Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief investment strategist Brian Belski used his mid-term update for the TSX as a way to reiterate his belief that Canadians stocks will eventually outperform.
“From our perspective, the sharp underperformance of the TSX over the last few months (especially relative to its neighbour to the south) has been largely driven by declining confidence in the earnings outlook for the big three sectors in Canada (Energy, Financials, and Materials). As such, restoring assurance in the earnings outlook for these sectors will likely be key to a second half recovery. For our part, we believe 2H23 will be defined by a combination platter of stabilizing revision trends and longer-term earnings outlooks, thereby ultimately generating newfound investor confidence. Therefore, a return in equity flows and a rebound in valuations should follow suit. Indeed, the TSX excluding the big three sectors has significantly outperformed year-to-date as earnings in these areas stabilized and recovered in the early part of the year, a pattern we expect the big three sectors to mimic as we head into year-end. Overall, we remain steadfast in our view that Canadian equities offer strong relative value, cash generation, and stability as global markets travel down the long and increasing curvy road of normalization”
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RBC REIT analyst Pammi Bir warned that investors in the sector will need to be patient.
“They say that time heals all wounds. We believe there’s some truth in this saying, but REIT investors will need to wait longer. As macro headwinds persist, our recommendations remain skewed to property types where we see tailwinds to support resilient organic growth, including multi-family, industrial, self storage, & defensive retail. On the back of the sector’s recent pullback, we see better entry points to our top picks: AP, BEI, CAR, CIGI, CSH, DIR, ERE, FCR, FSV, GRT, HOM, IIP, KMP, MI, MRG, REI, SRU, SVI…similar story globally, but Canada’s pain was more acute. After a strong Q1, the TSX REIT Index posted a -8% total return in Q2 to date, leaving the sector in the red (-4% YTD) … The usual suspects that have plagued the sector over the past year seem to have taken a heavier toll in the recent pullback—rising bond yields at the long-end of the curve, further anticipated rate hikes as central banks work to suppress inflation, and prospects of a recession—take your pick. Liquidity concerns are likely also still weighing on select property types, particularly office.”
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As the holder of stock in Stryker Corp. I am biased towards orthopedic stocks but that won’t stop me from pointing out that U.K.-based Smith & Nephew is a ‘Best Idea’ stock pick at Bernstein.
“We rate Smith & Nephew Outperform with a target price of £15.80. Smith & Nephew has effectively been a 10+ year turnaround story. Despite a lot of false dawns, we think the stock is finally ready to inflect. And in fact, nearly two-thirds of the business is doing quite well already (Advanced Wound Management and Sports Medicine).
Orthopedics remains the problem child. The perception that S&N chronically underperforms in Hip and Knee Reconstruction is not actually true. The Hip business had largely grown in-line with the market for several years until the pandemic, while in Knees they had been outperforming their peers except for Stryker. But in the past 2-3 years that trend reversed, as they significantly underperformed through the pandemic. New CEO Deepak Nath has set out a detailed 12-point plan to improve underlying performance, most of which is focused on Orthopedics. While not there yet, we expect the gap vs. competitors to narrow in the coming quarters”.
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Diversion: “A Few Questions” – Collaborative Fund
Tweet of the Day: “This chart shows the lack of #reopening boom in #China’s Manufacturing sector. After a brief uptick earlier this year, China’s Manufacturing #PMI has remained below 50, the assumed threshold between growth and decline, for the last three months” – Twitter

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