Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief investment strategist Brian Belski believes a rally is due in domestic dividend stocks,
“Against the backdrop of rising long-term interest rates year to date, ALL the Canadian yield-heavy sectors have underperformed. However, from our perspective each of these areas are excessively oversold and are extremely overdue for a sharp reversal to the upside once interest rate concerns stabilize. While we do subscribe to the “higher-for-longer” interest rate narrative, our work shows that these sectors can post solid absolute returns and, in some cases, even outperform when long-term interest rates are in a range. Indeed, the Real Estate sector typically posts its best absolute and relative performance when interest rates are range bound … While the Communication Services sector is interest rate sensitive, we believe the sector should be doing much better on an absolute basis given we are likely at or near peak long-term interest rates. Utilities is historically the most correlated with interest rates, but typically sees a clear inflection of performance once long-term interest rates peak and is generally a Market Perform in range-bound rate environments. Lastly, Canadian banks have become too interest rate sensitive in our view … the sector can outperform in most interest rate environments and typically posts its best absolute performance when interest rates are range bound or rising gradually”
***
Scotiabank real estate analyst Mario Saric restated his top picks in the sector after a CBRE report on industry profitability,
“We think winners = Apartments and Strip Retail, while Industrial (Class A), Office and Regional Malls = more challenged. Geographic winners = Halifax and perhaps Ontario, while Vancouver, Edmonton and Quebec lagged … Our ratings are intact heading into Q1 results. Top Growth Picks = BAM [Brookfield Asset Management], CAR [Canadian Apartment Units], CIGI [Colliers International Group], CSH [Chartwell Retirement Residences], GRT [Granite REIT], IIP [Interrent REIT] and SVI [Storagevault Canada]. Top Value Picks = BN [Brookfield Corp], DIR [Dream Industrial REIT], and REI [Riocan REIT]. Top Income Picks = AP [Allied Properties REIT], CHP [Choice Properties REIT], CRR [Crombie REIT], and CRT [CT REIT] … We still believe higher deal volume (tied to BoC/Fed rate cuts) is a critical catalyst for CAD REITs/BN/CIGI to the extent it helps substantiate our estimated 19% REIT NAV discount (perhaps closer to 10% than 20%; still “buy” territory) … We still believe that CAD Office REITs could perform well in a Soft Landing given the discounted valuation (for AP in particular) but fundamental catalysts (i.e., occupancy gains) may have to wait for H2/24″
***
TD Cowen analyst Mario Mendonca thinks domestic bank stocks have roughly 20 per cent upside if they can hit their return on equity (ROE) target. The catch is that he doesn’t believe they will,
“The group delivered an adjusted ROE of 13.8% in 2023, 610bps below the 5-year average before the GFC, reflecting a sharp decline in NIM [net interest margins] and much lower leverage. The sharp decline in leverage was a direct result of much higher capital requirements related to the introduction of Basel III and all its iterations. Without a sharp increase in NIM, we do not believe medium-term ROE guidance is achievable. We believe that if the ROE makes it back to medium-term guidance it will happen through a combination of a) 10-20bps increase in NIM, b) a recovery in capital markets revenue (CMRR), and c) slightly better efficiency ratios. There are a number of reasons why industry NIM is down 75bps over the last 20+ years, but we believe the most important (and most likely to reverse) is the sharp decline in 5-year bond yield.”
***
Diversion: “AI Can Tell Your Political Affiliation Just by Looking at Your Face, Researchers Find” – Gizmodo
Scott Barlow