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Five investment themes to watch in 2022, including the rise of small caps and value stocks – Financial Post

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Peter Hodson: Business is very good, but you would never know it by the prices of some stocks

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We went three for five on our specific stock market predictions last year after going nine for 10 the prior two years. But we are retiring this yearly practice with an 80-per-cent record, which is pretty good in the land of stock market predictions, though we certainly blew our “inflation won’t be a big concern” prediction. It was, perhaps, the biggest concern of the year.

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Instead of predictions, we offer five investment themes investors might be focused on. Sure, everyone knows about the big picture issues, such as inflation, interest rates, corporate earnings and, of course, COVID-19 and its emerging variants. But what other themes might present themselves in 2022? Let’s look at five possibilities.

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Small caps could surge : We spend a lot of time looking at this sector. Business is very good, but you would never know it by the prices of some stocks. Many small-cap stocks are down 50 per cent, 60 per cent or even more from their highs. Investors are gaga over Apple Inc. and other trillion-dollar companies, leaving smaller companies behind with low valuations. How low? Based on recent data, small-cap companies, relative to large-cap companies, have never been cheaper.

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All it takes is a little bit of confidence from investors and small caps could experience big valuation multiple expansions. If not, then we might see a giant wave of takeovers as large companies buy small companies at big discounts. It might be a fun year for small-cap investors, who have been depressed since February, watching large caps surge while their own portfolios struggled.

Value stocks may finally rocket : As a growth investor we always struggle with this. Growth stocks are, simply, way more fun. Value stocks don’t triple in a year, as some growth stocks can do. But we have to accept reality. In a world where investors are worried, and rates and inflation may rise, investors might see value stocks as the best, or at least safest, bet in the next couple of years.

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Why buy a stock at 20 times sales, when you can get one at 20 times earnings? Of course, the reason to do this is to get higher growth, but if growth stocks stay weak, then investors will naturally gravitate to value stocks. This shift might persist for a while, or at least until investors have collectively decided interest rates have peaked.

The metaverse might really be the next big thing : The metaverse got a lot of hype in 2021, but I don’t think it is going away anytime soon since it just makes too much sense for a lot of companies and consumers.

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Think of a virtual shopping mall, where your avatar can try on clothes and you can see exactly what they will look like on you. Sales will increase, returns will decrease and some companies will opt to not have physical locations at all. Profit margins could soar. It takes online shopping to a whole new level. Zoom meetings might be far more realistic, and companies will continue to save tons of money on travel budgets. Some companies to watch in this space include Nvidia Corp., Matterport Inc. and Meta Platforms Inc.

The Roarin’ 20s (22s) : If you are like me, you are sick of COVID-19, lockdowns, restrictions and tests. There are jobs aplenty and asset prices have soared. Most consumers have lots of money to spend, if only they could find somewhere to spend it. Yes, Omicron has delayed a full travel recovery, but we think the underlying pressure of consumer demand is about to blow over.

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Like we saw in the Roaring Twenties, consumers might be about to embark on a giant, multi-year spending party once pandemic restrictions ease. Now, a massive influx of spending might not help inflation numbers, but it will be a boon to corporations, which will see higher revenue, higher demand and more customers lining up at the door. Travel and leisure stocks could surge again, too.

Gold versus bitcoin : A lot of ink was spilled in 2021 about how bitcoin and other cryptocurrencies were replacing gold in portfolios. How else to explain gold’s weakness when the conditions for a gold rally were, perhaps, ideal? Bitcoin is the new gold, some said, and it certainly outperformed. But we would not be so fast to jump off the gold bandwagon.

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Bitcoin has never been tested in a period of inflation, nor in a true bear market. We have seen a lot of merger activity in the gold sector this year, setting up cost savings for these merged companies and eliminating some stocks that sector investors can buy. Higher gold prices, cost savings and fewer companies could combine to form a powerful gold sector rally once investors lose their love affair with cryptos.

Financial Post

Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also associate portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)

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Toronto index set for biggest weekly drop since early December

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Canada’s main stock index fell on Friday as weaker crude oil prices weighed on energy stocks, putting the benchmark index on course for its biggest weekly drop since early December.

