The strategy team at Scotiabank is recommending investors upgrade their portfolios to high quality, defensive Canadian names given “monetary policy, earnings trajectory, and valuations.”
Scotia also believes that stocks have not found their trough in the current cycle.
The strategists have assembled 19 Canadian stocks to consider.
We also feature bullish but tempered views from BMO’s Chief Investment Strategist, and a more bearish opinion on stocks from the strategy team at Bank of America.
Plus, from the archive, Five Stocks for 2023, and 10 Stocks to Own Thought 2025 (see below).
“We have been recommending to add a Quality edge to investors’ portfolio in the last few months.
Degrading macro data and poor sentiment has pushed our style switching model into favouring Quality stocks since the start of the year.
Moreover, from a more fundamental standpoint considering monetary policy, earnings trajectory, and valuations, our overall view is also that equity markets may not have found their ultimate trough yet in this current cycle.
We would recommend that investors willing to upgrade their portfolio’s defensive characteristics look at the list.
It highlights Top Ranked Quality names screening out Quality Traps (i.e., names with seemingly high rankings on certain Quality metrics, but that may not deliver as much outperformance as expected)”
The highest quality names are, in order:
- TMX Group
- Timbercreek Financial
- Automotive Properties REIT
- Royal Bank
- Altrium Mortgage Investment
- Canadian Western Bank
- Ritchie Brothers Auctioneers
- SmartCentres REIT
- Hydro One
- Choice Properties REIT
- Waste Connections
- Canadian Utilities
- Dream Industrial REIT
- Northwest Healthcare Properties
- Canadian Pacific Railways
From BMO Capital Markets’ 2023 Outlook:
The S&P 500 may travel higher in 2023 but the gain may be modest and the path to get there uneven as investors continue to navigate around the Federal Reserve’s signals on monetary policy, according to BMO Capital Markets.
The firm’s 2023 market outlook said investors are likely seeing the days of liquidity-induced gains behind them.
“For all intents and purposes, 2022 will likely be remembered within the world of investing as the year when reality truly did bite.
Long gone are the days following the Great Financial Crisis of monetary slack and mostly easy gains for both stocks and bonds,” Brian Belski, BMO’s chief investment strategist, wrote.
“But the news is not all dire.
In fact, we believe this ‘great unwind and return to normalcy’ is actually very good news – with some bumps and bruises along the way,” he said.
Bumps may be prevalent in 2023.
“For the first time in many years, our enthusiasm for stock market performance potential next year is relatively tempered,” said Belski.
The firm put a target of 4,300 on the S&P 500 next year, representing 5% upside from Thursday’s level.
The base-case outlook centers on the US economy entering a mild recession next year amid aggressive interest rate increases by the Fed to tame hot inflation.
Fed funds futures pricing on the CME suggests most investors widely expect the key rate to go as high as 5% from the current level of 3.75%-4%.
BMO expects the Fed to raise interest rates through May 2023.
“Unfortunately, we believe it will be difficult for stocks to finish 2023 much higher than current and anticipated levels given the ongoing tug-of-war between Fed messaging and market expectations.
“From our perspective, the Fed has been crystal clear in their intentions – which means at least a few more Federal Open Market Committee meetings of rate hikes followed by a prolonged pause period, something that we do not believe the market has fully discounted.”
Future consumer price inflation reports that are hotter than expected will likely spark an “overreaction” to the downside in stocks, the firm added.
The market also will likely experience heightened volatility in both directions during the first half of 2023 until overall inflation levels trend downward throughout the second half of 2023.
The S&P 500 could retest its current cycle low or even establish a new one – “although if that does happen it is not likely to be much lower than the previous one and in no way alters our outlook,” the firm said.
Earnings for S&P 500 companies may contract by roughly 5% to $220 a share in 2023 from this year given the macro circumstances.
“Stated differently, earnings are likely to be down because we believe that is what needs to happen for inflation expectations to come down (i.e., profit margin deterioration) and for the Fed to finally step aside,” Belski wrote.
“Fortunately, we think this is well understood by investors and believe that the market will care more about falling inflation than a slight earnings decline – and maybe even more so than the prospect of a mild recession.”
From Bank of America:
Stock investors’ optimism around a cooling labor market and a Federal Reserve pivot is overdone, according to Bank of America Corp. strategists, who recommend selling the rally ahead of a likely surge in job losses next year.
“Bears (like us) worry unemployment in 2023 will be as shocking to Main Street consumer sentiment as inflation in 2022.
We’re selling risk rallies from here.”
Stocks have rebounded in the past two months on bets that the Fed will be able to tame inflation in time to avoid a recession.
That was reinforced earlier this week after Chair Jerome Powell signaled the central bank was ready to slow the pace of rate hikes, but data Friday showed employers added more jobs than expected in November, indicative of labor demand that’s still too strong.
According to Bank of America’s note, global equity funds had $14.1 billion of outflows in the week through Nov. 30, led by exits from US stocks, the largest outflow in three months.
About $2.4 billion left global bonds, while cash funds had inflows of $31.1 billion, the note showed, citing EPFR Global data.
European equity funds posted a 42nd straight week of redemptions.
By style, US large caps had outflows of $14.5 billion, with small cap, growth and value funds also seeing redemptions.
Among sectors, utilities and health care had inflows, while $600 million left financials.