Economically sensitive cyclical stocks have been significantly outperforming defensive sectors in anticipation of a 2020 rebound in the global economy that may not occur. For investors looking ahead to 2020, there’s really only one big question: are we going to get the recovery or not?
Bank of Montreal chief economist Doug Porter outlined the dilemma for investors in a weekend research report called “Global Growth: The Great Debate”. Mr. Porter notes that a growth revival would result in higher bond yields and borrowing costs and a profitable jump in corporate profits. The reverse scenario – lower yields and lower profits – would occur if growth flags.
There is a case to be made both ways, according to BMO. On the optimistic side, progress in the trade war between the U.S and China would be a huge boost to growth, unleashing pent-up demand in resources and electronics. Global monetary policy remains stimulative after a raft of rate cuts, and U.S. equities have historically performed well during presidential election years.
Trade-related animosities could intensify with the imposition of new tariffs on Chinese goods scheduled for Dec. 15, hindering a recovery. Most importantly, there are few signs of an upturn in the economic data. Mr. Porter writes, “broader leading indicators continue to point to weaker growth, not a comeback. And that goes for either the U.S. indicators or the broader OECD figures.”
U.S. economic data continued to disappoint on Monday. The ISM index of manufacturing activity was reported well below expectations and ISM new orders, the most forward-looking component of the broader index, also came in well below expectations.
The economically sensitive corners of the global equity market – including Canada’s materials stocks – appear to be well ahead of where current global growth levels suggest they should be. This does not, however, mean a recovery is less likely - equity prices often lead economic statistics. But the longer the divergence between positive expectations and negative data continues, the higher the investment risks become.
-- Scott Barlow, Globe and Mail market strategist
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For value investors, the past few years have been one long migraine – which may explain why these tortured souls are celebrating a mild recovery with so much excitement. But how should one play a possible rebound in value stocks? There is no consistent value approach. Ian McGugan looks at some prominent value investors’ portfolios to get an idea.
Others (for subscribers)
John Heinzl’s model dividend growth portfolio as of Nov. 30, 2019
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: CFO sells over $2-million of this high-flying tech stock
Plunge in 3 Hong Kong stocks offers a cautionary tale
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Ask Globe Investor
Question: I saw this week that Fortis Inc. is raising at least $1.1-billion in an equity offering at a lower price than the shares were trading at before the announcement. I also noticed that Fortis terminated the 2-per-cent discount on its dividend reinvestment plan (DRIP)? As a Fortis shareholder, should I be concerned about these things?
Answer: Not at all. Fortis (FTS) plans to use proceeds of the equity offering to, among other things, help fund its five-year, $18.3-billion capital plan, which includes modernizing its electricity grid and building capacity to deliver more renewable energy. Capital investments such as these benefit utilities because they increase the “rate base” on which they can earn a regulated return. So the money Fortis raised will help the company increase its earnings.
The fact that the offering was done at a modest 1-per-cent discount to the market price is nothing to be concerned about; a discount is standard when companies are selling shares that brokers must resell to the public. In Fortis’s case, the offering includes: a $600-million “bought deal” with a group of Canadian underwriters; a $500-million sale directly to a U.S. institutional investor; and up to an additional $90-million “over-allotment option” for the underwriters.
As for the termination of the 2-per-cent discount on Fortis’s DRIP, investors enrolled in the plan may not like it because their reinvested dividends will now acquire additional shares at regular market prices. But it’s another positive sign for the company, indicating that it has ample cash and doesn’t need to offer an inducement to DRIP investors.
With the $1.1-billion share offering, “Fortis is now well positioned to fund its [growth] program,” spokeswoman Karen McCarthy said in an e-mail. “The 0-per-cent DRIP is also broadly in line with our industry sector, with the large majority of sector corporations no longer having discounts in place. Further, there are some who have suspended their DRIP plans altogether. Our DRIP program remains in place with no further plans for change.”
Bottom line: The money Fortis raised will help the company become even more profitable, which in turn will help support continued dividend growth. Fortis hiked its dividend by 6.1 per cent in September and is targeting increases of about 6 per cent annually through 2024. (Full disclosure: I own Fortis shares personally and in my model Yield Hog Dividend Growth Portfolio.)
--John Heinzl
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What’s up in the days ahead
Jennifer Dowty interviews a top-ranked analyst at National Bank Financial to get his best stock recommendations for 2020 in the dividend-rich industrials sector.
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Compiled by Globe Investor Staff