Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Note: I wrote “Investors need to embrace The Lobotomy Paradigm” for the Globe Investor newsletter sent Wednesday, using a client letter from Accumen Management Ltd., a U.K.- based foreign exchange trading firm. At the time, the client letter was not publicly available, but it has been published on the company’s website overnight.
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National Bank Financial economists Matthieu Arsenault and Alexandra Ducharme published “Is Canadian residential real estate teetering on the brink?" on Wednesday. The conclusions were that a U.S.-style collapse in housing prices like 2008 is not in the cards but it will still be painful,
“We foresee a marked drop in prices, about 10 per cent, sharper than in any of the country’s last three recessions…[we expect] an unemployment rate in the neighbourhood of nine per cent in the coming year. Yet these job losses could affect the housing market less than might be thought. The home ownership rates of workers [in the hardest hit sectors] are among the lowest … this time the effect of monetary could be much smaller … [rates] have very little room to move lower … the seven per cent drop we see for Montreal is less than those we posit for .. Toronto, where we see -13 per cent, and Vancouver (-12 per cent) … Calgary, meanwhile (-10 per cent), has been hit by the double whammy of lockdown and oil price collapse”
“ Special Report: Is Canadian residential real estate teetering on the brink?” – National Bank Financial
“@SBarlow_ROB Summary of National Bank report: "Is Canadian residential real estate teetering on the brink?" – (research excerpt) Twitter
See also: “BIS residential property price statistics, Q4 2019” – Bank for International Settlements
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National Bank strategist Jean-Michel Gauthier sees a trend of major outperformance for value stocks in the U.S. and Canada (my emphasis),
“Value stocks saw three large scale rallies since bottoming in March (only two in Canada). The previous two faltered along the way and almost fully reversed. However, the current move upward at the tail end of April is quite astounding. Our top Value lists have jumped to top performing style this month, beating the S&P 500 and TSX by 1,002 and 2,004 basis points, respectively. Moreover, they are outperforming their bottom ranked counterparts by 974 basis points and 1,069 basis points in the US and Canada, respectively.”
“@SBarlow_ROB NBF:" Our top Value lists have jumped to top performing style this month, beating the S&P 500 and TSX by 1,002 and 2,004bp, respectively" – (research excerpt, charts) Twitter
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Credit Suisse U.S. equity strategist Jonathan Golub provided a useful reminder on the importance of starting price to earnings multiples and 10-year returns (in other words, the average index PE when buying vs average annual returns for following decade).
“We’ve repeatedly made the case that more cash flow-rich companies, in a less volatile environment, would lead to a new regime of persistently higher multiples and the secular outperformance of growth and long-duration (less volatile) equities. Bearish investors would (correctly) point out that future returns are highly influenced by starting valuations, with higher P/Es leading to weaker performance, as multiples de-rate toward long-term averages. We, in turn, would counter that valuations have little influence over the near term. Previously-skeptical investors are increasingly becoming comfortable with higher multiples, while we remain unconvinced given the current backdrop. Regardless of your point-of-view, with P/Es at 21.3x, we thought these charts were worth recirculating”
The charts he mentions indicate that the current S&P 500 PE ratio suggests flat average annual returns for the next decade.
“@SBarlow_ROB CS' Golub: "Bearish investors would (correctly) point out that future returns are highly influenced by starting valuations, with higher P/Es leading to weaker performance" – (research excerpt, chart) – Twitter
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Diversion: “ Is the “science” behind the lockdown any good?” – FT Alphaville (free to read with registration)
Tweet of the Day: “@jsblokland ‘Rotation’ charts! #Value > #Growth #Smallcap > #Largecap #Cyclicals > #Defensives “ – Twitter
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