Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief investment strategist Brian Belski’s performance report on his North American Dividend Growth portfolio provided informative commentary on market conditions for equity income investors,
“Relative Performance: 3Q23 = -2.2%; Benchmark: 40% S&P/TSX + 60% S&P 500 … Energy was the main area of weakness in the quarter as our preferred yield names, TC Energy and Enbridge significantly underperformed the overall sector… a renewed focus on higher-for-longer interest rates, dividend-based strategies, particularly yield-focused factors, struggled in the third quarter. From our perspective, much of this re-rating of dividend names is overdone. Furthermore, this underperformance of high yield sectors highlights the pitfalls of focusing purely on yield. In fact, we believe income investors should focus more on dividend growth and cash flow factors when looking for opportunities … We continue to believe Canada is a clear cross-section of growth, value, and income, which we believe makes Canadian equities a key area of multi-year relative stability. While the TSX may continue to “chop around” during the final months of 2023, we believe as interest rates AND recession fears fade, so too will concern around earnings and yield, providing the key catalyst for valuation expansion and broadening of market performance”.
The top five holdings in the dividend growth portfolio are Enbridge Inc., Bank of America, Toronto-Dominion Bank, TC Energy Corp. and JP Morgan Chase & Co. The bottom five performers for the quarter were Brookfield Infrastructure Corp., Target Corp., BCE Inc., Telus Corp and Emera Inc. The top five performers were all non-Canadian - Amgen Inc., Comcast Corp., UnitedHealth Group, Cisco Systems Inc. and LyondellBasell Industries.
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National Bank chief economist and strategist Stéfane Marion provided the unwelcome news that Canada has never had anything close to the housing deficit we have now,
“The September employment report showed another outsized increase in the working-age population, resulting in a cumulative quarterly gain of 267,000 in Q3. This surge, the largest on record, followed a gain of 238,000 in the second quarter and 204,000 in the first quarter. There is no precedent in modern Canadian history for setting three consecutive quarterly records for population growth. Not surprisingly, homebuilders cannot keep up with this unexpected immigration-driven influx of new people, and as a result, the housing supply deficit worsened to its worst level on record in Q3. As today’s Hot Chart shows, there is currently only one housing starts for every 4.2 people entering the working-age population (people 15+). This compares to a historical ratio of one housing starts for every 1.8 new entrants to the working-age population. This massive imbalance is likely to persist for the foreseeable future until demographic growth slows significantly’
“NBF: New record housing deficit” – (chart) Twitter
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RBC Capital Markets energy analyst Michael Tran provides a good reminder that consumers don’t buy oil, refineries do. As a result, crack spreads, the profit refiners make on each barrel of oil, determine crude demand,
“Distillate stocks are tight and cracks are signaling for refineries to run harder and produce more diesel, while gasoline cracks are tanking to try to shut the door on runs to prevent an oversupply of motor gas. As long as distillate stocks remain tight, the corresponding crack will remain strong enough for refiners to run… From Ugly to Uglier?: The prompt gasoline crack looks cheap by historical standards. In fact, spot cracks have only been cheaper than current levels during 4.9% of the days over the past five years. However, refineries do not operate in isolation by product. Consider the following: the distillate crack is still currently stronger than 79% of the time over the past five years… What needs to break?: Distillate cracks are elevated based on historical norms, but given the tight US and global inventory backdrop, positioning for a correction in the near term could be a precarious endeavor. The conviction short on the distillate crack is likely low at best. This means that gasoline prices must do the majority of the leg work lower if the goal is to disincentivize refiners from running at seasonally high levels”.
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Diversion: “19 Winning Wildlife Photos Show Moments of Heartbreak, Wonder, and Extreme Survival” – Gizmodo
Scott Barlow