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[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, we will discuss whether it's time to batten down the hatches or raise the sails when it comes to the market. MorningStar's chief US market strategist David Sekera joins us.
MoneyTalk's Anthony Okolie is going to have a look at a new TD Securities report on real estate investment trusts. And in today's WebBroker education segment, Jason Hnatyk will walk us through how dual listed stocks work. So here's how you can get in touch with us. Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Before we get our guest of the day, let's get you an update on the markets. We'll start you at home with the TSX Composite Index. Right now we are at 28 points in the green, pretty modest,A little more than 1/10 of a percent. Among the most actively traded names when TSX at this hour includes a TransAlta Renewables.
TransAlta says it's going to buy the minority stake in TransAlta Renewables that it doesn't already own. You can see it they are up a little more than 18%.
TransAlta Renewables was spun out of TransAlta back in 2013. 10 years later, the stock is on the move. Athabasca Oil getting a bit today as well on fairly strong volume. At three bucks and $0.18 per share, you got Athabasca up a little more than 5%.
South of the border, of course we are going to get a pretty key read on inflation tomorrow. The key read, the inflation report coming out from the stateside.4427, Europe 18 points on the S&P 500, a gain of almost half a percent.
A lot can happen on the other side of that CPI print that's coming up tomorrow morning before the markets open.
Let's check in on the tech heavy NASDAQ.
What is going on there in terms of the tax base?
About five points, pretty modest but it is upside green, but not a lot. An Amazon, the Prime Days sales have begun.
There was one item I had my own, checked in this morning, wasn't on sale.
So I don't know, I'm not impressed.
We will see what other people have to say.
Amazon up right now 1 1/4%.
And that's your market update.
The first half of the year saw equity markets perform stronger than some had anticipated. But could that trend continue with central banks poised to continue raising rates? Joining us after the house is David Sekera, chief US market strategist with Morningstar Research.
Great to have you on the show.
>> Good afternoon. Good to see you.
>> Stocks in the first half of the year perform better than some had anticipated.
He recently came in with a note were you raised the question, is a time to batten down the hatches or raise the sales? How should we read this market?
>> During the second quarter, there was a big rise. It's an indicator of what's considered a new bull market. Once that happened, I started hearing a lot of market commentators in two different camps.
one was saying that this is the indication of a second bull market and you should be putting out more money into stocks.
the other camp being this is a bull trap in a longer-term bear market you should be getting out while the getting is good.
But I think both of these camps really missed the point and thinking about investing, it's really about where you should be putting your money to work where you see the best valuations.
so at the beginning of the year, without the markets are trading at a pretty significant discount to a composite of the fair values of the stocks that we cover.
But now following this rally, we do continue to see the market slightly undervalued but now trading at much less of a margin of safety. Now thisis the time for investors to be looking at their portfolios and thinking about where they should be making changes. I think that they need to look at what's overextended, look to take profits. For example, in the growth stock area and the tech sector, those are two areas that we think have become overvalued. And then reinvest those proceeds in those sectors that are a bit left behind, those that we think remain undervalued and still see opportunities for investors, such asvalue category and a lot of the cyclical sectors.
>> Not so much of a dire situation or off to the races situation but really tactical thinking about the markets and how you should be allocating funds.obviously, this market is very dependent on big events. I think the terms of inflation reports which we will be getting another one tomorrow. I do feel though that the market last summer, things got very wacky. You gotta print that was either hotter or colder and markets would go to her three point's in one direction in an afternoon. Things seem to have calmed. What will be the impact of these events now?
>> Probably lower volatility now and I think people are looking at the longer term as opposed to any individual economic print.
but today it has the feel that it could be the lull before the storm over the next couple of weeks and for earnings season.
So as you mentioned, we do have CPI coming out tomorrow.
PPI later this week. It now interesting yesterday, we saw a big decrease in used car prices and I think that now the market expectation is that CPI will probably come out lower than what consensus is right now.
so the market is still fully expecting the Fed is going to raise another 25 basis points at their meeting later this month, but if the CPI does come out lower than consensus, I think that will take some of the pressure off the Fed from having to raise the federal funds rate any further thereafter. Now, we actually project that inflation will continue to keep moderating and our economics team forecasts that this hike in July should be the last hike of this monetary policy tightening scenario.
Now we are looking at earnings season starting at the end of the week. We have the big megabanks reporting and then some of the regional banks early next week.
And then, we will wrap that all up on the 25th and 26 with the Fed meeting and see what chair Powell has to say at his press conference.
>> When it comes to earnings season, the fact that, I've been told by other guests on the show, when you think about the reason why we are still seeing central banks hiking rates or threatening to hike rates further is that the economy has been stronger-than-expected and then that could feed through into corporate earnings, because things weren't quite as bad as perhaps they thought they would be. Is that the right mindset to enter this earnings season with?
