‘The heat is indeed on’ in the REIT sector, says CIBC analyst

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

CIBC analyst Dean Wilkinson is getting more optimistic about the REIT sector,

“The heat is indeed on – REITs performed relatively well last month, with the XRE posting a 3-per-cent gain on what we would describe as a very in-line Q2 reporting period. Year-to-date, TSX Real Estate has delivered in excess of a 10-per-cent total return, past the mid-point of our initial full-year expectations and well on the way to our upper end; our caution is being supplemented with a bit more optimism … Our REIT coverage universe is trading at an average 10-per-cent discount to NAV and just under a 13 times P/FFO multiple, levels that have historically meant increased capital markets activity. With select equity issuances earlier this year, and now increased M&A and ongoing strategic reviews, we think more activity could lie ahead as we finish out the year and ultimately prove positive for relative valuations. While a defensive posture has paid off for quite some time, It might be worth considering going on offense … Some of the sector’s best returns this year have come from lagging names outperforming in response to catalysts – e.g., H&R, IIP and DRR. We also continue to believe a change in perspective could benefit asset classes where prices have been under pressure, but still offer healthy fundamentals, like Industrial … Our Top Picks Remain, But We Do See Some Changes Coming: By asset class, we continue to favour seniors housing (CSH and SIA) and multi‑family (KMP domestically, GO, MHC for U.S. exposure). Q2 results reinforced our positive view on the strength in Retail (FCR, CRR) and we see an improving backdrop in Industrial (GRT)”

***

Morgan Stanley chief strategist Michael Wilson is predicting a market rebound as confidence recovers from Liberation Day,

“We’re not of the view that a rapid/acute rise in the unemployment rate and/or significantly negative payroll numbers are coming unless we were to see another shock to the economy. We think the v-shaped rebound in earnings revisions breadth (a guidance proxy) supports our view as it shows that corporate confidence has improved materially since Liberation Day. As we show in today’s note, we’ve only seen these types of inflections higher in earnings revisions breadth when we’ve been in early cycle transitions (i.e., after recessions, not before). Friday’s jobs data and improvement in revisions means June is the latest low point for payrolls this cycle, though other measures we track suggest labor weakness was most prevalent around Liberation Day—the trough of the rolling recession, in our view … We prefer Healthcare among defensive sectors. The cohort’s market cap weight in the S&P 500 and its relative forward P/E ratio are around historical lows. Meanwhile, earnings revisions are strengthening for Pharma/Biotech and Healthcare Equipment/Services”.

Mr. Wilson’s Fresh Money Buy List of stock picks remains concentrated - Abbvie Inc., American Tower Corp., CenterPoint Energy Inc, Coca-Cola Co., Colgate-Palmolive Co, McDonald’s Corporation, Northrop Grumman Corp., The Progressive Corp., Public Service Enterprise Group Inc, and Walmart Inc.

***

When currency strategists like commodity-based currencies but don’t like U.S. exposure, they recommend AUD-CAD, like Citi strategist Daniel Tobon is,

“U.S. and Canadian labor market data was weak, triggering sell-offs in both USD and CAD as front-end rates rallied. We had positioned for this possibility by going short USDCHF and long AUDCAD (current spot ref at 3:53pm ET: USDCHF - 0.7983; AUDCAD - 0.9075). We continue to see downside risks to US data, with next week’s NFP benchmark revisions another potential signpost. We also note the expanding breadth of labor market weakness historically leads developments in the UR, suggesting a continued risk of weak labor market data in coming months. We maintain our tactical short USDCHF through this event, looking for a re-test of the July 0.7872 low. AUDCAD also confirmed a bullish breakout through the 0.90-0.9050 area, which could lead to a re-test of the 0.94+ area; we see further scope for markets to price a more dovish BoC.”

***

Bluesky post of the day:

Diversion: “ChatGPT Told a Man His Symptoms Were Fine, But Then He Saw a Real Doctor and Realized He Was Dying” – Futurism