A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
There’s been more negativity than usual surrounding domestic banks stocks lately thanks to U.S. hedge fund manager Steve Eisman, but a Citi research report released Thursday offers investors’ favourite sector some support,
“We do not view the risk of meaningful domestic asset quality deterioration as a near-term concern and expect the banks to maintain strong profitability with improving efficiency helping to counter revenue pressures. An average [Return on Equity] of 18.9% in 2019-20E and 46% payout ratio should drive 8% sector [tangible book value] growth in 2020E. Adding to that a 4% forward dividend yield and 2% buyback yield generates a total shareholder return (assuming unchanged P/TBV multiple) of c.14%. Top Pick — While we rate all Canadian banks Buy, our top pick is TD”
“@SBarlow_ROB C: bullish on Canadian banks” – (research excerpt) Twitter
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The potential for a liquidity-driven downdraft in credit markets is a risk that has sat in the background for a number of years. The recent near-collapse of a U.K. hedge fund had the bank of England warning about ‘systemic risk’ in markets,
“Carney said, via Reuters: This is a big deal. You can see something that could be systemic . . . These funds are built on a lie, which is that you can have daily liquidity for assets that fundamentally aren’t liquid. And that leads to an expectation of individuals that it’s not that different to having money in a bank … History is littered with popular investments that seem liquid until suddenly they’re not. The current rules tacitly acknowledge this unknown, and it seems to have worked OK for most.”
Citi credit strategist Matt King has frequently pointed out that corporate bond ETFs are also possibly susceptible to liquidity issues because the underlying investments often can’t be sold easily.
“Carney, and the question of open-ended funds” - FT Alphaville (free to read with registration)
“Illiquid investment funds 'built on a lie', BoE's Carney says” – Reuters
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Merrill Lynch energy analyst Doug Leggate highlighted a gigantic draw on U.S. crude inventories reported Wednesday ,
“After several weeks where transitory demand issues weighed on the broader oil complex, this week’s Energy Information Administration (EIA) data delivered the second highest crude draw in 20 years (near 13mn bbls), ahead of critical G-20 (demand) and OPEC (supply) meetings… if there is one consistency echoed by investors across the energy complex, it is that the volatility is exhausting and continues to undermine confidence … we continue to believe that with only a handful of exceptions, large cap US oils are undervalued at current strip prices.”
“@SBarlow_ROB ML: "this week's Energy Information Administration (EIA) data delivered the second highest crude draw in 20 years"” – (research excerpt) Twitter
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The Financial Times described the reasons for “the incredible shrinking stock market,”
“In the US alone, the number of listed companies stands at just over 4,000, half the amount in 1996, the zenith for the US market. Europe has also contracted, to a lesser degree… Low interest rates, meanwhile, have increased the appeal of debt financing for companies that may have previously decided to raise money by selling equity. “Stock markets are not competitive places to raise capital or sell companies right now,” said Robert Buckland, an analyst at Citi. “Public equity markets are shrinking because companies can find cheaper capital elsewhere.”
“The incredible shrinking stock market” – Financial Times (paywall)
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Tweet of the Day:
Diversion: “The 100 Best Moments in Culture in 2019” – The Ringer
Newsletter: “Gold rally reflects something really wrong in global finance” – Globe Investor
Scott Barlow