Today we’ll tackle a CIBC strategist positing a powerful rally in income equity sectors, discuss technology advancements as democratizations, find some new music and look ahead to upcoming data.
Income investing
Extra fuel for the dividend stock rally
Interest rates are heading lower on the back of central bank rate cuts and it takes only a Fisher-Price level of market knowledge to know that dividend paying stocks should perform well as a result. CIBC Capital Markets managing director of equity research Ian de Verteuil, however, is adding some excitement by suggesting that the move higher in income stocks might be turbocharged by other recent trends this time.
The Bank of Canada overnight rate had climbed to 5 per cent by the end of the third quarter of 2023, territory it had not visited since 2007. Bond yields and GIC rates were dragged higher, which pulled investor assets away from less attractive utilities and REITs and other equity income instruments.
Using bank balance sheets, Mr. de Verteuil estimates there is over C$200-billion in excess (not explained by conventional asset allocation) investor assets in fixed income products. This includes money market, high interest savings accounts and GICs.
The strategist believes that dividend-paying domestic stocks are “a more natural traditional home for these funds” than risk-free instruments and expects them to move back into equities. He cited favourable tax treatment and dividend growth as important reasons for this, as well as widespread business and earnings stability among income-generating equity sectors. I’ll add that an aging population in need of steady income streams adds to demand and stock prices.
As for timing, Mr. de Verteuil is using the 35-year history of Canadian bank term deposits as a template. He found that outflows have occurred 350 to 400 days on average after the peak in short-term bond yields. The domestic two-year bond yield peaked on Sept. 20, 2023 and has declined steadily since. September 20, 2023 was 355 days ago.
There are already signs of investor interest in dividend stocks. BMO analyst Michael Markidis, for example, noted Monday that the S&P/TSX Capped REIT index’s three-month return of 14.7 per cent outperformed the S&P/TSX Composite by 11.2 per cent, and that’s before accounting for the yield.
Falling risk-free bond yields are an undeniable tailwind for equity income sectors. If Mr. de Verteuil is right, and investor assets are just beginning to add fuel to the rally by migrating back into dividend-paying stocks, the party has just begun.
Trends
AI as technology’s third democratization
It’s been interesting to follow Report on Business readers’ response to artificial intelligence-related research highlighting investment opportunities. It’s been mediocre, to put it charitably, despite a U.S. market primarily driven by AI spending beneficiaries like Nvidia Corp. (Anything involving dividends, on the other hand, gets pounced on according to our website traffic reports. I’ll leave readers to draw their own conclusions.)
BofA Securities analyst Alkesh Shah thinks investors should be paying attention to AI. He outlined an interesting framing for his optimism, citing AI as the third stage of democratization through technology.
Mr. Shah views the spread of personal computers in the 1980s as the first major democratization. It made computing power, previously only available to those with access to NASA-like rooms full of mainframe equipment, accessible to all. The Internet was the second democratization, allowing the mass availability of information and the ability to distribute it.
AI will provide broad access to algorithms - the means to analyze data - that were previously only available to data scientists. This would be the third democratization. Mr. Shah believes that entire labour forces using powerful computer intelligence can create revolutionary results.
LONDON, ENGLAND - JULY 25: Lewis Whiting, Douglas Frost, Lily Fontaine and Nicholas Eden of English Teacher attend a photocall for the 2024 Mercury Music Prize 'Album of the Year' at The Langham Hotel on July 25, 2024 in London, England.Jeff Spicer/Getty Images
Diversions
Finding New Music Made Easy
The history of the U.K.’s Mercury Prize is an amazing way to find new music. The award has been handed out since 1992 to the best album released by artists from the United Kingdom or Ireland. The judging is done by the British Phonographic Industry and the British Association of Record Dealers.
This year’s prize was awarded to the band English Teacher last week. I’d never heard of them before but have been listening to them a lot the past few days, a sort of mashup of Radiohead and PJ Harvey.
I’m not hyping English Teacher here. The best part of the Mercury Prize is that it’s open to any genre of music, so the list of nominees covers a lot of musical tastes. Previous winners include Ms. Harvey, who won twice, Portishead, Arctic Monkeys, Wolf Alice and Arlo Parks. Wikipedia has the list of nominees and winners for every year.
The essentials
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Globe Investor highlights
Rob Carrick outlines four places where you can still find strong returns on savings, GICs and investing cash.
Tom Bradley has some thoughts on six important macroeconomic trends.
What can a rational investor do in a market that is showing signs of increasing irrationality? Ian McGugan shares some insight from one of the investment industry’s most prominent minds.
David Rosenberg thinks the economy will do better under Donald Trump and that he may have to change his bullish call on bonds if Kamala Harris comes to power.
What’s up next
There is very, very little on the Canadian economic calendar this week, and nothing the average investor needs to be concerned about. The Americans will have the consumer price index released on Wednesday and a rise of 2.6 per cent year over year for the headline number for August is expected, or 0.2 per cent month over month excluding food and energy.
Producer prices will be reported on Thursday and the result ex-food and energy is expected at 0.2 per cent month over month. The University of Michigan sentiment survey is out Friday but - and I mean no offense to any Wolverines - I don’t care about backward-looking data points with no consistent correlation to future market performance.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)