National Bank Financial Markets

Jul 12, 2023

National Bank strategists: underweight Canadian equities, overweight bonds Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow The economics and strategy team at National Bank Financial Markets is recommending lower equity weightings in favour of fixed income, “After reaching multi-month highs in June, global equity markets are struggling at the start of the third quarter. The underperformance of stock markets coincides with increasingly negative economic surprises. Unfortunately, with core inflation still resilient, central banks continue to raise interest rates. Equity market valuations based on P/E ratios appear stretched at this point in the economic cycle as monetary policy becomes increasingly restrictive. The stretched PE argument is particularly valid for the US, where the Federal Reserve continues to show no signs of relenting in its fight against inflation, with the yield on the 3-month T-bill rising to a new cyclical high in July. With the S&P 500 trading at more than 24x trailing earnings, this is the first time since 1997 that the earnings yield on stocks has slipped below the yield on cash. Investors seem to think that the S&P 500 will beat expectations for 7% EPS growth over the next 12 months despite the fact that the ISM manufacturing index fell to a cyclical low of 46 in June. There is no precedent for an acceleration in trailing EPS in the months following such a reading.” The recommendations are to reduce Canadian equity exposure by 2.0 per cent to 18 per cent of portfolios (16 per cent for U.S. equities), drop cash to 9.0 per cent and increase fixed income to 51.0 per cent. *** BMO senior economist Robert Kavcic published a brief comment entitled BoC’s Psychological Battle with Housing, “Whatever the Bank of Canada ultimately decides to do on Wednesday, it should be aware that it is in a long-running psychological battle with the housing market. That is, swings in market activity and price momentum have largely followed changes in BoC policy and messaging. Think of it this way: If demographic, employment and supply-side fundamentals are the structure of your backyard bonfire (pit size and the number of logs), BoC policy is the gasoline, or water. Using weekly polling data from Nanos, it’s pretty clear that expectations of home price growth were ignited by the BoC’s lowfor-long messaging in 2020, and further inflamed by near-zero rates through 2021. Expectations (and the market) turned lower the minute rates were first raised; and they swung higher again the minute the BoC signaled a pause. Now it looks like buyers and sellers are waiting to see the BoC’s next move…” “BMO: “BoC’s Psychological Battle with Housing”” – (research excerpt) Twitter *** BofA Securities U.S. quantitative strategist Savita Subramanian has been my favourite source of S&P 500 earnings analysis and her second quarter preview was released Tuesday, “Following a strong 1Q, S&P 500 2Q consensus EPS has been cut by just 2% since March (vs. -4% historical average) to $52.88 (-8% YoY). While macro headwinds remain, we see several tailwinds into 2Q earnings: 1) a 94th percentile beat in macro data, best since 3Q20 2) strongest guidance ratio since 2021 and 3) improving corporate sentiment. Seven of 11 sectors are expected to see better YoY earnings growth this quarter vs. in 1Q and ex-Energy earnings are expected to be flat YoY. We expect a 3% beat or $54.50, representing a trough quarter at -5% YoY… We expect companies to sound more upbeat than in prior quarters. Companies are likely to highlight bottoming process in business conditions and building momentum throughout the quarter and into July. March-April was likely the trough in business conditions.” Ms. Subramanian believes economically sensitive stocks will begin to outperform in the months ahead. *** Diversion: “The Best TV Shows of 2023 (So Far)” – The Ringer Tweet of the Day: “2023 was meant to be the year China’s economy roared back to life after years of strict Covid-19 controls. Instead, its economy is slowing” – Twitter