Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Morgan Stanley chief Asia economist Chetan Ahya believes investors should prepare for a paradigm shift in the global economy and markets,
“The share of corporate profits in GDP has been on a rising path for the past 40 years, while the wage share has been declining until recently. At the same time, income inequality has increased sharply and intergenerational mobility has declined … As time wore on, these trends became increasingly unsustainable. Calls for action grew louder and a collective voice began to make its way into policy-making circles … [Policy-makers are now] explicitly aiming for a high-pressure economy. Drawing on the experience of the past cycle, they believe that such an economy will create broad-based and inclusive economic growth, which will help to reduce the impact of the recession on lower-income households and address the longstanding problem of income inequality … Policy-makers are intervening to temper the adverse effects of market forces. The efforts under way to raise minimum wages are a case in point. But there will also be increasing scrutiny of the tech, trade and titans trio – the key factors that have held down the wage share of GDP … "
Mr. Ahya argues that the new market environment will feature rising wages, general inflation, and falling corporate profit margins. This points to hard assets, including commodities, as outperformers along with companies with low labour intensity.
“@SBarlow_ROB MS’s Ahya: Paradigm shift ahead in global economy and markets” – (research excerpt) Twitter
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Citi U.S. equity strategist Tobias Levkovich sees four potential catalysts for an equity market sell-off ahead,
“With the S&P 500 trading above our year-end target of 4,000, we maintain a cautious view over the next several months, especially since investors might encounter four different catalysts (tapering discussion, inflation, margin pressures and taxation) that could coalesce around the same time. Sentiment remains ebullient, valuation is not attractive and the Street already expects strong profit trends. Stock repurchase programs and low interest rates provide some cushion and we are buyers on weakness as a result, particularly given a mid-2022 objective of 4,350 … 2022 [profit] visibility is clouded by tax policy. Profitability seems set to be squeezed by rising input costs that will not immediately be offset by price increases. Second quarter comps will be facing off against last year’s ability for corporates to furlough workers and push wages to the government”
“@SBarlow_ROB Citi: 4 potential sell-off catalysts ahead (but buy on weakness)” – (research excerpt) Twitter
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Goldman Sachs U.S. equity strategist David Kostin presents his list of U.S. stocks with the highest risk-adjusted returns,
“S&P 500 has rallied 14% year-to-date to an all-time high as both realized and implied volatility register at the lowest levels in 12 months. The semi-annual rebalance of our 50-stock, sector-neutral High Sharpe Ratio basket of firms with the highest forward risk-adjusted returns occurs in this report. Since 1999, GSTHSHRP has a 64% hit rate of 6-month outperformance vs. S&P 500 and an average excess return of 263 bp (526 bp annually). The median basket stock has returned 0% YTD but consensus expects the basket will generate a significantly higher risk-adjusted return than the S&P 500 median. The basket historically exhibits a Value tilt, but many of the new firms entering the basket are popular large-cap Growth stocks.”
The basket has 50 members, too many to list here. The most notable names for Canadian investors include Netflix Inc., Activision Blizzard, Walt Disney Co., Nike Inc., Amazon.com, Chipotle Mexican Grill, Walmart Inc., Kimberley-Clark, Estee Lauder Co.s, Intercontinental Exchange, Merck & Co., Thermo Fisher Scientific, Zimmer Biomet Holdings, Apple Inc., Qualcomm Inc., Mastercard Inc., Advanced Micro Devices and Ball Corp.
" @SBarlow_ROB GS: high sharpe ratio basket’ – (full table) Twitter
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Table: “The highest-yielding stocks on the TSX, plus risk data” – Globe Investor
Diversion: “The Drug That Could Break American Health Care” – The Atlantic
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