Barlow’s Research Roundup: The two best candidates for portfolio diversification from a BofA strategist

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Diversification candidates

BofA Securities global quant strategist Nigel Tupper offered two promising diversification opportunities,

“This month, we provide a quantitative view of two new global themes which may provide opportunity for investors to diversify away from AI-related themes. Air Defense is supported by the growing complexity of aerial threats and the need for scalable, multi layered protection. Our News Pulse is stronger for Air Defense than the broader Defense theme. The second new theme is Agricultural Production, driven by food security and the need to raise agricultural output despite constraints on land, water, and labour. Long-only funds have shifted increasingly overweight this theme in recent years … Among 22 global themes, Cybersecurity (up 17 per cent), SaaS (up 10 per cent) and AI Compute (up 5 per cent) performed best over the last month, while Nuclear Energy (down 14 per cent), Rare Earths (down 12 per cent), and Gold (down 11 per cent) fell the most. AI-related global themes still rank highly on Triple Momentum, with AI Compute, Photonics, and Data Centers ranking highest. In contrast, Nuclear Energy, Alcoholic Beverages, and Consulting are the lowest ranked themes. Top-ranked stocks globally within each theme Among the Most Important Stocks within each theme, the top-ranked stocks by Triple Momentum in AI Compute is TSMC, Photonics is Fujikura, Data Centers is Kioxia, Grid Modernisation is Siemens Energy, Air Defense in Hanwha Aerospace, and in Agricultural Production is Archer Daniels Midland”.

U.S. stocks within the air defence theme include Mercury systems, Leonardo DRS, RTX and Lockheed Martin.

Industrials

Scotiabank analyst Jonathan Goldman provided top picks in Canadian industrials,

“Top picks into 3Q are RUS/NFI/TVK: For RUS, consensus estimates imply flat steel prices q/q despite the benchmark rising 8 per cent in 3Q. A rising price environment also supports margin expansion (i.e., inventory holding gains). We see upside on volumes against a strong demand backdrop and Kloeckner integration. We expect steel prices to remain higher for longer supported by the strong demand environment and positive tariff impact. Straight-lining spot gets EBITDA 10 per cent/20 per cent above consensus in 2026/2027. For NFI, we expect another clean quarter (three and counting) supporting increased confidence in the full-year guide and 2027 expectations. For a stock that is still institutionally under-owned, consistent results and deleveraging are the path of least resistance for a further re-rate. We estimate mid-cycle earnings power is 30 per cent higher than LTM [last 12 months] implying shares are trading at 6.5 times EV/EBITDA on mid-cycle vs. the company’s 10-year average of 8.5 times. For TVK, we are materially ahead of consensus as we see upside to data center tank deliveries. ACT Research recently raised its 2026-2030 trailer production forecast, the first upward revision since 2024, suggesting the industry may be moving past the trough. We also like ATRL/CAS. For ATRL, the next nuclear milestone is Monark safety case acceptance from CNSC, expected towards the end of 3Q”.

Important trend

BMO senior economist Robert Kavcic reported a trend that will drive sectors of the market for the next decade, albeit at a gradual pace,

“Embedded in the weak September Canadian jobs report was word that the participation rate fell to the lowest non-pandemic level since the pit of the mid-1990s. This is entirely a demographic phenomenon, not a reflection of deteriorating labour market conditions. Note that while the aggregate participation rate is down 0.4 ppts in the past year (and almost 3 ppts from its high), the working-age participation rate continues to hold steady near all-time highs. This comes as the share of the population older than 65 is not only increasing, but is doing so at an accelerating rate (recall that as that cohort grows, it pulls down the aggregate participation rate even if every individual age group holds steady). This ramp-up in relative share of the 65+ cohort will continue over the next decade, dragging down the participation rate and capping labour force growth (unless offset elsewhere)”.

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Diversion

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