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Analyst outlines 'Yield at a Reasonable Price' investment strategy – The Globe and Mail

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A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web

Savita Subramanian is the chief quantitative strategist at B of A Securities, the brokerage firm formerly known as Merrill Lynch. In a mammoth 93-page report published January 6, Ms. Subramanian recommended a ‘YARP’ – yield at a reasonable price – strategy for investors in U.S. equities,

“ We have long maintained a preference for dividend growth over high dividend yield. But with bonds in negative yield territory and central bank easing, a yield grab will likely persist. While we continue to recommend dividend growth stocks for long-term investors, stocks with the highest dividend yields could continue to attract a disproportionate amount of assets. Thus, we target stocks with higher dividend yields but look for “Yield at a Reasonable Price” (YARP). Favored sectors generally offer a balance between yield, relative valuations, and above-market dividend growth”

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The attached graphic highlighted U.S. financials and utilities as the best sectors to find YARP stocks.

“@SBarlow_ROB ML: ‘Yield at a Reasonable Price’ strategy (U.S.)” – (research excerpt, chart) Twitter

Financial Times oil expert David Sheppard listed five reasons crude prices failed to soar on Middle East tensions. The five, in order, are investors expected a quick de-escalation, the passage of oil tankers seems safe so far, OPEC has scope to increase supplies, prices had already rallied, and higher prices would just lead to more global production which would pushing prices right back down. The explanation under the final category was most relevant,

In the back of every oil trader’s mind is this simple calculation, which has arguably become even more germane with the rise of the US shale industry. While shale’s supercharged growth is projected to slow this year, as companies prioritise generating cash over boosting drilling, stronger oil prices may well bring a swift response from the shale industry to increase output. That is likely to damp enthusiasm among oil traders. “Oversupply concerns will continue to stalk the energy complex,” said Stephen Brennock at PVM, an oil brokerage”

“Five reasons oil prices failed to soar on US-Iran tensions” – Financial Times (paywall)

Nomura strategist Masanari Takada follows the trades of the world’s most speculative and aggressive hedge funds. He seemed bemused about the market’s rapid turnaround Wednesday in a research report released overnight,

“It is quite rare for a piece of research to have a shelf life as short as that of yesterday’s edition of this memo… The risk-off mood that struck during trading hours in Tokyo came and went in short order, passing like a freak thunderstorm. Markets in Europe and the US then proceeded to experience a relief rally across a broad range of asset classes … the ultra-short-term traders tracked by the SG Short Term Traders Index (NEIXSTTI), which typically have investment horizons of 10 days or less, had started off the year reducing their net exposure to US and European equities, but then appear to have piled into accumulating longs once the de-escalation of the Iran situation gave birth to a relief rally”

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“@SBarlow_ROB Nomura: “The risk-off mood that struck during trading hours in Tokyo came and went in short order, passing like a freak thunderstorm” – (research excerpt) Twitter

B of A analyst Gregory Francfort downgraded Restaurant Brands International, parent company of Tim Hortons, to underperform and slashed the price target by $$14 to $80. He writes,

“ We think Tim Hortons (TH) struggles will weigh on RBI until the brand is stabilized and the Dec 27 announcement of the departure of Tims president Alex Macedo suggests that may take longer than expected… Despite Tims representing just 20% of system sales, it is 49% of total EBITDA… We think Tim Hortons has lost share over the past several years in Canada to its two biggest competitors, Starbucks and McDonald’s. With Starbucks, strong Canadian store growth of 3%-4% has accelerated over the past two quarters to 5.9%, which may be contributing to a deceleration in recent sales growth at the market share leader Tims.”

“@SBarlow_ROB Tim Hortons parent co downgraded to Underperform at B of A Securities (ML)” – (research excerpt) Twitter

Newsletter: “ It’ll be either feast or famine for investors in 2020” – Globe Investor

Diversion: “ Inside the corrosive new generational blame game: The generational divide is society’s new battleground, pitting boomers against millennials and everyone in between. Who’s really to blame?” – Macleans

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Tweet of the Day: Tweet of the Day: “@SBarlow_ROB ML: [Elizabeth] Warren: Optics vs Reality” – Twitter

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Investment

Oil rises as investors focus on OPEC+ decision amid growing Omicron fears

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Oil prices rose on Thursday, recouping the previous day’s losses, as investors adjusted positions ahead of an OPEC+ decision over supply policy, but gains were capped amid fears the Omicron coronavirus variant will hurt fuel demand.

Brent crude futures rose 85 cents, or 1.2%, to $69.72 by 0402 GMT, having eased 0.5% in the previous session.

U.S. West Texas Intermediate (WTI) crude futures gained 85 cents, or 1.3%, to $66.42 a barrel, after a 0.9% drop on Wednesday.

“Investors unwound their positions ahead of the OPEC+ decision as oil prices have declined so fast and so much over the past week,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.

Global oil prices have lost more than $10 a barrel since last Thursday, when news of Omicron shook investors.

“Market will be watching closely the producer group’s decision as well as comments from some of key members after the meeting to suggest their future policy,” Ueno said.

The Organization of the Petroleum Exporting Countries and its allies, together known as OPEC+, will likely decide on Thursday whether to release more oil into the market as previously planned or restrain supply.

Since August, the group has been adding an additional 400,000 barrels per day (bpd) of output to global supply each month, as it gradually winds down record cuts agreed in 2020.

The new variant, though, has complicated the decision-making process, with some observers speculating OPEC+ could pause those additions in January in an attempt to slow supply growth.