At 9:35 a.m. ET (14:35 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was down 141.11 points, or 0.67%, at 20,917.07. It hit a more than two-week low in the previous session.

The index has lost 2.4% so far this week, hurt by higher bond yields as expectations build that central banks will hike interest rates over the coming months to tame unruly inflation.

The healthcare and technology sectors have dominated the weekly losses, dropping 7.4% and 4.5%, respectively.

On Friday, the energy sector led the declines with a fall of 1.9% as an unexpected rise in U.S. crude and fuel inventories profit-booking pressured crude oil prices.[O/R]

The financials sector slipped 0.8%, while the industrials sector fell 0.5%.

The materials sector, which includes precious and base metals miners and fertilizer companies, lost 0.4% on weaker copper prices. [MET/L]

On the economic front, data showed Canadian retail sales rose 0.7% to C$58.08 billion ($46.40 billion) in November on higher sales at gasoline stations, and building materials and gardening equipment and supplies dealers.

“Canadian retail sales for November grew less than expected, while new house price inflation plateaued at a high level, another sign of stagflation in the North American economy,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.

HIGHLIGHTS

The TSX posted one new 52-week highs and 10 new lows.

Across all Canadian issues there were two new 52-week highs and 55 new lows, with total volume of 32.05 million shares.

 

(Reporting by Amal S in Bengaluru; Editing by Aditya Soni)

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CAPP expects oil and gas investment to rise 22 per cent this year to $32.8 billion – Energeticcity.ca

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But CAPP president Tim McMillan pointed out that in spite of the fact that oil prices are at seven-year highs and companies are recording record cash flows, capital investment remains well below what it was during the industry’s boom years. In 2014, for example, capital investment in the Canadian oilpatch hit an all-time record high of $81 billion, capturing 10 per cent of total global upstream natural gas and oil investment.

“Today we’re at $32 billion, and we’re only capturing about six per cent of global investment,” McMillan said. “We’ve lost ground to other oil and gas producers, which I think is problematic for a lot of reasons . . . and it leaves billions of dollars of investment that is going somewhere else, and not to Canada.”

Investment in conventional oil and natural gas is forecast at $21.2 billion in 2022, according to CAPP, while growth in oilsands investment is expected to increase 33 per cent to $11.6 billion this year.

Alberta is expected to lead all provinces in overall oil and gas capital spending, with upstream investment expected to increase 24 per cent to $24.5 billion in 2022. Over 80 per cent of the industry’s new capital spending this year will be focused in Alberta, representing an additional $4.8 billion of investment into the province compared with 2021, according to CAPP. 

While the 2022 forecast numbers are good news for the Canadian economy, McMillan said, it’s a problem that companies aren’t willing to invest in this country’s industry at the level they once did. 

He said investors have been put off by Canada’s record of cancelled pipeline projects, regulatory hurdles and negative government policy signals, and many now see Canada as a “difficult place to invest.”

However, Rory Johnston, managing director and market economist at Toronto-based Price Street Inc., said laying the decline in the industry’s capital spending at the feet of the federal government is overly simplistic.

He added while current “rip-roaring, amazing” cash flows and a period of sustained high oil prices will certainly give some producers the appetite to invest this year, Johnston said, it will likely be on a project-by-project basis and certainly on a smaller scale than the major oilsands expansions of a decade ago.

“You have global macro trends across the entire industry that have begun to favour smaller, fast-cycle investment projects — and most oilsands projects are literally the polar opposite of that,” he said.

One reason capital spending isn’t likely to return to boom time levels is because companies have become much more cost-efficient after surviving a string of lean years. And that’s not a bad thing, Johnston said.

“The decade of capex boom out west was tremendously beneficial for Canada and Albertans, but it also caused tremendous cost inflation,” he said.

“While what we’re seeing right now is not as construction-heavy and not as employment-heavy —and those are two very, very large downsides — the upside is that you’re much more competitive in a much more competitive oil market,” Johnston said.

