This edition of Market Factors starts with a promising stock selection method and continues with signs of an imminent economic slowdown. There’s a karaoke-related diversion and we look ahead to important data releases for the coming week.
Stock tickers are displayed at the New York Stock Exchange.Mark Lennihan/The Associated Press
Equities
Four investment themes and one outperforming stock screen
Morgan Stanley equity strategist Stephen Byrd not only identified four investment themes he expects will outperform in the coming decade but also implemented a proprietary stock screening method to uncover related investments. Inevitably, artificial intelligence is one of the themes but the others – multipolar world, future of energy and longevity – offer investors more options.
The strategist believes that the high investment costs for AI – roughly US$3-trillion for data centers and power equipment by 2028 – will generate US$11-trillion in revenue by the same year. Humanoid robots and rapid software development will prove the exponential growth and benefits of AI technology.
Multipolar world refers to the trend of countries “[promoting] their visions of national and economic security through less open commerce and more local control of supply chains and key technologies.” This combination of economic nationalism and deglobalization will create corporate dilemmas and require new investment.
The future of energy theme covers decarbonization, energy security, the AI-driven surge in energy demand, new technologies (carbon capture and grid optimization for example), the international spread of natural gas power and increased electrification.
Morgan Stanley’s definition of the longevity theme covers the rapid development in obesity treatments, affordable nutrition, education for aging workers as retirement ages move higher and the changing needs of financial retirement planning as longevity increases.
The stock screening method for companies benefitting from these trends takes the universe of overweight-rated stocks at Morgan Stanley with a market cap over US$70-billion, removes those where the analyst bear case stock price is over 50 per cent of the bull case as well as those where the options market implies a less than 15 per cent probability of target prices being hit. Backtesting is never proof of future performance but this method outperformed the S&P 500 by an average of 2.5 percentage points over the past decade.
Stocks benefitting from the AI theme that are most likely to interest Canadian investors include Salesforce Inc., Nvidia Corp., Broadcom Inc. and Samsung Electronics. Lockheed Martin Corp. and Northup Grumman Corp. are part of the multipolar world trends while Petrobras, Rio Tinto PLC and Rolls Royce Holdings PLC were highlighted for the future of energy. AstraZeneca PLC and Eli Lilly & Co. are the two companies listed for longevity.
Economy
Survey signals imminent economic slowdown
BMO chief economist Doug Porter found an unsettling undercurrent in U.S. economic data released last week. The big news was that employment results for April on Friday came in better than expected and that is important. A day earlier, however, the ISM Manufacturing survey results signaled an economic slowdown ahead.
The manufacturing survey is composed of five equally weighted components – new orders, production, supplier deliveries, employment and inventories. The new orders segment, which came in at a contractionary 45 (50 is no change) when 47.2 was forecast, is conventionally viewed as the most forward-looking part of the survey.
Mr. Porter finds, however, that the production component most accurately predicts GDP growth with a three-month lag. The production reading for April was down four points from the prior month, to 44, a level consistent with no economic growth in the ensuing 12 months. Mr. Porter adds, “There’s no mystery where the weakness was—export orders plunged 6.5 points to 43.1 … it’s only been lower during the 2009 recession and in 2020.”
In this Tuesday March 26, 2019, photo from left, Zach Rowley, Bryan Cooper, Heidi Stevenson, and Liz Adeola sing at Heart & Seoul Karaoke, a new business in Salt Lake City.Trent Nelson/The Associated Press
Diversions
Most popular karaoke songs
Alan Cross’s Journal of Musical Things site posted the results of a study identifying the greatest karaoke songs of all time. Backstreet Boys, Whitney Houston and Britney Spears figure prominently but everybody knows the best karaoke songs are Broken Wings by Mister Mister and I Want to Know What Love Is by Foreigner.
The essentials
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Globe Investor highlights
Count Ian McGugan as one market follower who believes U.S. stocks can’t stay this strong when consumers are so downbeat. Meanwhile, Jamie McGeever looks for reasons why equity investors are much more bullish than those trading oil, gold and fixed income
Grocery stocks are surging. David Berman warns this isn’t the time to load up on them
Rob Carrick outlines some top adviser picks for retirees who want to keep some of their investments in cash
Norman Rothery shows us some hard numbers on the pitfalls of holding only a few stocks
What’s up next
Employment numbers for April are the only potentially needle-moving data releases in the coming week for Canada. Economists expect 25,000 new jobs and an unemployment rate of 6.7 per cent on Friday when the report comes out.
The domestic earnings season really heats up. Prominent reports include Suncor Energy Inc. on Tuesday ($1.246 per share expected) and then Fortis Inc. ($0.972) and Manulife Financial Corp. ($0.978) on Wednesday. Thursday is huge as BCE Inc. ($0.622, market will be looking for dividend cuts), Hydro One Ltd. ($0.546), Emera Inc. ($1.028), Shopify Inc. (US$0.253), Cenovus Energy Inc. ($0.406) and Sun Life Financial ($1.710) all report.
Telus Corp. ($0.22) and Enbridge Inc. ($0.959) results are out Friday and Constellation Software Inc. profits are announced next Monday (US$18.837).
The Americans will digest an ISM Services Index update for April where an expansionary 50.2 result is forecast. The Federal Reserve will announce their decision on interest rates on Wednesday (no change to their trend-setting rate is expected).
Key U.S. earnings results include Advanced Micro Devices Inc. ($0.943) and Palantir Technologies Inc. (-0.129) on Tuesday and Emerson Electric Co. ($1.413) and Walt Disney Co. ($1.199) on Wednesday. Molson Coor’s beverage Co. ($0.82) and Monster Beverage Corp. (0.41) report Thursday.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)