Merrill Lynch chief investment strategist Michael Hartnett published a report Thursday predicting a series of major inflection points for global markets. Mr. Hartnett believes that the dominant investment trends of the past few years will be reversed -- bond yields will stop falling and rise quickly, globalization will be replaced by protectionism, saving will be replaced by spending and Main Street will benefit at the expense of Wall Street.
Inflection points are hard on portfolios – everyone tends to underperform. Even passive index investors get caught overweight the sectors that benefitted from the previous trends, and are set to outperform in the new environment, because they've become a larger portion of the index. For more active investors, it takes a long time before they trust that the new top performing sectors will sustain their growth, and they are slow to transfer assets accordingly. Strategist and founder of RB Advisors Richard Bernstein notes that in 2001, investors were still positioning for a return of the technology bubble, rather than moving to the commodity sectors that would outperform.
Inflection points are also difficult for strategists – Mr. Hartnett is truly sticking his neck out with his forecast. Market tops – even those for individual investment themes – are notoriously hard to time.
Mr. Hartnett could very well be wrong, or too early, in predicting inflation pressures will replace the deflationary environment of recent years. But nothing lasts forever and eventually bond yields will rise and cyclical, economically sensitive stocks will begin a period of outperformance. Investors should move quickly once convinced this change is taking place.
-- Scott Barlow
Stocks to ponder
Sun Life Financial Inc. This dividend stock, which appeared on the TSX breakouts list, benefits from rising interest rates and has 13 'buy' calls, writes Jennifer Dowty. Its dividend is $1.62 a year and its yield is 3.7 per cent. Since May 2015, the company has a pattern of announcing a dividend hike every other quarter. If this trend continues, investors may see another dividend hike announcement next month. The average one-year target price based on 15 analysts' forecasts is $45.75, which implies approximately 6 per cent upside potential over the next 12 months.
ECN Capital Corp. This newly listed stock has nine 'buy' recommendations and 33 per cent upside forecast. Earlier this month, Element Financial Corp. completed its reorganization, splitting into two companies, Element Fleet Management Corp. and ECN Capital Corp. The company's dividend if 4 cents a year for a dividend yield of 1.2 per cent. Analysts commonly value the stock on a price-to-book value basis. The average one-year target price is $4.49, which implies 33 per cent upside potential over the next 12 months.
Air Canada. This high-flying airline stock has 13 'buy' calls, writes Jennifer Dowty, an it appeared on the positive breakouts list a few days ago. It reported better-than-expected second quarter results in July. It does not pay a dividend. The average one-year target price is $14.50, which implies approximately 16 per cent upside potential over the next 12 months. Earnings estimates have been rising in recent months.
Top North American stock picks from Barclays
Following an unusually quiet summer, the year's closing quarter is shaping up to be eventful and volatile for stocks, writes Tim Shufelt. Despite the noise, however, North American equities on average are still in good shape, at least compared to bonds, according to Barclays. Its equity research team has issued a report that compiles the firm's best investment ideas from the U.S., Canada, and Latin America. The continent's population of equities has been culled into 47 stock picks representing the greatest "alpha-generating" prospects.
Here's another 'yield' metric that smart investors should focus on
Canadian investors love dividend stocks. But income seekers should look beyond a company's dividend yield to other factors that can enrich – or impoverish – shareholders, writes Norman Rothery. Share repurchases represent one such factor because they are another way to effectively send money to shareholders. Investors need to go beyond just looking at a company's dividend yield to look at their buyback yield -- the number of shares the company has actually bought to reduce its shares outstanding from year to year.
Housing-related firms among most heavily shorted on TSX
A large or rising short position can be a red flag warning of trouble ahead for a company. Larry MacDonald looked at some of the red flags currently hoisted on the Toronto Stock Exchange, particularly housing-related companies, and outlines the top stocks that are being shorted on the TSX right now.
