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The BofA indicator points to TSX outperforming the S&P 500

Daily roundup of research and analysis from The Globe and Mail market strategist Scott Barlow

BofA Securities equity and quantitative strategist Ohsung Kwon turns more bullish on domestic equities,

“Our Canada Cycle Indicator (CCI) shows further improvement in May, recovering for the sixth month in a row. Increasing interest rate differentials versus the US, an improving earnings revision ratio and rising commodity prices drove the rebound (CPI and Leading Indicators not yet released). The latest monthly reading (the indicator uses the three-month average) was 0.03, the first positive reading since February 2023, suggesting that the indicator could reach positive territory within a few months. When the indicator was in positive territory, the TSX outperformed the S&P 500 60 percent of the time by 4.2 percentage points over a twelve-month period (vs. a 23 percent hit rate and 5.9 percentage points when it was negative) . TSX 60 earnings rose 1 percent year-over-year, ending the earnings recession that started in the first quarter of 2023. Compensations ease in Q2 (versus a 22 percent decline in Q2 23) and the consensus expects earnings per share to accelerate to 9 percent annualized in Q2, similar to the 10 percent expected for the S&P 500. Narrowing growth differentials should result in relative reassessment of the TSX versus SPX”

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RBC Capital Markets analyst Jimmy Shan reported the highlights from the company’s recent real estate conference:

“Many questions centered around the impact of the Federal Government’s announcement to reduce the number of non-permanent residents (including foreign students), which appeared to be the main cause of the multi-res sector’s underperformance since March. The responses were generally: 1) skepticism about whether the federal government will actually meet the 5 percent target given conflicting policies and motivations; 2) the market has overreacted – there is still pent-up demand due to a previous imbalance between supply and demand; 3) The impact of foreign students must be limited, especially considering that the main target group was smaller colleges. 2. Moderation in market rental growth: Investors have generally been sniffing around whether we’re starting to see soft market rents and whether we’re starting to run into affordability issues. Responses were generally that there may be weakness at the top end of the market or in markets that saw significant growth last year. More affordable markets (Nova Scotia, Alberta) remain strong. The resounding message from most was that there is significant market value rental opportunity within their portfolio, so that even if market rental growth moderates, there is still a good runway for revenue growth. 3. Takeovers: The investment market remains quiet, with few institutional bids, and a gap remains between buyers’ and sellers’ expectations.”

RBC analysts have outperform ratings on Boardwalk REIT, BSR REIT, Flagship Communities REIT, Interrent REIT, Killam Apartment REIT, Minto Apartment REIT, Morguard Residential REIT, Chartwell Retirement REIT, Allied Properties REIT, Dream Industrial REIT, Granite REIT, First Capital REIT, RioCan REIT, Smartcentres REIT and Storagevault Canada Inc.

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Sam Morgan, global head of FICC sales at Goldman Sachs, discussed how India’s growth prospects are (and are not) similar to those of China two decades ago.

“India’s growth is in some respects comparable to that of China 20 years ago, including in terms of demography (the current average age in India is around 28 years, similar to that of China in the late 1990s), the sectoral distribution of the labor force (the agricultural sector is responsible for over 40 percent of the percent of India’s labor force, comparable to China at the time), the rate of decline in the agricultural labor force (about 1.25 percent), urbanization (about 35% in India by 2023, similar to China in the early 2000s) and air quality challenges. However, there are important differences in terms of domestic political processes, investment as a percentage of GDP (much lower in India), external environment (the world globalized in the 1990s versus protectionist developments in recent years), labor force participation, including women’s labor force participation (lower in India) and separation between services and manufacturing (China is more manufacturing oriented than India)”.

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Detour: “Do we need antitrust action against ‘big alcohol’?” – Marginal revolution