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Intrigued by banks, pipelines and railways? Here’s a one-stop investment for 2023

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The S&P/TSX 60′s top stocks, based on their weightings, are like a wish list of solid performers, including Canadian National Railway Co.Mark Blinch/Reuters

Canadian banks, oil producers, railways and pipelines look like fine sectors to ride out the economic turmoil ahead, given their mix of reasonable valuations, strong cash generation and rising dividends.

So, why not grab them all with a fund that tracks the S&P/TSX 60 Index?

The benefits of passive investing – a strategy based on accepting the returns of the market, rather than trying to outperform it with active stock selection – are well known.

But the appeal of Canada’s blue-chip index looks particularly strong in 2023, given the index’s exposure to companies that can survive an oncoming recession and reap the benefits of an economic recovery, all while paying out hefty dividends.

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The S&P/TSX 60′s top stocks, based on their weightings, are like a wish list of solid performers, including Royal Bank of Canada RY-T, Enbridge Inc. ENB-T, Canadian National Railway Co. CNR-T and Canadian Natural Resources Ltd. CNQ-T.

The blue-chip benchmark does not have the diversification of the S&P 500. It doesn’t have the exposure to smaller companies that the S&P/TSX Composite Index delivers. And it lacks the global tech-stock dominance of the Nasdaq.

But none of these shortfalls looks like a bad thing right now, with higher interest rates weighing on tech stock valuations in particular.

The S&P/TSX 60 is also currently free of hype surrounding any particularly overvalued hot stock among its top holdings.

Recall that Valeant Pharmaceuticals International Inc. (now Bausch Health Cos. Inc. BHC-T), Research In Motion Ltd. (now BlackBerry Ltd. BBT), Potash Corp. of Saskatchewan Inc. (now Nutrien Ltd. NTR-T), Barrick Gold Corp. ABX-T and Nortel Networks Corp. all briefly dominated as Canada’s most valuable companies during remarkable rallies, only to fade soon after.

The most recent example, Shopify Inc. SHOP-T, overtook RBC as the country’s most valuable company in 2020. But Shopify’s shares have declined 64 per cent over the past 52 weeks, and it is now languishing as the 10th most valuable company.

But the best reason for considering a fund tied to the S&P/TSX 60 is the one-stop exposure to banks, energy, rails and pipelines, which appear well-suited to today’s economic backdrop.

Bank stocks have tumbled 15 per cent over the past year amid concerns about the Canadian economy and fears that rising borrowing costs will weigh on the country’s wobbling housing market.

But some analysts say that decline implies that a mild recession has been priced in already, and it has lifted the Big Six banks’ average dividend yield to nearly 4.8 per cent. As well, valuations, as measured by estimated price-to-earnings ratios, are below the historical average, giving the stocks the potential to deliver upbeat returns over the longer term as valuations improve.

Railways maintain indispensable transportation networks that can benefit this year from bumper crops, even if demand for commodities such as lumber subsides.

Pipeline operators Enbridge ENB-T and TC Energy Corp. TRP-T are compelling dividend plays, with yields of 6.4 per cent and 6.5 per cent, respectively. Both companies play a crucial role in traditional energy infrastructure that has taken on new significance over the past year.

Traditional oil producers have also roared back to life as lofty crude prices drive gargantuan profits, which large companies are distributing as bigger dividends as their debt levels decline.

“Among the many themes within the global energy landscape last year, none resonates more than the commitment of energy producers to return meaningful capital to shareholders,” Greg Pardy, head of global energy research at RBC Dominion Securities, said in a note this week.

Of course, you can buy any of these stocks individually (full disclosure: I own Enbridge shares and a fund that tracks the Big Six bank stocks, among other Canadian holdings).

But exchange-traded funds – such as the iShares S&P/TSX 60 Index ETF (ticker: XIU), a descendant of the world’s first ETF, launched in 1990 – have advantages that are hard to ignore.

Fees are slim: 0.18 per cent for the iShares fund, or $18 per year for every $10,000 invested. And academic evidence suggests that it is very difficult to outperform major indexes over time, even for professional stock pickers. That helps explain why the XIU fund has nearly $11-billion in assets.

“XIU has a significant amount of institutional usage. You have this critical mass of assets because of how widely used the product is,” Steven Leong, head of product for iShares Canada, said in an interview.

The S&P/TSX 60 is not immune to a deeper-than-expected recession, a downturn in commodity prices or further tumult in Canada’s housing market, which could cause volatility. But as an all-in-one bet on Canadian blue-chip stocks that will deliver results over the longer term, the index may be hard to beat.