When it comes to successful investing, think slowly
If you want to be successful in your investing, you need to know how your brain thinks, writes Scott Barlow. Princeton University psychology professor Daniel Kahneman was awarded the Nobel Memorial Prize in Economic Sciences in 2002 for a series of studies popularized in his book Thinking, Fast and Slow. Prof. Kahenman's work showed that the human brain has two separate systems for thinking and problem solving, and this has profound implications for investors. Thinking fast allows for quick reactions, and that's not good for investors. Instead you need to find out how to think slow to make measured decisions.
Searching for a monthly income fund? Look south
It seems that these days everyone is looking for yield. The problem for investors is that there is no definition of what a monthly income fund actually is, Gordon Pape said. He's searched for monthly income funds with strong returns, and he's found one in the U.S., the Sentry U.S. Monthly Income Fund.
How can I tell if my adviser is bound by new disclosure rules?
In his latest video, Rob Carrick talks with Denise Morris from the Ontario Securities Commission about who is covered by the new investment cost disclosure rules and how you can find out.
How principal-residence tax changes will affect every Canadian homeowner
For many people, their home is the biggest investment they make in their lives. Tim Cestnick says the changes introduced this week by the Federal Government to help moderate the hot housing market will affect everyone, especially the new principal-residence tax changes. He explains what this all means to homeowners.
These five indicators will dictate how you position your portfolio
The five indicators Scott Barlow has chosen as most important for Canadian investors are to a great extent just different ways to answer the same, all-important question, "will the U.S. and global economic and profit growth accelerate, or are we faced with a debt-ridden Japan scenario of endless sluggish growth and frequent earnings recessions?" They include U.S. economy, and wage and consumption growth; bond yields; the domestic unemployment rate; the performance of cyclical and defensive stocks; and the U.S. dollar.
The role of 'stink bids' in the chase for higher returns
Benj Gallander and Ben Stadelmann, the Contra Guys, write that "stink bids" are anything but stinky. A stink bid is simply entering an offer so far below the current price that under most circumstances it probably will not be filled. But sometimes that order dangling in cyberspace gets taken when the stock price dips or dives. They explain using Brick Brewing as an example.
Marijuana stocks undergo buying spree as investors pin hopes on legalization
Publicly traded pot stocks have soared to record highs in recent months as the Liberal government moves ahead with its promise to legalize marijuana for recreational use, leaving investors wondering if all of the gains are already baked in, writes Brenda Bouw. The legislation isn't expected until the spring of 2017, with sales potentially starting in 2018, but many stocks in the emerging sector have more than doubled – and then some – since the Liberals won the election around this time last year.
Ask Globe Investor
How do I know which companies offer dividends?
One of the easiest ways to determine if a company pays a dividend is to enter the stock symbol in the search box at Globeinvestor.com. Then scroll down the page until you find the "indicated annual dividend" and "dividend yield". The first number tells you how much the company pays in dividends annually and the second is the annual dividend expressed as a percentage of the share price. If these spaces are left blank the company does not pay a dividend. You can also check the investor relations section of the company's website and look under "share information" or "dividends."
Companies that pay dividends are nice, but those that raise their dividends regularly are even better. If you scan the company's dividend history on its website, you'll be able to see if the dividend has been rising over the years. You can also set up a Watchlist of stocks on Globeinvestor.com to find information about a company's historical dividend growth. Choose the "dividends" view in the Watchlist drop-down menu and you'll find columns that indicate the company's one-year and five-year annualized dividend growth rates. A growing dividend is often a positive sign.
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What's up in the days ahead
Watch for Rob Carrick's take on Canada's growing robo-advisers, who's new on the scene, and why you need to get serious about comparing them if that's how you plan to build your portfolio. On Monday, Tim Shufelt will give a fall outlook for the stock market, and Rob Carrick will give advice about how not to get buried in debt this Christmas. On Tuesday, watch for a stock profile of Richelieu Hardware by Jennifer Dowty, and explanation from Larry Berman why the British pound fell like a rock on Friday in a matter of minutes before it bounced back.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston