Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank analyst Mario Saric remains concerned about federal government measures to curb profits in residential REITs in the wake of the Liberal/NDP bargain to keep Justin trudeau in power,
“Very few details [had previously been] provided by the Federal Liberals on plans to ‘curb excessive profits in residential real estate (i.e., financialization),’ leaving investors to ponder the extent of the policy review. CAD Multi-family REITs have lagged the broader REIT space since (+0.6% vs. +5.3%), part of which we attribute to market uncertainty over the regulatory environment … Yesterday’s Liberal-NDP agreement. Regarding housing: (1) the Rapid Housing Initiative was extended for a year, (2) Re-focus the $26B Rental Construction Financing Initiative (changed basis of “affordability” definition to market rent from median household income), (3) Move forward the $4B Housing Accelerator Fund (i.e., creation of 100,000 homes by 2024-2025), (4) A $500 one-time Canada Housing Benefit top-up which may be renewed in coming years depending on the cost of living, (5) Implement Homebuyer’s Bill of Rights…”by the end of 2023″ leaves us with mixed feelings. In the near-term and assuming no news in the upcoming Budget, we think the longer timetable lessens a near-term headwind for CAD Apartment REITs … On the downside, we suspect regulatory clarity surrounding operational and structural parameters is critical for owners, with the announcement potentially delaying the desired clarity. We still think rental is more affordable than owning and relationship to income matches historical avg.; more new supply to accommodate Federal Immigration targets is key”
“Scotia: The NDP/Liberal deal and the potential to curb ‘financialization’ of the REIT sector” – (research excerpt) Twitter
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Morgan Stanley analyst Carlos De Alba recommended taking some profits in the North American mining sector,
“With global inflation reaching decade highs and downside risks to global growth building up, we looked at prior periods that exhibited both high global inflation and low global growth (e.g., 1 std deviation from their LT average) to assess the risk of a potential global stagflationary shock to metals and mining equities in the Americas. In the five years that we identified with marked stagflation traits (1974–75, 1985, 1992, 2008), industrial M&M equities in the Americas underperformed the broader equity market by 12%, on average… Downgrading iron ore names Vale SA [Brazil] , CMIN [ CSN Mineracao SA, Brazil], and CAP SA to EW (from OW) as we see limited upside to our new PTs and less appealing risk-rewards … Our commodities team sees commodity prices remaining extremely volatile at elevated levels, with the market oscillating between concerns about the supply impact of the Russia- Ukraine conflict and inflation-driven global growth concerns/demand destruction. The team has a bearish tilt in their price deck into year end, as tradeflows adjust and they see risks to demand. China’s demand signals remain mixed”
Mr. De Alba also downgraded Southern Copper Corp. to “underweight” and Alcoa Corp. to “equal weight.” Canada’s Teck Resources remains “overweight” rated.
“MS downgrades metals and mining sector” – (research excerpt) Twitter
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Goldman Sachs chief economist Jan Hatzius detailed the link between energy price shocks and recessions,
“Why are oil price spikes so often followed by recessions, and does the familiar combination of geopolitical turmoil and higher commodity prices that preceded the 1990-91 downturn argue for recession in 2022 as well? … We estimate that price increases for oil, natural gas, and agriculture over the last year represent 1.9% of US consumer spending, even larger than the 1.2% shock in 1990 recession and similar to the 1.8% shock in 2008. Higher commodity prices erode the real incomes of consumers and are a key reason we forecast GDP growth of just +1.9% this year (Q4/Q4 basis). We also forecast below-potential growth in the first half of the year, when the impact of commodity prices should be largest … Will the current commodity price shock culminate in recession as well? We find that the absolute size of the commodity shock is a less reliable predictor than its size relative to income growth (excluding transfer payments). In the early stages of the recessions of 1974, 1980, 1990, and 2008, commodity price shocks fully offset the trend in real income growth — implying no scope for consumption to rise without drawing down savings. This is not the case in 2022 thanks to strong payroll and wage gains.”
“Hatzius: Why energy price shocks cause recessions (he doesn’t they will this time)” – (research excerpt) Twitter
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Newsletter: " Bonds aren’t doing their job” – Globe Investor
Diversion: “Record-Shattering Heat at Both Poles Is Freaking Scientists Out” – Gizmodo
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