BofA Securities U.S. equities and quantitative strategist Savita Subramanian, in defiance of bearish strategists like Morgan Stanley’s Michael Wilson and Citi’s Matt King, published ten reasons why U.S. stocks are likely to outperform current consensus estimates.
Reasons one and two are related to negative sentiment. First, fund managers have significant underweight positions in equities – and overweights in bonds – and most investors are bracing for recession. Both are contrarian buy signals.
Reason three for optimism is that with Federal Reserve policy rates around 5 per cent, there is ample room for the central bank to cut rates if economic growth softens. Reason four is that venture capital and private equity funds are sitting on a record amount of cash that could be put to work in equities.
Reason five is the defensive positioning of hedge funds and mutual funds in sectors like health care, utilities and consumer staples. A low weighting in economically sensitive stocks means that there is significant upside for them when growth resumes.
Reason six is a resurgent Japan Factory Automation index, an important leading indicator for global profit growth.
Reasons seven through nine have to do with valuations. Ms. Subramanian notes that many investors predict lower valuations (and stock prices by extension) as a recession approaches. However, the strategist predicts a bottom in earnings growth in the second half of 2023, with a rapid recovery thereafter. Productivity gains and improving profit margins are likely ahead, and also earnings visibility is high.
Seasonality is also a positive influence as BofA’s chief technician Stephen Suttmeier predicts a summer rally.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Russel Metals Inc. (RUS-T) This stock has been rallying this month ahead of first-quarter earnings results on May 8. Another earnings beat could send the share price back up to record levels. However, capping the potential upside are concerns surrounding an imminent recession and technical resistance. Jennifer Dowty takes a look at the investment case for the distributor of metals.
Stantec Inc. (STN-T) The stock hit a record high this month and recently reported better-than-expected financial results. Edmonton-based Stantec is a consulting, design, and engineering company that features steady growth, a solid backlog of work, a healthy balance sheet and - even at record highs - a reasonable valuation. Jennifer Dowty profiles the company.
The Rundown
The days of easy money with alternative investments are over
Over the past few decades, institutional and affluent investors have increased their exposure to an asset class labelled as, for lack of a better term, alternative investments. They include, but are not limited to, hedge funds, private equity, natural resources, real estate and infrastructure. Veteran fund manager Tom Czitron explains why the days of easy money for these investments are over.
Debt ceiling worries bubble up in U.S. stock options market
Worries over a debt ceiling showdown are creeping into U.S. options markets, as investors grow increasingly concerned that lawmakers will be unable to hammer out a deal in coming weeks, potentially sparking stock volatility as a key deadline nears.
What should investors consider when selecting their mutual funds?
Keen-eyed investors will have noticed a common footnote on all their mutual fund and ETF performance statements: “Performance quoted represents past performance and does not guarantee future results” (or something similar). Although potentially viewed as a statement of the obvious, it also prompts the question – what should investors consider when selecting their investments for the future if past performance is not guaranteed? Danielle LeClair of Morningstar has some answers.
Others (for subscribers)
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Globe Advisor
Are dividend aristocrats ETFs a good bet for cash flow with high inflation?
Volatile markets increase appeal of ETFs with a buffer
Will Emerge ETFs’ trading halt lead to more concerns about investing with niche providers?
AI and ETFs: The machines are coming – but not always winning
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Ask Globe Investor
Question: I retired early at 55. I did not have an employee pension plan so I lived on my RRSP, with the plan to take out $25,000 a year for life from my savings. At 60, I started a reduced CPP at $770 a month with the plan to start my Old Age Security at 65.
But life changed, and l was diagnosed with a rare cancer half-way through my 60th year. I was told l had four months to live, and advised to get things in order. Today, after two and a half years of battling, I’m 63 and living with hope for maybe another three years.
I have about $550,000 left in my RRSP. I sold everything l owned and moved in with my girlfriend. I’m still removing 25,000 a year from my RRSP to live on, with the added income from the CPP.
Everything is in order for my passing, and l would like to leave the remaining money in the RRSP to my three children, but if l pass in three years and have $500,000 remaining, they will lose about 35 per cent to taxes upon my death. Do you see something that l can do to reduce having to pay that 35 per cent upon my passing? – Albert P.
Answer: You didn’t tell us your province of residence, which makes a big difference to your tax rate. So, let’s use Ontario as an example. Your annual income (RRSP and CPP) puts your marginal tax rate at about 20 per cent (the rate of tax on the next dollar earned). It will stay at that level until your taxable income reaches about $46,000. That means you could take an extra $12,000 out of the RRSP at a 20 per cent tax rate and distribute it to your children.
Of course, an extra $12,000 a year over three years won’t make much of a dent. You can increase the extra withdrawals by another $34,000 and still end up with a marginal tax rate below 30 per cent, according to the EY tax calculator.
I don’t know of any legal way to withdraw money from an RRSP tax-free, but this will at least reduce the bill. And who knows? The doctors were wrong before. You may have more years remaining than you think.
- Gordon Pape (Send questions to gordonpape@hotmail.com and write Globe Question on the subject line.)
What’s up in the days ahead
The U.S. dollar may soon no longer be king. Or so says Tom Czitron, who will tell us how to invest to profit from its decline.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff