The Citi global strategy team’s market forecasts have taken a distinct turn for the bearish, predicting significant equity price volatility in the months to come.
The firm’s chief U.S. equity strategist Tobias Levkovich kicked things off Tuesday with Market Strength Does Not Mean It Isn’t Vulnerable, in which he first highlighted current levels of bullishness reminiscent of the late 1990s.
Mr. Levkovich also cited a consensus view among portfolio managers that no catalysts for a sell-off are apparent, but he sees potential corporate tax hikes, profit margin-compressing input cost inflation and Fed monetary tightening as substantial threats to higher U.S. stock prices.
Robert Buckland, the firm’s U.K.-based head of global strategy, cited the likelihood of higher American bond yields as the motivation to downgrade U.S. equities to “neutral weight” from “overweight”. For Mr. Buckland, the risks centre less around nominal bond yields and are more about inflation-adjusted (or real) bond yields.
The current U.S. real ten-year bond yield is deeply negative at -1.21 per cent. Faced with losing money annually in inflation-adjusted terms, bond investors have increasingly diverted portfolio assets to equities and this has been driving stock prices and valuations higher. The strategist presented a chart showing that growth stocks in particular, including technology equities, have benefitted most from falling real yields (I posted the chart on social media here).
Citi expects real yields to climb 70 basis points to negative 0.51 per cent in 2022, causing a ‘re-rating’ of growth stocks. In this case, the term means lower stock prices and valuation levels.
This is only one firm’s view but it’s a useful one. There’s no need for investors to change their portfolios in the short term but they can heed the warnings – watching for corporate tax news, falling profit margins, hints of monetary tightening and higher bond yields – and gauge the effects on equity market volatility for the remainder of the year and into 2021. Mr. Buckland’s sector recommendations – reduce technology, build overweight allocations to health care, financials and materials – become more credible if volatility climbs.
Also see: Earnings bounce, bond-yield drop help keep party going for U.S. stocks
— Scott Barlow, Globe and Mail market strategist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to ponder
Information Services Corp. (ISV-T) You’ve probably never heard of this stock, unless you live in Saskatchewan. It’s a small company based in Regina. It provides exclusive registry and information services to the province. These include the Land Titles Registry, Land Surveys Directory, Personal Property Registry and Corporate Registry. Dull, dry stuff. You’d expect an operation like this to be part of a government bureaucracy, but it’s not. It’s actually a public company that trades on the Toronto Stock Exchange. For those who have never owned the stock and are interested in a stable, dividend-paying security, Gordon Pape explains why it should be placed on watch lists.
McCoy Global Inc. (MCB-T) Based in Edmonton, with operations in 50 countries, this company has a long, rich history since it began in 1914. It operates in the oil and gas sector and focuses on maximizing wellbore integrity and data collection, so customers can make swift decisions with the best information. In June, McCoy formed a committee to examine strategic options. While joint ventures and partnerships are possibilities, an assessment by The Contra Guys is that the preferred alternative is to sell the enterprise. They look at the investment case of buying the stock before any potential deal.
Major Drilling Group International Inc. (MDI-T) In June, the company reported disappointing quarterly earnings results, and, at the same time, commodity prices were rolling over, putting downward pressure on the stock price. The share price has recently stabilized but remains down 22 per cent from its 2021 closing high of $10.97 reached on May 18. Jennifer Dowty looks at the investment case for buying the shares now as analysts anticipate a sharp rebound.
Top tips for investors from three fund managers facing off for charity
The organizers of the annual Holland Bloorview Investor Challenge and their participants were left navigating the troubled waters of 2020 as COVID-19 spread across the globe. Since 2015, three veteran investors are chosen each year to face off to help raise money for the Holland Bloorview Kids Rehabilitation Hospital in Toronto. While the contest normally runs a full calendar year with the same three fund managers, it was extended by an additional 12 months. Darcy Keith reports on how the three fund managers are faring in their portfolios (one has enjoyed a return of 242 per cent since the start of 2020) and what their top advice is right now to investors.
Dividend growth stocks that look expensive
With the S&P/TSX Composite Index up almost 34 per cent for the 12 months to June 30, it’s to be expected that some stocks are pricey. Included in this group are some popular dividend growth stocks, banks among them. There may still be room for their share prices to increase as the economy recovers from the pandemic, but by one measure they appeared to be at least a bit pricey in late July. Rob Carrick tells us who they are.
Why Davis Rea’s John O’Connell still likes U.S. big caps – and is steering clear of Canadian banks
Nobody can accuse portfolio manager John O’Connell of home bias. In his $400-million portfolio, the chairman and chief executive officer of Davis Rea Investment Counsel holds about 95 per cent U.S.-listed names in about 25 stocks across sectors, including technology, banking, industrials and health care. And he hasn’t owned a Canadian bank stock in about four years. Brenda Bouw had a chat with him to find out more about his thinking and top holdings.
Chinese stock sell-off: Behind Beijing’s crackdown
China is now in open conflict with many of its most prominent entrepreneurs, a battle that is rattling markets as investors question how far Beijing will go in bringing its superstar companies to heel. As Ian McGugan explains, anyone tempted to bargain hunt Chinese shares after their recent beat down should not assume that such uncertainties will ease any time soon.
John Heinzl’s model dividend growth portfolio as of July 31, 2021
Analysts’ forecast returns and recommendations for all S&P/TSX Composite Index stocks
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
What’s up in the days ahead
Lineups getting long at your neighbourhood Starbucks? Maybe it’s time to invest in the stock. Brenda Bouw will survey what fund managers and analysts think.
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Globe Investor Staff