Briefing highlights
- BMO’s Belski on Canadian stocks
- A Senate scene I’d love to see
- Markets, Canadian dollar at a glance
- EU hits back at U.S. with tariffs
- Fox agrees to Disney bid
- Aurora to spin off U.S. holdings
Four things
As Brian Belski sees it, there are four things you should know about Canadian stocks.
“To be sure, investors remain fixated on rhetoric and noise versus analysis, in our view,” the chief investment strategist at BMO Nesbitt Burns Inc. said in his latest outlook, which sees the S&P/TSX Composite at 17,600 this year.
“Indeed, despite general underperformance of the S&P/TSX so far this year, Canadian equities continue to show many areas of hidden strength,” he added.
Mr. Belski’s four:
‘U.S.-CENTRIC GROWTH’
“One of the clearest observations of TSX performance this year has been the renewed outperformance of companies with high foreign revenue exposure versus the purely domestic-oriented companies. Indeed, we believe the passage of U.S. tax reform and the associated surge in U.S. growth are likely the main drivers.”
Thus, as long as “U.S.-centric growth” holds as the main force behind the global economy, Canadian companies linked to U.S. and other foreign revenue streams should fare better than the rest.
Technology and industrial stocks, for example, are among the best performers this year.
’BEHIND THE CURVE’
“Analysts remain behind the curve, with earnings trends consistently stronger this year.”
Traditionally, Mr. Belski said, stock analysts begin a year “overly optimistic” about earnings per share, lowering their projections as they go along. Which means such estimates “rarely trend higher,” he added.
For 2018 and 2019, though, projections are being revised up for the first time in more than a decade.
“Furthermore, the TSX per-cent earnings surprise is now at the highest levels since the 1990s.”
’SHELTER FOR YIELD INVESTORS’
BMO has been hearing a lot from clients fretting over the fallout from higher interest rates on high-yielding equities, which have underperformed their peers on the lower-yielding side of things.
“However, our works shows that companies with strong free cash flow, enough to cover their dividend yield, have in fact outperformed other high-yielding names,” Mr. Belski said.
“This is a trend we expect to continue while rates are rising, and would advise yield-focused investors to focus on dividend growth and dividend coverage during periods of rising rates,” he added.
“Unlike pure dividend yield where higher yield has underperformed, companies that are returning capital with relatively high share buybacks continue to be rewarded.”
‘QUALITY FACTORS’
“Stick with quality factors within the underperforming defensive sectors,” the BMO strategist said, adding that these groups have been “structurally underperforming” cyclicals for more than two years.
“Our work shows that the best-performing defensive stocks and worst-performing defensive stocks have broadly comparable yields,” Mr. Belski said.
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A scene I’d love to see
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Photo illustration
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