Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief strategist Brian Belski downgraded the Canadian consumer staples sector,
“We are downgrading the Canadian Consumer Staples sector to Underweight from Market Weight given the apparent peak in food inflation, moderating relative price performance trends, and the slowing earnings momentum exhibited over the last few months. In our 2023 Canadian Sector Positioning report we maintained our Canadian Consumer Staples sector at Market Weight despite downgrading US Consumer Staples to Underweight. Our primary rationale was the strong correlation of the Canadian Staples sector to food price inflation (which was in a clear and defined uptrend), not to mention the continued positive revision and earnings surprise cycle within the sector. However, our work shows that these trends have likely peaked and are beginning to roll over. As such we are downgrading the Canadian Consumer Staples sector to be more in line with the US and shifting the weight modestly to Information Technology and Consumer Discretionary. Yes, Consumer Staples is a classic defensive sector and could benefit if there is a flight to safety. However, we believe there are other ways to manage volatility in the current environment, especially by focusing on dividend growth and GARP.”
The largest companies in the consumer staples subindex are Alimentation Couche-Tard Inc., Loblaw Companies Ltd., George Weston Ltd. and Metro Inc.
“BMO downgrades Canadian consumer staples” – (research excerpt) Twitter
***
Rockwell Automation Inc. is an interesting proxy for both the re-shoring and productivity (to avoid paying higher wages) trends. Bernstein analyst Brendan Luecke summarized what’s happening with profit growth at the company,
“Rockwell is in an odd spot. The short-cycle business is now positioned as a secular winner in a decelerating macro environment … Re-shoring feels very real. Coming into the quarter we were hoping for an entry point into Rockwell. We thought we’d finally see orders roll (harder) as demand pulled-forward conspired with falling PMIs. This didn’t really happen. ROK orders were guided down a by a bit more than PMI’s would suggest. But at ~$9B for FY23, orders were still running ~$800M above FY21, and ~40% above pre-COVID norms. We also see continued evidence of reshoring, especially in manufacturing construction spend. This leads us to believe that outsized FY23 growth (and backlog) have more to do with genuine end market expansion than supply chain snarls pulling forward demand. Secular trumps the cycle for now.”
***
In a separate BMO report, chief economist Doug Porter noted the return of domestic insolvencies,
“Insolvencies: Something’s Happening Here ... And what it is, is pretty clear. The number of consumer and business insolvencies took a big step up in March, rising 28% from year-ago levels. In raw terms, this is basically back to the relatively high level seen before the pandemic. Recall, that in 2020, insolvencies took a huge step down, and stayed there for a couple years, amid heavy-duty government support, low borrowing costs, and some forbearance. Those supports are all now gone, and insolvencies are rising back to more typical levels. While March’s run-up is an eye opener, note that there is some real seasonality to these figures. In adjusted terms (red line), insolvencies are rising, but still lower than normal levels—so far. Still, the key takeaway is that the extreme lows of the pandemic are now behind us, and more typical economic drivers are taking hold. "
“BMO: “Insolvencies: Something’s Happening Here…”” – (research excerpt) Twitter
***
Diversion: “FEATURE: Competition for increasingly scarce water resources is sparking fights in Spain. It’s a sign of what’s coming for the rest of Europe as it faces the second consecutive year of extreme drought” – Bloomberg
Tweet of the Day: