Full episode: Market Call for Monday, March 1, 2021
Brooke Thackray, research analyst at Horizons ETF Management Canada
Focus: North American large cap stocks and seasonal investing
The stock market has been rotating from technology and growth stocks to cyclical and value stocks. The rotation has been caused by two factors. First, investors have been increasingly anticipating the re-opening of the economy, which favours cyclical sectors, such as industrials and materials. In the early part of the COVID-19 pandemic recovery, a lot of the “growth companies” benefited from the work from home trend at the expense of the cyclical and value sectors. Now that the economy is re-opening, investors have flipped the trade and are focusing on the cyclical and value sectors of the market and as a result, they are outperforming. Second, as investors are anticipating higher inflation and interest rates, growth stocks have been underperforming. Growth stocks tend to perform well in an environment of declining interest rates and underperform in a rising interest rate environment. On a seasonal basis, cyclical stocks tend to perform well in March and April.
The key to performing well over the next few months is to watch for changing inflation expectations. Inflation expectations have been rising rapidly and the inflation expectations curve is in backwardation. The front end of the curve (five-year inflation expectations) are higher than the long end (ten-year inflation expectations). This is typically a short-term situation that resolves with inflation expectations across the curve stabilizing and the curve moving back into contango (short-end lower than the long-end). The impact on the stock market will probably be investors decreasing their interest in the cyclical sectors and a possible shift back to growth sectors and or some of the defensive sectors of the stock market that pay higher dividends.
Suncor has a strong seasonal period from February 18 to May 9. Suncor cut its operating expenses last year, which is helping its bottom line this year. At $35/bbl WTI, Suncor covers its enterprise operating costs, plus sustaining capital and dividend. At the current price of oil, Suncor is producing lots of free cash flow and is targeting buying back $500 million to $1 billion of stock. The company pays a healthy dividend of over 3 per cent. Suncor is expected to perform well in the current environment and if interest rates start to contract, Suncor is expected to be one of the better performing stocks in the energy sector.
Eastman Chemical has a strong seasonal period from January 28 to May 5. It has a high current dividend of approximately 2.7 per cent and has raised its dividend five times in the last five years. Recently, the American Chemistry Council released its February 2021 Chemical Activity Barometer. In February, the indicator rose one per cent on a three-month moving average basis, which indicates a strong back drop for economic growth which in turn helps support Eastman Chemical to perform well in its seasonal period.
Canadian banks have a strong seasonal period from January 23 to April 13. Canadian banks have been performing well recently as rising interest rates have helped to increase their net interest margins. In addition, recently the big six Canadian banks have released strong earnings, helping to support their stock prices. Canadian banks are also attractive because of their relatively high dividend rates, which tend to make Canadian banks attractive in an environment of falling interest rates, at least until investors start to question economic growth in the future.
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Twitter Handle: @BrookeThackray