Daily summary of research and analysis by Scott Barlow, market strategist at The Globe and Mail
The title of Scotiabank strategist Hugo Ste-Marie’s latest report is blunt: Foreign investors show little interest in Canadian stocks,
“While the TSX Composite is posting solid gains this year (+10%) and last year (+16%), foreign investors are showing little interest in Canadian equities. In fact, the latest data from Statistics Canada for the month of June shows that foreign investment in Canadian equities and mutual fund shares declined by C$5.5 billion… the negative reading in June is not a new phenomenon as foreign investors have been steadily reducing their exposure to CDA stocks over the past few years. They sold C$14 billion worth of shares this year and C$27 billion over the past 12 months, which should not be surprising given the massive outperformance of U.S. equities (Mag-7 + AI theme). Interestingly, June divestments were mostly in shares of Canadian banks. If the banks manage to beat expectations and deliver solid results overall, global investors may be tempted to mount a comeback and potentially boost TSX returns again as their FQ3 reporting season begins this Thursday.”
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RBC Capital Markets analyst Darko Mihelic provides an outlook on the banking sector earnings reports that begin in two days at TD,
“We are making some changes to our models and our Q3/24 core EPS estimates are increasing slightly; we are increasing our Canadian P&C loan (personal and commercial) growth assumptions in line with RBC Elements model predictions and adjusting our capital markets estimates (higher for NA and lower for CM and TD). We continue to view credit quality as one of the key areas to watch across Canadian banks as we have seen signs of credit quality deterioration (rising unemployment, higher NCO ratios among U.S. peers, etc.). We expect impaired PCL ratios to increase on average by 3bps QoQ and 12bps YoY. We are adjusting our models to reflect a subdued level of capital markets revenue growth of 0.8% QoQ overall for the major Canadian banks we cover.” Capital remains solid in our view as the last remaining banks with discounted DRIPs are shutting them down soon (CM shutting them down in Q3/24 and BNS intends to shut them down in Q4/24)”
Among the large banks, Mr. Mihelic rates only TD as “outperform” and prefers insurance stocks.
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Arjun Goyal, an analyst at BofA Securities, believes that the rapid decline in the VIX index is (counterintuitively) a signal to hedge risk.
“Volatility markets have stabilized quickly following the August 5 spike, with the VIX already almost back to its pre-August annual average. In fact, the speed of this retracement has been historic, with the VIX falling from its peak to below its long-term median in just 7 days (the fastest ever). With volatility back to relatively low levels, equities having resumed their rally, and numerous downside risks from macroeconomic to political to seasonal, we believe it remains prudent to hedge against the downside risks.”
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Benjamin Reitzes, interest rate and macro strategist at BMO Canadian, notes the lack of growth in mortgage loans.
“As the housing market continued to languish in the spring under the pressure of high interest rates and prices, mortgage activity also remained under wraps. Mortgage inventories grew at a 3% annualized rate in the second quarter, the second slowest quarterly pace since 2000. Last week’s July home sales figures showed a slight decline, suggesting Canadians are maintaining a cautious attitude toward the housing market even as rates begin to fall (mortgage rates are off their highs, even though the BoC’s rate cuts only began in June). While the modest mortgage loan growth reflects weakness in the housing market, the positive side is that it also points to a further decline in household debt-to-income ratios. The latter will be welcome news as increased debt increases household financial vulnerability.”
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Detour: “The terrifying rise of ransomware gangs” – Macleans
Market factors: Three long-running trends that will reverse. Plus the surprising winners so far in 2024
