Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Citi credit strategist Matt King continues to be one of the most interesting thinkers in sell-side research. In a Thursday report, Mr. King attempted to explain why equity markets have become more driven by flows into bond markets, and why steadily lower bond yields are needed to keep markets afloat,
“The way that credit flows drive asset prices depends on two factors: the actual flow of new money being added to the system, and the willingness of investors to allocate that money to risky assets rather than safe ones. It used to be that the level of interest rates – in conjunction with investors’ perceptions of opportunities in the real economy – would drive both of these factors. But over the last few decades, as demand to borrow has waned even as interest rates have moved lower, central banks have chosen to pump in new credit through QE.
“At the same time, the ‘artificial’ nature of this injection seems to have produced a change in investor and hence market behaviour. Just as it has taken an ever lower interest rate to persuade the private sector to borrow, so it seems to require an ever lower real yield to persuade investors to remain invested in risk assets at what they perceive are artificially inflated valuations. While the QE flow continues and real yields are held down, risk asset valuations are propped up. But when the flow slows, there is a greatly increased likelihood that money will go back into “safe” assets and risk assets sell off. US real yields moving up seem at a minimum to be a lead indicator of such moves, and conceivably are themselves a driver.”
I’m still contemplating the implications of this, but I already know it’s important. The report underscores U.S. inflation-adjusted yields as the most important market indicator.
***
Vanguard senior investment strategist Bilal Hasanjee sees four reasons for loonie weakness in the coming months,
“The loonie’s relative métier against other commodity currencies is attributable to the economy’s 4 relative strengths: (1) Political stability; (2) The government’s credibility for substantial and decisive corrective action in the wake of the pandemic relative to other commodity economies; (3) Its energy & mining sector constitutes a comparatively smaller portion of its GDP; (4) Canada’s ability to attract foreign capital inflows even during the pandemic, bringing in a record $49 billion, during April, to Canadian securities.
“On the downside, however, we are concerned about these key factors that may play to the Canadian dollar’s weakness during the months ahead: (1) Weak, global oil demand and its negative impact on the Canadian jobs, consumption and GDP; (2) Lower real estate prices that could reduce consumption and real estate activity; (3) Stressed consumer balance sheets due to housing and other consumer debt; (4) Substantial dependence on foreign investors to finance budget and current-account deficits. Our medium-term (2 to 3 years) outlook for the currency is to trade in a 1.30-1.45 range against the USD.”
“Vanguard Canadian Quarterly Overview & Outlook: July, 2020” – Vanguard Canada
“@SBarlow_ROB Vanguard sees 4 reasons to worry about the loonie” – (research excerpt) Twitter
***
The Financial Times details the U.S. investment industries push to sell alternative income strategies to investors,
“Retail investors in the US are turning to hedge funds and private equity to boost returns, as persistently low interest rates and a crowded equities market have cramped the performance of stocks and bonds.
“Assets under management in these so-called alternative assets which reached $10.3tn in 2019 among institutional investors globally, are forecast to hit $14tn by mid 2023, according to Preqin, a data provider. Recent regulatory guidance in the US that will expand retail investor access to alternatives — including allowing private equity to be included in 401(k) pension plans — is likely to add to this trend.”
The high demand for yield is unquestionable and extensive. Many of these alternative strategies are opaque in terms of asset pricing and that may become reason for concern over time.
“Retail investors open to alternatives in the hunt for higher yields” – Financial Times (paywall)
***
Newsletter: “Why gold is rallying. Plus, bargain dividend stocks and tools for timing the market” – Globe Investor
Diversion: " The Tech Giants Are Dangerous, and Congress Knows It” – The Atlantic
Tweet of the Day:
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Scott Barlow