November 16, 2023
Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
“Outlook 2024″ season continues with Morgan Stanley’s global equity outlook released today:
“We see a still difficult outlook for global equities into 1H24, with our macro colleagues now forecasting later policy rate cuts and further USD appreciation. Global growth is expected to slow further and China has not shown a comprehensive response to debt deflation risks. Falling inflation and expected policy easing in 2H24 should support a later recovery, but we think that investors should remain selective, given that earnings are still adjusting lower and aggregate valuations are expensive to history. S&P 500 target moves up to 4,500, but near-term risks persist: We continue to recommend a defensive growth and late-cycle cyclicals barbell and look for a durable earnings recovery to emerge during 2024 … In the short term, we expect the earnings recession to continue as weak earnings revisions breadth and performance in cyclical and interest rate-sensitive areas of the market corroborate near-term growth risks. Retain a preference for Japan equities and caution on EM [emerging markets]”
Goldman Sachs believes we’re “Living in a [U.S.] dollar world” that benefits the loonie relative to other major non-greenback currencies, “Out of the G10 commonwealth currencies, CAD has the most to gain from US outperformance. While it leans pro-risk, CAD also has a positive exposure to both higher US yields and US equity outperformance, compared with other high-beta G10 currencies, given its close correlation with the Dollar (Exhibit 18). This means it should perform well on crosses alongside elevated US yields and supported equities … Domestic data out of Canada, Australia, and New Zealand suggest that policy may need to tighten further, but we think this is not necessarily sufficient to be more constructive on them versus the Dollar over the shorter term”.
BMO senior economist Robert Kavcic does not expect a domestic consumer credit crisis but does see four reasons domestic spending will continue to struggle despite a strong jobs market,
“Interest rates are biting. Hard: The Bank of Canada is likely done raising rates, but the level of policy rates is well into restrictive territory and likely to stay there for a while, unless the economy really cracks. With underlying core inflation of 3%-to-3.5%, and the overnight rate at 5%, real rates haven’t been this high since the pre-GFC era, and mark a big adjustment after 15 years at or below zero (they were historically negative through late 2022).
While that might be a bit of an academic concept, in the real world, mortgage payments are gradually resetting higher and will continue to do so steadily through 2026… Housing market correction: We cover this at length in other venues, so the short story is that many markets across Canada, especially Southern Ontario, are seeing weak sales volumes and falling prices. Changes in sales volumes tend to correlate with retail spending a few months down the road—e.g., you buy a house, you need some new furniture.
But there’s also a wealth effect that is likely turning negative after a long supportive run… Inflation hurts: If they don’t have to eat, drive to work, or live somewhere, Canadians are probably doing just fine. Otherwise, sticky inflation and lasting past price increases are still eating into other discretionary spending … Population explosion: Canada’s population has grown by a massive 3% in the past year, and adding 1.2 million more people means more spending in the aggregate. What’s interesting is that total core retail sales (excluding autos and gas) have grown.
Our Thoughts at about 3% annualized over the past six months; in volume terms, they’ve been flat; and in real per capita terms, they’ve contracted about 3% annualized. In effect, more people are each spending the same amount of money on less stuff … Jobs and wages: The labour market is still tight and we’re seeing some fraying around the edges. The unemployment rate is up 0.8 ppts from the cycle low and unfilled job openings have fallen by more than 320k since May 2022, but the market is moving off historically strong levels’
