Why Citi thinks this bull market isn’t over, Second Cup’s marijuana bet sparks trading frenzy, and five stocks that made forecasters look foolish

Citi research has just published their quarterly review compiling the efforts of all of the company’s strategists worldwide, including Montreal’s own Tobias Levkovich who is currently Citi’s chief U.S. equity strategist.

Citi believes that the post-financial crisis equity rally has entered a new late ‘Phase 3’ but it’s far too early for investors to panic and start selling their stock holdings,

“Citi equity strategists think it is still too early to call the end of this bull market. Our Bear Market Checklist (only 3/18 red flags) agrees… Late cycle bull markets typically narrow into growth and momentum trades. This should favour U.S. equities and [technology] stocks… We think [Phase 3] started in February. It is characterized by [global manufacturing growth] roll-overs, flattening yield curves and rising credit spreads. Continued [earnings] growth keeps equities rising, if with greater volatility.”

In simpler terms this amounts to the big getting bigger – successful companies with outperforming stocks continuing their dominance. The ‘narrow’ in the excerpt warns that there will be fewer stocks generating strong returns.

Citi also reduced its ranking of global financial stocks to neutral from overweight as part of the quarterly review, and this is something for bank-loving Canadian investors to keep in the back of their minds.

There has, of course, never been a bad time for patient investors to buy Canadian banks. Citi cited slower global economic growth, a flatter yield curve and widening credit spreads as their reasons for downgrading the sector. But domestic banks, in light of their dominant position in virtual all facets of the Canadian economy, should be able to weather the effects of those trends easily.

It is what comes next in the credit cycle – Phase 4 is ‘The Bad Debt Cycle’ – that provides reason for caution on bank stocks.

“We will eventually enter the dreaded Phase 4, when the bear market begins. Global recession approaches, stock market bubbles burst and more defensive strategies become appropriate. Buying the dips is very dangerous.”

Past market history strongly implies that while domestic bank stocks might endure some pain, they will be fine through Phase 4. It is extremely unlikely that the next global downturn will be anything as severe as 2008 and our banks came through that period relatively unscathed.

It’s also true that Canadian households have never carried as much debt as they do now, and economic growth has rarely been so dependent on real estate and private credit expansion. We have to examine the probability, even if it’s well below 50 per cent, that the banks will get hit much harder this time when Phase 4 hits.

I’m not worried about bank stocks now and I won’t be anxious about them if the U.S. slips into recession either. I will, however, be watching closely for signs of stress as Phase 4 begins in case this historical confidence is misplaced.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Wheaton Precious Metals Corp. (WPM-T). This stock is on the positive breakouts list. There are a number of gold and silver stocks that are gaining positive price momentum fuelled by trade war fears. This stock provides investors with leverage to rising commodity prices and also offers investors a dividend yield of 1.6 per cent. Since releasing its first-quarter earnings results, 13 analysts have issued buy recommendations on the stock. Jennifer Dowty reports (for subscribers).

The Second Cup Ltd. (SCU-T). Second Cup Ltd. is discovering that the stock market’s madness for marijuana comes with a downside. The Mississauga-based coffee chain, which has suffered from declining sales in recent years as it battles multinational behemoths such as Starbucks Corp. and McDonalds Corp., struck a deal in the spring to convert some of its cafés into cannabis dispensaries. Its stock price quickly shot up to their highest point in years. Within days, the shares had gone up nearly 50 per cent, to more than $4, a level they had not seen since early 2015. And since then? Investors have lost all of those gains, amid a volatile ride for the entire cannabis sector as the country edges toward legalization of the drug in October. Brenda Bouw reports (for subscribers).

Enbridge Inc. (ENB-T). Is Enbridge Inc. on its way to becoming boring again? Investors certainly hope so. Long admired for its financial stability and steadily rising dividend (if you’re into that sort of thing), the pipeline owner has looked dangerous for more than a year. But look at Enbridge now: The shares have rebounded 25 per cent over the past two months, sending the dividend yield down to a less-alarming 5.7 per cent. Subsiding bond yields are helping. So is the recent regulatory approval from Minnesota for Enbridge’s Line 3 route through the state. And a deal announced on Wednesday to sell Enbridge’s Canadian natural-gas-gathering and processing business to Brookfield Infrastructure Partners LP for $4.3-billion suggests that there is demand for energy assets. Judging by their recent buying, corporate insiders never lost their confidence in the company. David Berman reports (for subscribers).

The Rundown

Five stocks this year that made a mockery of expert opinions

There’s always a place for smart macro-driven calls, but the Canadian stocks that performed best in the first half of the year didn’t require keen insight into oil prices, interest rates, the U.S. dollar or even cannabis legalization. Instead, ignoring experts and fear-mongers proved to be a far more profitable investing strategy. David Berman takes a look at the top five performers in the first six months of 2018 (for subscribers).

RBC’s ‘Imagine 2025’ list: A dozen TSX stocks it thinks will outperform

A thought exercise by RBC Dominion Securities on technology, the future and how to invest for it has produced a list of stock picks – several Canadian names among them – for those willing to buy and hold for the long run. “Imagine 2025,” RBC says, is an attempt to identify themes that will become the norm in seven years and the forward-looking companies that will benefit. The report contains quirky ideas, such as the prospect of autonomous driving allowing consumers to turn their cars from depreciating assets to income generators, as well as broader concepts of the explosion of artificial intelligence, cloud technology and “precision farming.” David Milstead reports (for subscribers).

Health care needs a place in your portfolio. Here’s the best ETF for adding income

An area in which the Canadian stock market falls short is healthcare, in large part due to our universal health care system. We can’t invest directly in hospitals, clinics, or service providers. There are no giant healthcare insurers like UnitedHealth Group in the U.S. For companies like Manulife or Sun Life, health insurance is only a small part of their business and involves providing protection beyond that which is provided by Medicare. But if you look at demographics and take a long-term view, healthcare is an area that should have a place in your portfolio. Canada’s population is aging, as it is in most of the Western World. We are spending more money on healthcare every year as a result. Gordon Pape takes a look at a health-care ETF that he thinks should be part of your portfolio (for subscribers).

Top Links (for subscribers)

‘Triple Shock’ to global economy leaves investment risks ‘clearly skewed to the downside’: HSBC

‘Our global risk appetite index is near panic levels’: Credit Suisse

Others (for subscribers)

Thursday’s analyst upgrades and downgrades

Thursday’s Insider Report: Companies insiders are buying and selling

Wednesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: Companies insiders are buying and selling

Others (for everyone)

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