In a report released this week, the International Energy Agency (IEA) hiked its oil demand growth forecast for the coming year by 200,000 barrels a day, to 3.3 million barrels a day. 

According to the IEA, global oil demand will exceed pre-pandemic levels this year due to growing COVID-19 immunization rates and the fact that the new Omicron variant hasn’t proved severe enough to force a return to strict lockdown measures.

This report by The Canadian Press was first published Jan. 20, 2022.

Amanda Stephenson, The Canadian Press

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Cash-flow investing isn't just a strategy for your grandparents – Financial Post

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Cash-flow investing is increasingly attractive during times of increased market volatility

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The outlook on the Omnicron variant of COVID-19 on global markets is changing by the minute, but I am reminded of a tried-and-true approach that can provide investors with some peace of mind during uncertain market conditions: focusing on the value quality that cash flow adds as opposed to movements in the asset price.

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Cash-flow investing, in basic terms, means purchasing an asset that provides income at regular intervals versus one solely based on price appreciation. Whether it is monthly, quarterly, semi-annual, etc., you will receive regular cash distributions that can be reinvested or used to finance your lifestyle.

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Considered a relatively conservative approach to investing, acquiring cash-flow-producing assets can be attractive for a number of reasons.

First, the asset will provide value on a regular basis regardless of its current market price. A temporary drop in value can be viewed as positive for cash-flow investors because they can now use the distribution amount to buy more of the asset at a distressed price, hence increasing their future cash-flow amount.

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Secondly, dividends or proceeds from cash-flow investments can be used to fund lifestyle expenses in retirement without eating into your overall pot of capital.

This shift in focus from market price to value can help diversify investment portfolios and mitigate the impact of public market uncertainty. Ultimately, cash-flow investments provide flexibility to rebalance, protection against market volatility, and peace of mind that you’re earning sustainable income with less concern about the economic impact of current events.

For example, in February 2020, we switched our monthly cash-flow-producing assets from reinvest to pay out for many clients when public equity markets sharply reacted to COVID-19 uncertainty. This free cash flow allowed us to purchase dividend-paying equities at a large discount for the ensuing six months until they reached their pre-pandemic valuations.

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Dividend-paying equities are just one of several types of cash-flow investments.

Real estate : Cash flow is the result of proceeds from rent collected. The value of the property will likely appreciate over the long term, but the cash flow produced monthly or annually is relatively consistent. The goal here is for the income from the property to cover all your costs on the property and provide a steady profit.

Investing in a real estate fund can be an excellent source of passive income and provide steady long-term returns. Real estate funds can have a similar return to individual property ownership without the added stress of personally maintaining the property.

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Mortgage funds : Cash flow comes from regular loan interest repayments over the term of the loan. Loans are often secured by real property with a varying loan-to-value ratio.

Private assets : Assets such as private debt offer higher-yielding returns with significantly lower volatility than publicly traded securities. By their nature, private assets are not subject to the same whims of the crowd that the public markets are.

Dividend-paying stocks : Arguably the most volatile cash-flow-producing investment available to the average retail investor. The income from dividend-paying stocks can be less consistent than other cash-flow-generating assets. Also, your investment value can fluctuate depending on market events and the company’s performance. One strategy for mitigating some of the volatility is to invest in a fund focusing on long-term growth in a large number of dividend-paying stocks.

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Bonds or bond funds : Bonds, essentially the debt of companies or governments, can provide relatively low returns, but are generally viewed as safe investments depending on their rating. Again, a way to protect your bond investment and still see regular cash flow is to invest in a bond fund that provides diversification across the bond market.

As a whole, cash-flow investing helps protect investors in volatile markets while also taking advantage of temporary market troughs. This is one strategy I would recommend to all investors regardless of portfolio size. If there’s one thing I’ve learned over the past number of years, there’s never a wrong time to start.

James McCarthy, CIM, is a senior wealth associate/client relationship manager at Nicola Wealth. This article should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Nicola Wealth is registered as a portfolio manager, exempt market dealer and investment fund manager with the required provincial securities commissions.

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