Sentiment in the housing market is ‘falling apart’: BMO economist

Daily roundup of research and analysis from Globe and Mail market strategist Scott Barlow

Savita Subramanian, quantitative strategist at BofA Securities US, finds “plenty of reasons to be concerned” about the upcoming earnings season.

“All of the macro barometers we track that tend to lead earnings results point to error: a declining guidance index, weakening corporate sentiment, signs of slowing in both consumer and industrial activity, plus negative economic surprises. However, channel checks from our analysts in Industrial and Software are healthy, and early reporters have outperformed earnings per share by an average of 3%; typically, early reporters don’t do as well before a disappointing quarter. Q2 expectations are down 1% from the average cut of 4% over the last three months, but excluding Energy, the cut has been 5% deeper. We expect EPS in line in Q2 ($55.35/+5% YoY). Guidance weakening will remain the focus; we believe 2H-2023 consensus EPS will decline substantially; 2023 earnings are at least $20 too high… The Real Estate, Materials and Energy screen is the one you are most likely to beat; Com. Services and Cons. Discretionary screen as the weakest”.

“BofA sees ‘Lots of reason to worry’ about Q2 earnings” – (research excerpt) Twitter

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Scotiabank analyst Mario Saric released his monthly REIT Stuff report highlighting the importance of cash flow or AFFOPU (adjusted funds from operations per unit)

“The REIT sector is now trading at an AFFO multiple of 16.1x versus a multiple of 20.7x earlier this year (essentially an all-time high). The AFFO multiple spread for Colombian government bond yields is now approaching the historical average, and it appears that the AFFO multiple compression phase is well past its midpoint (or perhaps nearing its end). While it was all a top-down approach in the first half of the year with declines across the sector across the board, we think now is the time to focus on the bottom-up AFFOPU forecast. In this issue of REIT Stuff, we illustrate the importance of AFFOPU growth by looking at various REIT investment styles since 2008. We found that AFFOPU growth was a key factor leading to REIT unit price outperformance over the years. over time. Our study was based on a consensus forecast (we note that NAVPU growth is not published by sell-side research and is therefore not considered here). However, we do highlight a Correlation Performance Analysis report we published in 2018, which noted that NAVPU growth was the biggest driver of REIT unit prices over time…in 8 of the last 14 years, the REITs that had the highest FFOPU growth at the start of the year delivered the best returns that year… Our top picks tend to have a superior AFFOPU growth profile: Our top growth picks = BAM, GRT, HOM, IIP, SMU , SVI and TCN. Our highest value picks = AP, BAM, CAR, CSH, DIR, ERE, IIP, REI and TCN. Our main income picks = APR, CRR, CRT and NWH”

“Scotiabank’s Top REIT Picks” – (research excerpt) Twitter

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BMO economist Robert Kavcic sees sentiment in the real estate market ‘falling apart’.

“More Canadians now expect lower house prices in the future than higher prices. According to weekly Nanos survey data, only 30% now expect higher prices, which is down from nearly 70% at the height of the pandemic boom. At the same time, 33.3% now expect prices to go down (the bottom was around 5%, or basically no one). We have always argued that there was an important behavioral aspect to what was happening in Canadian housing, where the sharp price gains were not driven by supply shortages, but by FOMO, speculation and investment activity. In fact, the proof is that even a simple initial push in interest rates was enough to break expectations and trigger a correction. Wednesday’s (likely) 75bp rate hike will be TKO [technical knockout] any remaining foam driven by expectations.

“BMO: “Psychology in the collapse of housing” – (research excerpt) Twitter

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Diversion: “The winners and losers of the 2022 Emmy nominations” – the ringer

Tweet of the Day: “Deutsche Bank Says Weak US Corporate Earnings Heavily Discounted – Bloomberg” – Twitter

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