Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO senior economist Sal Guatieri warned of pain to come for the domestic indebted and, by extension, the domestic economy,
“Despite elevated debt and the sharpest runup in borrowing costs in three decades, the average debt service ratio of Canadian households rose just 0.5 ppts to 14.0% of disposable income in Q3, still a full percentage point below the peak of 15.0% reached just before the Great Recession and nearly matched before the pandemic. Barring a reversal in rates, the DSR will likely eclipse its all-time high as mortgages, in particular, refinance at higher rates in coming years. This will bite into spending power and likely tip the economy into a shallow downturn next year.”
“BMO: “Cdn Household Debt: Paying the Piper”” – (research excerpt) Twitter
***
BofA bank analyst Ebrahim Poonawala published a report on Canadian banks with the ominous title Earnings & Beyond: Beginning of the end,
“2023 consensus EPS revisions -1.2% (vs. pre-4Q): TD +1.4% best; CM -6.2% worst. Few drivers of positive EPS revisions ahead as loan growth slows, margin expansion moderates and credit costs (PCLs) normalize. Capital leverage non-existent for the most part. BofA forecast FY23 vs FY22: avg. loan balances +7.4% vs 12.4%; net interest income +10.7% vs 10.9% and PCLs 29bp vs 13bp… Valuation at 9.9x 2023 P/E and 1.5x YE23e P/Book: Discounting a slower growth backdrop. Increasing odds for a recession could see stocks revisit previous trough P/B multiples (implies 15% downside on average) or potentially worse … Mortgage growth buckling: 4Q22 loan growth 1.9% QoQ vs 2.4% in 3Q22 as activity slows in face of higher rates … Gross impaired loans +8% QoQ; flat YoY; net write offs +21% QoQ; +12% YoY. No obvious area of stress evident for now but pockets of consumer, all things housing/construction related could come under pressure”
***
Also from BofA Securities, the firm’s widely perused monthly fund manager survey (FMS) uncovered bearishness on economic growth,
“Net 69% expect weaker global growth, but pessimism stable thanks to China (74% expect full reopening by end-23); macro doubts mean CIO’s want CEO’s to focus on balance sheets (56%), not capex (21%) or stock buybacks (16%); the good macro news…record 90% of investors predict lower global inflation in ‘23… expectations for lower rates highest since Mar’20, for lower bond yields close to all-time highs; peak cash…FMS cash levels drop from 6.2% to 5.9%, peak risk aversion … FMS investors say best performing asset in ‘23 to be government bonds & most overweight bonds vs stocks since Apr’09 (Chart 1); peak yields = peak US$...highest expectation of US$-depreciation since May’06 … Contrarian Trades: if no GDP/EPS collapse Q1′23…long stocks, REITS, consumer, industrials; if big China reopening = higher-for-longer inflation/Fed funds…short bonds.”
“BofA fund manager survey in a nutshell” – (research excerpt) Twitter
***
Citi U.S. equity strategist Scott Chronert provided yet another ‘first half bad, second half good’ market outlook but makes one interesting observation about the consensus view about recession (my emphasis),
“Next year’s recession risk remains a key focus. Implicit in our S&P 500 index price and earnings expectations is the view that this may be the most widely anticipated recession in decades. Thus, investors need to allow that historic recession playbooks may disappoint. We look for index weakness early in the year as a buying opportunity. While our year-end 2023 index price target of 4000 implies flattish performance, the year should be defined by ongoing volatility, but with increased dispersion effects setting up stock, sector, and thematic investment opportunities.”
***
Diversion: “See the Best Images from the Thrilling Artemis 1 Splashdown” – Gizmodo
Tweet of the Day: