Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank is the most bullish research firm I can think of in regards to their expectations that early-cycle cyclical stocks will continue to rally, while Wall Street giants like Morgan Stanley, Goldman Sachs and BofA Securities are recommending higher quality market sectors and warning of slowing (but far from negative) global economic growth.
Scotia’s Orest Wowkodaw argued a commodity super cycle awaits (resources are early-cycle outperformers) and outlined top picks in a Monday report,
“After solely rescuing commodity markets in 2020, we anticipate a strong stimulus-driven recovery in ex-China markets in 2021-2023 that more than compensates for moderating Chinese growth. We believe that fears related to higher interest rates, a stronger USD, and a slowdown in China are transitory. In the medium to long term, we anticipate the emergence of a new commodities super cycle driven by growing demand from global decarbonization efforts to address climate change amplified by the impact of severe underinvestment in new production capacity… We forecast the Cu [copper] market to post a meaningful 2021 deficit driven by demand recovery … Moreover, we anticipate Cu to be among the biggest beneficiaries of growing global decarbonization efforts… . We recommend 14 of 24 equities under our coverage. Our top picks remain CS-T, FCX-N, FM-T, and VALE-N. We also recommend CCO-T, CIA-T, CMMC-T, HBM-T, IVN-T, LIF-T, LUN-T, TECK.B-T, TRQ-T, and U-T. The average implied return for our preferred equities is now 35% (vs. 30% last quarter)”
“@SBarlow_ROB Scotiabank still sees commodity supercycle under way’ – (research excerpt) Twitter
Morgan Stanley chief U.S. equity strategist David Kostin is asking three big questions as U.S. earnings season approaches,
“Consensus expects aggregate 2Q EPS growth of 61% year/year, driven by a combination of 22% sales growth and 256 bp of net margin expansion (to 11.1%). However, the median stock is forecast to grow EPS by a more modest 24%. We focus on three questions for managements this earnings season: (1) How will firms preserve profit margins amid input cost pressures? (2) How will companies prioritize their cash spending as balance sheets recover? (3) How does ongoing policy uncertainty affect the business outlook? Rates have plunged and high “quality” themes are outperforming.”
Mr. Kostin recommends stocks with high and improving profit margins to navigate inflation pressures and potential tax increases. He presented a list of 32 companies. Those likely to be of most interest to Canadian investors include Activision Blizzard, Netflix Inc., Merck & Co. Inc., Abbot Laboratories, Analog Devices Inc., KLA Corp., Applied Materials, Advanced Micro Devices and Linde PLC.
“@SBarlow_ROB GS: “Stocks with above-average net profit margins that expanded by 50+ bp in 2020 and are expected to expand by 50+ bp in each of 2021 and 2022″” – (full table) Twitter
Morgan Stanley U.S. equity strategist Michael Wilson firmly believes we are entering a more mature, middle stage of the market cycle that will be characterized by ‘rolling corrections’,
“Since February, financial markets have endured what we would call a “rolling correction” despite new highs being made every week in the major US equity indices … This is all quite normal during a mid cycle transition and the major indices remain vulnerable until they complete what should be a 20% de-rating process [market correction]. So far, that de-rating has only amounted to 5%… The first half of the year has been characterized by a record amount of direct stimulus to consumers and the reopening of the economy. This has been a potent combination for above trend GDP growth … However, asset prices most levered to these drivers are now under-performing broadly suggesting there may not be as much pent up demand as the consensus now is modeling … We continue to favor Quality with defensive & GARP biases. Since our June update, the relative performance of EW [equal weighted] baskets of our Quality + Defense and our Quality + GARP screens has been 2.8% and 0.1% respectively vs EW S&P 500. We refresh the screens and note MS OW [overweight] rated stocks on either: ABC, AMGN, ATO, ATVI, BDX, CI, COST, CVS, FB, GILD, GOOGL, HRC, MNST, MO, MRVI, MTCH, NRG, ORLY, and PG.”
“@SBarlow_ROB MS’s Wilson: Less pent-up demand than thought” – (research excerpt) Twitter
Diversion: ” How Do We Know Birds Are Dinosaurs?” – Gizmodo
Tweet of the Day: ” @lisaabramowicz1 Economists say the softening in China’s economy has come sooner than expected, and could now ripple across the world. “There is no doubt that the impact of a slowing China on the global economy will be bigger than it was five years ago,” bloomberg.com/news/articles/… ” – Twitter
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