A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Morgan Stanley U.S. equity strategist Michael Wilson believes there’s more downside for equity markets,
“Over the past week, markets faced 2 new curve balls —Omicron and a faster taper of asset purchases by the Fed. Importantly, the decline over the past few weeks still leaves P/Es higher than they were 2 months ago with unfinished business on the downside due to the mid cycle transition rather than Omicron … What Would Make Us More Bullish? First and foremost is valuation. Our target multiples are still more than 10% lower than current levels. Second is better visibility on the 1H deceleration we see for earnings growth … the vast majority (70%) of S&P 500 industry groups are currently trading in the top 25% of historical forward P/E levels going back to 2010 (even with last week’s volatility) and all but 5 groups (out of 24) are trading above the S&P’s average multiple since 2010 (15.9X). Bottom line: elevated valuation is pervasive despite a lot of focus on a concentrated market … We continue to favor large cap defensive quality with reasonable valuations.”
“MS: More downside ahead for equities” – (research excerpt) Twitter
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Citi commodities analyst Ephrem Ravi notes bearishness in commodity price forecasts and highlights stocks that will benefit if things turn out better than expected,
“Consensus commodity price forecasts have broadly aligned with spot commodity prices over the recent months indicating a lack of conviction in taking directional medium-term views. Generally speaking, commodity price forecasts have been revised lower with mark-to-market towards spot prices.
“The divergence of consensus 2022 forecasts versus spot is the highest in coking coal (-34%) and thermal coal (-17%). Coal prices are yet to settle down after a blowout rally this year and therefore there could be potential downside that the market is expecting. In our view, ‘new normal’ coal prices would likely settle higher than the ‘old normal’ levels given years of underinvestment would potentially result in medium-term supply tightness.
“On a spot basis, if the coal prices hold at the current levels into next year, Glencore, Anglo and South32 would be beneficiaries and could re-rate on a mark-to-market earnings momentum. Glencore and Anglo are our top picks in the European mining universe.”
“Citi: Bearish commodity price forecasts into 2022″- (research excerpt) Twitter
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Nomura foreign exchange strategists like the loonie for the first half of 2022,
“We view CAD as an attractive currency among the G10 commodity-tied dollar bloc in H1 2022 for the following reasons: 1) we expect the Bank of Canada to lift off in mid-2022 or potentially earlier in view of high domestic inflation, and likely maintain its hawkish stance, 2) oil prices are likely to remain elevated in the first half of 2022 as the countries in OPEC+ are still cautious over increasing oil supply and will likely act accordingly to prevent the plunge in price, and 3) the Canadian economy is less vulnerable to China’s growth slowdown than the Antipodean economies. Therefore, we recommend short AUD/CAD (entry: 0.9100, target: 0.8850) regarding the monetary policy divergence and tailwinds from the terms of trade. However, we will not keep on holding this position in H2 2022, but rather reduce our conviction on long CAD. Even though the BoC rate hike is likely to occur earlier than major central banks around the globe, the market’s expectation on this rate hike is likely to be much priced in by then.”
“Nomura recommends long CAD vs AUD” – (research excerpt) Twitter
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Diversion: “The US crackdown on Chinese economic espionage is a mess. We have the data to show it” – M.I.T. Technology Review
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