Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
RBC Capital Markets bank analyst Darko Mihelic sees OFSI’s increase of capital requirements as ‘bad timing’,
“Canadian Banks: Bad timing, OSFI increases capital requirements. Our view: OSFI’s decision to raise the DSB [domestic stability buffer] is negative for Canadian bank investors as the higher range is negative for longer-term ROE and the timing is less than ideal. In addition to lower longer-term ROEs, our concern is that investors could also adopt a view that the Canadian banks are now operating in a hostile regulatory/political environment. This announcement comes after the Canadian government has imposed higher taxes (statutory and windfall taxes), as well as possibly regulating interchange fees. On the back of OSFI’s announcement yesterday, we ran a “worst-case” scenario for some banks. According to our calculations, the worst-case scenario for BMO would suggest its CET 1 ratio could fall below the new minimum 11.0%, though we readily admit there are a lot of moving parts with a large possible degree of error. Though we believe an equity raise is not strictly necessary for BMO, if it should choose to raise equity (say $1.6 billion-ish), it would not alter our investment thesis for the bank. For CM, after a possible worst-case Cerberus charge, we find its ratio would still be above 11.0% but it would screen as the second lowest ratio for Q1/23″
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Always quotable, BofA Securities investment strategist Michael Hartnett published his weekly Flow Show report (my emphasis) ,
" Inflation is Dead, Long Live Inflation: inflation will fall in ‘23, why bond yields rallying; but big 3 secular themes for 2020s are 1. climate change, 2. globalization to regionalization, 3. inequality to inclusion, and all inflationary; leadership shift from deflation to inflation assets at early stage (note healthcare + tech still >40% ACWI even excluding GOOG, TSLA…); buy ‘23 dips in new leadership of commodities, banks, small cap, EU, EM, value stocks, assets that perform in backdrop of high but stable inflation; avoid end of era QE winners of credit, tech stocks, private equity, private credit; and note in ‘23 Fed likely admits defeat on 2% CPI, which weakens US dollar & reverses 15-year bull markets of US equities over EAFE & EM stock markets.”
“From Hartnett’s weekly (BofA)” – (research excerpt) Twitter
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I missed it when the report was published earlier in the week but the strategy team at Scotiabank argued that investors are getting too complacent and a correction is likely in the cards,
“Our thinking has not changed much recently. With the S&P 500 up 14% since its October low, the equity rally is once again testing the bear case. The TSX has rebounded 12% over the same period. For most investors (us included), the pain trade seems to be higher for longer. The narrative behind the latest equity push goes like this: peak inflation and peak hawkishness. Still, it’s too early to turn bullish and bet the farm. In our opinion, investors have become complacent regarding inflation, the Fed, and 2023 growth prospects. … we still think now is not the time to swing for the fences. We would flag the following points. 1. Watch the VIX. The fear gauge dropped below 20 twice this year, and each time, it coincided with an exhaustion of the bear market rally (late March/April and August). 2. Overheating conditions. The percentage of S&P 500 stocks trading above their 50-d line hit 91% on Thursday vs a peak of 92 last summer. 3. Fed wants to see cracks in the US job market, but they’re hard to see”
“Scotiabank strategists see market complacency” – (research excerpt) Twitter
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Diversion: " The Top Ten TV Shows of 2022″ – The Ringer (podcast)
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