule of thumb I use is to not let any one stock exceed about 5 per cent of my total assets, and to cap my exposure to any one sector at about 15 per cent. These numbers aren’t carved in stone; the idea is to establish some general guidelines that will prevent you from going overboard on any single stock or industry and to apply those guidelines to your portfolio as a whole.

 
--John Heinzl

 
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

 
What’s up in the days ahead

 
Where do you take refuge in an uncertain stock market? One idea is to look for companies that still have the power to raise prices. Citigroup has just published a list of 50 such U.S. companies and Ian McGugan will report on its findings.

 
Click here to see the Globe Investor earnings and economic news calendar.

 
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Compiled by Gillian Livingston

 
 
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