Of the most common investment assets, right now Canadian stocks appear to offer the most opportunity, especially small cap stocks with a value style (buying cheap). Prices aren’t particularly low compared to earnings, but earnings may be depressed and could jump higher with an economic recovery. To be fair, we’ve been waiting for a recovery since 2009, and the Canadian market is still below it’s 2008 peak. Having said that, other stocks and bonds look expensive at the moment. Fewer American stocks are showing upward momentum compared to last week.

Interest Rates

yieldcurve

The 30-day T-bill rate is 0.51%, the short government bond yield is 0.72% and the long government bond yield is 1.92%. The yield curve is normal. Long government bonds appear very overvalued. There seems to be very little opportunity for profit in bonds. A safe haven, such as tangible assets (eg. precious metals, real estate, etc.), may be a better bet.

Credit Environment

When the dials point left, the credit environment is cautious and risks are priced higher. Currently, corporate bonds are in greater favour than government bonds, long-term are favoured over short-term, and there doesn’t seem to be a clear preference between high quality and high yield. It may be that yields are so low that investors prefer long corporate bonds. Although the economy isn’t robust, there doesn’t seem to be a lot of fear of bankruptcy.
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Currency

The Brazilian Real (BZF), Japanese Yen (FXY), Canadian Dollar (FXC), Singapore Dollar (FXSG), Swedish Krona (FXS), Euro (FXE), Australian Dollar (FXA), Swiss Franc (FXF), and British Pound (FXB) are looking strong relative to the US dollar.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
US bonds and US stocks both have an equally tepid outlook:
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Canadian bonds are less desirable than Canadian stocks:
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Global Markets

  • Brazil has risen 5.24% in price since last week’s close.
  • Japan has fallen -6.47% in price since last week’s close.

Comparing national stock markets, Peru (EPU), Brazil (EWZ), Russia (ERUS), Turkey (TUR), Norway (ENOR), Canada (EWC), New Zealand (ENZL), South Africa (EZA), UAE (UAE), Chile (ECH), Saudi Arabia (KSA), Australia (EWA), Austria (EWO), Spain (EWP), Sweden (EWD), United Kingdom (EWU), Denmark (EDEN), Thailand (THD), France (EWQ), Germany (EWG), Mexico (EWW), Singapore (EWS), Switzerland (EWL), Italy (EWI), Belgium (EWK), Netherlands (EWN), Hong Kong (EWH), South Korea (EWY), USA S&P 500 (IVV), Israel (EIS), Indonesia (EIDO), Finland (EFNL) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,065.30. This is -1.08% lower than last week’s price (2,087.79), and -0.36% lower than last month’s price (2,072.78), and 6.49% higher than the price three months ago (1,939.38), and -1.20% lower than the price six months ago (2,090.35), and -1.46% lower than the price one year ago (2,095.84).The average P/E ratio of the S&P 100 (equal weighted) is 21.46. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.66% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

  • California Resources Corporation (CRC)
  • Devon Energy Corporation (DVN)
  • Halliburton Company (HAL)
  • Conocophillips (COP)
  • Anadarko Petroleum Corporation (APC)
  • Amazon.com, Inc. (AMZN)
  • Norfolk Southern Corporation (NSC)
  • Bristol-myers Squibb Company (BMY)
  • Occidental Petroleum Corporation (OXY)
  • Chevron Corporation (CVX)
  • Union Pacific Corporation (UNP)
  • Schlumberger N.v. (SLB)
  • Exxon Mobil Corporation (XOM)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • General Motors Company (GM)
  • Ford Motor Company (F)
  • Metlife, Inc. (MET)

Canadian Stocks

Yesterday’s closing price was 13,951.50. This is 1.13% higher than last week’s price (13,796.00), and 3.80% higher than last month’s price (13,440.40), and 10.08% higher than the price three months ago (12,674.40), and 1.16% higher than the price six months ago (13,791.90), and -7.94% lower than the price one year ago (15,154.70).The average P/E ratio of the TSX60 (equal weighted) is 24.84. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.03% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

  • Kinross Gold Corp. (K.to)
  • First Quantum Minerals Ltd (FM.to)
  • Teck Resources Limited (TCK-B.to)
  • Yamana Gold Inc (YRI.to)
  • Barrick Gold Corporation (ABX.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Eldorado Gold (ELD.to)
  • Silver Wheaton Corp. (SLW.to)
  • Goldcorp Inc (G.to)
  • Encana Corp. (ECA.to)
  • Crescent Point Energy Corp. (CPG.to)
  • Franco-nevada Corporation (FNV.to)
  • Cenovus Energy Inc. (CVE.to)
  • Arc Resources Ltd. (ARX.to)
  • Cdn Natural Res (CNQ.to)
  • Pembina Pipeline Corporation (PPL.to)
  • Restaurant Brands International (QSR.to)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • Power Corporation Of Canada, Sv (POW.to)
  • National Bank Of Canada (NA.to)

Other Assets

Base Metals (ZMT.to), Silver (HUZ.to), Crude Oil (HUC.to), Natural Gas (HUN.to), TSX Capped Composite (ZCN.to), Real Estate (XRE.to), Gold (IGT.to), USA S&P 500 (SPY) are performing better than cash.
The gold price is rising, which often indicates nervousness in equity markets.
The oil price is rising, which increases manufacturing input costs and energy costs and may slow economic expansion.

Portfolio

A theoretical portfolio, split evenly between gold (IGT in Cdn$), real estate (XRE in Cdn$), Canadian stocks (XIU in Cdn$), US stocks (XUS in US$), international stocks (VDU in Cdn$) and bonds (XBB in Cdn$).

As of today, the theoretical portfolio would hold:

  • One unit (20%) of gold
  • One unit (20%) real estate
  • One unit (20%) Canadian stocks
  • 2 units (40%) cash
Market Outlook, May 2, 2016

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