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Weaker Orders, Investment Underscore Ailing US Manufacturing – Yahoo Canada Finance

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(Bloomberg) — US manufacturing showed more signs this week of succumbing to the Federal Reserve’s aggressive interest-rate hikes that are taking a bigger bite out of demand and risk upending the economic expansion.

Most Read from Bloomberg

The government’s first estimate of gross domestic product for the fourth quarter and a report on December factory orders for durable goods pointed to sizable downshifts in both spending on business equipment and bookings for core capital goods.

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The durable goods report Thursday showed orders for nondefense capital goods excluding aircraft — a proxy for business investment — dropped 0.2% in December after no change a month earlier. Over the fourth quarter, bookings for these core capital goods posted the weakest annualized gain since 2020. Shipments, an input for GDP, decreased for the third time in four months.

“Taken in tandem with the output data where industrial production has declined in six of the past eight months, it is increasingly evident that the manufacturing recession is well underway,” Wells Fargo & Co. economists Tim Quinlan and Shannon Seery said in a note to clients.

Also on Thursday, the GDP report showed outlays for business equipment dropped an annualized 3.7%, the largest slide since the immediate aftermath of the pandemic. That decline was part of a broader demand slowdown, which included a smaller-than-forecast advance in personal spending.

While GDP growth beat expectations, details of the report that offer a clearer picture of domestic demand were decidedly weak. Inflation-adjusted final sales to private domestic purchasers, which strip out inventories and net exports while excluding government spending, rose at a paltry 0.2% rate — also the weakest since the second quarter of 2020.

Last month’s retreat in core capital goods orders indicates manufacturing output, which already registered sharp declines in the final two months of 2022, may struggle to gain traction this quarter.

Read more: Weak US Retail Sales, Factory Data Heighten Recession Concerns

The slump in housing is also spilling over into producers of non-durable goods. Shares of Sherwin-Williams Co. tumbled this week after the paintmaker pointed to pressures stemming from a weak residential real estate market and inflation.

“We currently see a very challenging demand environment in 2023 and visibility beyond our first half is limited,” Chief Executive Officer John Morikis said on a Jan. 26 earnings call. “The Fed has also been quite clear about its intention to slow down demand in its effort to tame inflation.”

An accumulation of inventories only adds to the headwinds. Inventory building accounted for about half of the 2.9% annualized increase in fourth-quarter GDP. For the year as a whole, inventories grew $123.3 billion, the most since 2015.

With demand moderating, there’s less incentive to ramp up orders or production as companies make greater efforts to sell from existing stock.

In addition to the aforementioned data, the latest surveys of manufacturers show sustained weakness. Measures of orders at factories in four regional Fed surveys have all indicated multiple months of contraction.

All surveys released so far for this month are consistent with an overall contraction in activity that extends back through most of the second half of 2022.

Next week, the Institute for Supply Management will issue its January manufacturing survey and economists project a third-straight month of shrinking activity.

Most Read from Bloomberg Businessweek

©2023 Bloomberg L.P.

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Canada expected to buck trend of big investment banking layoffs – Reuters

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TORONTO, Jan 26 (Reuters) – Some of Canada’s top investment banks plan to maintain staffing levels to meet client expectations for the same level of coverage through the ups and downs of business cycles, head hunters and industry executives said.

U.S. investment banks, including Goldman Sachs (GS.N), began cutting over 3,000 employees on Jan. 11 citing a challenging macroeconomic environment, raising fears Canadian banks may follow suit. Like their global peers, many Canadian investment banks had staffed up during the pandemic only to see dealmaking slow last year.

At Royal Bank of Canada (RY.TO), the country’s biggest lender, for instance, headcount at its capital markets division jumped by 71% over the two years ending Oct. 31, 2022 to 6,887 employees.

But in the meantime Canadian dealmaking fell 39.7% last year to $89.7 billion. That is more than the 36% drop in global deal values to $3.8 trillion following a stellar 2021, according to data from Dealogic.

Yet, Canadian banks have not announced layoffs and some even say they may increase headcount, though dealmaking in the new year is down nearly 50% to $3.2 billion from a year ago, according to Dealogic.

“Right now there is a sense that there isn’t a need for cuts in the system,” Dominique Fortier, partner at recruitment firm Heidrick & Struggles’ Toronto office, told Reuters.

“When there was an upswing in 2021, it happened so quickly that there was no corresponding increase in hiring and so I don’t see that we’ll have the same decrease in terms of headcount coming.”

Toronto Dominion Bank (TD.TO), which last year agreed to buy New York-based boutique investment bank Cowen Inc (COWN.O), expects to continue to grow its global investment banking business as it work towards closing the deal, a spokesperson said.