“Oil prices climbed as some investors anticipate that OPEC+ will decide to maintain the current supply levels in January to cushion any damage on demand from the Omicron spread,” said Toshitaka Tazawa, an analyst at Fujitomi Securities Co Ltd.

Fears over the impact of the Omicron variant of the coronavirus rose after the first case was reported in the United States, and Japan’s central bank has warned of economic pain as countries respond with tighter containment measures.

U.S. Deputy Energy Secretary David Turk said President Joe Biden’s administration could adjust the timing of its planned release of strategic crude oil stockpiles if global energy prices drop substantially.

Gains in oil markets on Thursday were capped as the U.S. weekly inventory data showed U.S. crude stocks fell less than expected last week, while gasoline and distillate inventories rose much more than expected as demand weakened. [EIA/S]

Crude inventories fell by 910,000 barrels in the week to Nov. 26, the Energy Information Administration (EIA) said, compared with analyst expectations in a Reuters poll for a drop of 1.2 million barrels.

(Reporting by Yuka Obayashi; Editing by Tom Hogue)

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Toronto market hits 7-week low on Omicron uncertainty

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Canada‘s main stock index fell on Wednesday to its lowest level in over seven weeks as the United States reported its first case of the Omicron variant that investors fear could impede economic recovery, with the index giving back its earlier gains.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 195.39 points, or 0.95%, at 20,464.60, its lowest closing level since Oct. 12.

Wall Street also closed lower as the U.S. Centers for Disease Control and Prevention said the country had detected its first case of the new COVID-19 variant, which is rapidly becoming dominant in South Africa less than four weeks after being detected there and has spread to other countries.

It might take longer than expected for supply chain disruptions to abate, “especially if we have renewed shutdowns in Asia,” said Kevin Headland, senior investment strategist, Manulife Investment Management.

Still, Headland does not expect the new variant to lead to an economic recession or a bear market for stocks in 2022, saying: “Reaction to headline news provides opportunities for those that have a longer-term timeframe to add in the equity markets.”

The TSX will add to its recent record high over the coming year as the domestic economic recovery helps underpin corporate earnings, but gains are expected to slow from 2020’s breakneck pace, a Reuters poll found.

The technology sector fell 2.7%, while energy ended 1.9% lower as oil was unable to sustain an earlier rally. U.S. crude oil futures settled 0.9% lower at $65.57 a barrel

The materials group, which includes precious and base metals miners and fertilizer companies, lost 2.2%.

Financials were a bright spot, advancing 0.4%, helped by gains for Bank of Nova Scotia as some analysts raised their target price on the stock.

Bombardier Inc was among the biggest decliners. Its shares sank 10.4%.

 

(Reporting by Fergal Smith; Additional reporting by Amal S in Bengaluru; Editing by Peter Cooney)

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Canada’s TSX to extend record-setting rally; pace of gains to slow: Reuters poll

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Canada‘s main stock index will add to its recent record high over the coming year as the domestic economic recovery helps underpin corporate earnings, but gains are expected to slow from 2020’s breakneck pace, a Reuters poll found.

The median prediction of 26 portfolio managers and strategists was for the S&P/TSX Composite index to rise 9.1% to 22,540 by the end of 2022.

That’s a move that would eclipse last month’s record high of 21,796.16 and compares with an August forecast of 22,000. It was then expected to edge up to 23,150 by the middle of 2023.

The index had advanced 18.5% since the start of the year, putting it on track for its second biggest gain since 2009.

“We think the economy and markets will continue to progress further into the mid-cycle phase next year,” said Angelo Kourkafas, investment strategist at Edward Jones. “We are past the strongest point of the cycle, but there is plenty of runway ahead, especially from an economic standpoint.”

Canada‘s economy https://www.reuters.com/world/americas/canadian-economy-posts-annualized-gain-54-q3-october-gdp-seen-up-08-2021-11-30 grew at an annualized rate of 5.4% in the third quarter, beating analyst expectations, and growth most likely accelerated in October on a manufacturing rebound.

“Banks can continue to benefit from an improving economy and reducing loan loss provisions and resource companies can benefit from higher commodity prices,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.

Combined, the financial services and resource sectors account for 55% of the Toronto market’s valuation.

Nearly all participants that answered a separate question on the outlook for corporate earnings expected earnings to improve. But the pace of growth could slow.

“We expect a decelerating pace of (earnings) growth,” said Chhad Aul, chief investment officer & head of multi-asset solutions at SLGI Asset Management Inc. “In particular, we expect the recent strong earnings growth in the energy sector to begin to moderate.”

The price of oil, a key driver of energy sector earnings, has tumbled 24% since October, pressured by rising coronavirus cases in Europe and the detection of the possibly vaccine-resistant Omicron variant.

Another risk to the outlook could be a reduction in policy support, say investors.

With inflation climbing, the Bank of Canada https://www.reuters.com/world/americas/bank-canada-signals-it-could-hike-rates-sooner-than-expected-2021-10-27 has signaled it could begin hiking interest rates as soon as April and the Federal Reserve https://www.reuters.com/markets/us/powell-yellen-head-congress-inflation-variant-risks-rise-2021-11-30 is mulling whether to wrap up tapering of bond purchases a few months sooner.

“The key is the pace of both fiscal and monetary policy normalization,” said Ben Jang, a portfolio manager at Nicola Wealth. “This process will likely lead to more volatility in markets, potentially returning to an environment where we will see drawdowns of more than 10%.”

Asked if a correction was likely over the coming six months, nearly all respondents said yes.

 

(Reporting by Fergal Smith; polling by Mumal Rathore and Milounee Purohit; editing by David Evans)

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