Desjardins, another Canadian lender, will continue to invest in its growing capital markets division, a spokesperson said.

EXPENSIVE PROPOSITION

Bill Vlaad, a Toronto-based recruiter who specializes in the financial services sector, said that while there was some nervousness around the stability of investment banking teams, Canada is unlikely to see U.S.-level redundancies aside from the annual cull of poor performers called “maintenance layoffs.”

“The U.S. is very nimble. They will go in and out of hotspots very quickly. Canada doesn’t have that same luxury and has to stay relatively consistent in coverage,” said Vlaad.

“You have a consistent group of people working…and they don’t fluctuate all that much year to year, decade to decade.”

But another down year for dealmaking could see bonuses taking a hit.

RBC, which was ranked No. 2 in Canada M&A, equity capital markets and debt capital markets last year according to Dealogic, has no layoff plans for investment banking in Canada, a source with knowledge of the matter said.

Spokespeople for JP Morgan, which topped the M&A league table last year, Scotiabank (BNS.TO) and Canadian Imperial Bank of Commerce (CM.TO) declined to comment. BMO did not respond to requests for comment.

Headhunters and lawyers say it’s less expensive to lay off bankers in the United States compared to Canada.

Howard Levitt, senior partner at employment law firm Levitt Sheikh, said Canadian investment banking employees would be entitled to somewhere between four and 27 months severance with full remuneration depending on their status, re-employability, age and length of service.

Reporting by Maiya Keidan
Editing by Denny Thomas and Deepa Babington

Our Standards: The Thomson Reuters Trust Principles.

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Weaker Orders, Investment Underscore Ailing US Manufacturing – BNN Bloomberg

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(Bloomberg) — US manufacturing showed more signs this week of succumbing to the Federal Reserve’s aggressive interest-rate hikes that are taking a bigger bite out of demand and risk upending the economic expansion.

The government’s first estimate of gross domestic product for the fourth quarter and a report on December factory orders for durable goods pointed to sizable downshifts in both spending on business equipment and bookings for core capital goods.

The durable goods report Thursday showed orders for nondefense capital goods excluding aircraft — a proxy for business investment — dropped 0.2% in December after no change a month earlier. Over the fourth quarter, bookings for these core capital goods posted the weakest annualized gain since 2020. Shipments, an input for GDP, decreased for the third time in four months.

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“Taken in tandem with the output data where industrial production has declined in six of the past eight months, it is increasingly evident that the manufacturing recession is well underway,” Wells Fargo & Co. economists Tim Quinlan and Shannon Seery said in a note to clients.

Also on Thursday, the GDP report showed outlays for business equipment dropped an annualized 3.7%, the largest slide since the immediate aftermath of the pandemic. That decline was part of a broader demand slowdown, which included a smaller-than-forecast advance in personal spending.

While GDP growth beat expectations, details of the report that offer a clearer picture of domestic demand were decidedly weak. Inflation-adjusted final sales to private domestic purchasers, which strip out inventories and net exports while excluding government spending, rose at a paltry 0.2% rate — also the weakest since the second quarter of 2020.

Last month’s retreat in core capital goods orders indicates manufacturing output, which already registered sharp declines in the final two months of 2022, may struggle to gain traction this quarter.

Read more: Weak US Retail Sales, Factory Data Heighten Recession Concerns

The slump in housing is also spilling over into producers of non-durable goods. Shares of Sherwin-Williams Co. tumbled this week after the paintmaker pointed to pressures stemming from a weak residential real estate market and inflation.

“We currently see a very challenging demand environment in 2023 and visibility beyond our first half is limited,” Chief Executive Officer John Morikis said on a Jan. 26 earnings call. “The Fed has also been quite clear about its intention to slow down demand in its effort to tame inflation.”

An accumulation of inventories only adds to the headwinds. Inventory building accounted for about half of the 2.9% annualized increase in fourth-quarter GDP. For the year as a whole, inventories grew $123.3 billion, the most since 2015.

With demand moderating, there’s less incentive to ramp up orders or production as companies make greater efforts to sell from existing stock.

In addition to the aforementioned data, the latest surveys of manufacturers show sustained weakness. Measures of orders at factories in four regional Fed surveys have all indicated multiple months of contraction. 

All surveys released so far for this month are consistent with an overall contraction in activity that extends back through most of the second half of 2022. 

Next week, the Institute for Supply Management will issue its January manufacturing survey and economists project a third-straight month of shrinking activity.

©2023 Bloomberg L.P.

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