>> yeah, generally I think this earnings season is going to look pretty good and I think about the set up, coming into this earnings season, as you mentioned, a lot of people thought the economy is going to be weaker than what it turned out to be.
I think a lot of management teams gave pretty conservative guidance for the second quarter, so I think it generally is going to be pretty easy to meet or beat those expectations. Now the hard part is what management teams are going to be coming out with with their third-quarter earnings expectations.
So on the one hand, we still do expect the economy will continue to slow. We are looking for sequentially slower growth rate for the next three quarters until the first quarter of next year that we expected to re-accelerate thereafter.
Management teams may not necessarily want to get out over their skis and give to strong and earnings guidance. At the same point in time, with the economy holding a better-than-expected, they can't really cut their guidance too much.
If anyone comes out and really disappoints the market with lower-than-expected guidance, I do think those stocks will be at risk of having some pretty severe selloffs in the short term.
>> I feel like what we've been hearing from corporations and through their earnings in the last bit of the cycle, a lot of warnings about storm clouds on the horizon, recession fears, worried about the consumer.
sort of a recession that never shows up.
We talked about a slowdown in the economy but that's different than an actual recession. How do we feel about the prospects for the economy?
>> Our US economics team has really helped to view all year that they did not see a recession.
It was a relatively high probability compared to the past. We are looking at potentially a 30% probability of a recession, but our base case was never that we were going to be in a recession.
But we think that the rate of economic growth will slow in the next couple quarters, but we are not looking for any type of contractionthis year or next, so I do think that the economy should kind of almost get to this not too hot, not too cold area and I do think that that will take a lot of the pressure off the inflationary rate. In fact, on a year-over-year basis, we expect inflation will end this year at 2% and on average inflation in the US according to our projections will be slightly under 2% in 2024.
>> So we do have a Fed rate decision, as you know, later this month.
and then we will get another decision until he had into the fall.
I used to feel sort of sleepy. I made a big deal about it and then it didn't happen.
Last year, Jerome Powell decided to lay down. So between that rate decision and then another Jackson Hole event, what are you listening for and watching for with the Fed?
>> I think it's much different set up for Jackson hole.
Last year inflation was ramping up much higher than the Fed expected and markets had been pricing in. It peaked and only just started coming down early fall last year, so I think that was much moretop of mind for everybody. Inflation granted hasn't come down as fast as I think the Fed would prefer but it is still on a downward trend. We are still seeing a lot of indications of some of those things that really caused inflation to ramp up last year continuing to moderate.
So I don't think we still have that same kind of set up where we could potentially have Terry Powell coming out really with any new changes to his outlook for monetary policy.
>> interesting stuff in a great start to the program. We'll get to your questions about US stocks for David Sekera in just a moment time.
And a reminder that you can get in touch with us any time.
Just email moneytalklive@td.
com or fill out the viewer response box under the video player on WebBroker.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Nutrien says it is curtailing production at one of its potash mines in Saskatchewan because of the strike at the Port of Vancouver.
In a release, the company says that adjusted earnings will come in below the low end of its previous estimates.
It is pointing to that Port strike in Vancouver, also a terminal outage in Portland and lower global potash prices.
You see Nutrien right now flat on the day at $0.52 per share.
Shares of MTY Food Group on the rise following its latest earnings release. The casual dining and food court operator handed in sales growth that was much stronger than anticipated. Canada actually stood out for its performance.
Recent acquisitions by MTY also contributed to revenue and improve margin.
MTY you can see up almost 5% on the TSX.
Cineplex saying box office receipts are nearing pre-pandemic levels at least for the month of June. The theatre operator says revenue was $56 million for the month, that represents 90% of box office sales from June 2019 levels before the pandemic. Cineplex is also counting on some high-profile releases coming out including Barbie and Oppenheimer to boost Summer to ticket sales.
Now we'll check in on the stock markets.
The TSX Composite Index, a modest gain of 18 points, little shy of 1/10 of a percent. South of the border, one day away from the inflation printed out of the US.
It's up about 18 points as well a little bit less than 1/2 of a percent.
We are back with David Sekera, chief US strategist with Morningstar Research, taking your questions about American stocks.
got someone wondering where your outlook is for the banks. It was quite a dramatic turn of events especially for the regionalsin the spring.
>> I think with the banks is going to have to be separated into the megabanks versus the regionals. I think there's going to be a big difference in what people are listening for this earnings season.
The megabanks were not all that worried about deposit flight and I do think that earnings for the megabanks generally are probably going to lookgood. The economy has held up well and is going to keep the faults in bankruptcy is relatively low and interest margins should remain high.
I think we are going to be in the clear for the megabanks. For the regional banks, we could see some earnings pressure there and a lot of that is going to depend on how much deposit flight we saw on how much that has increased their funding costs.
So when I think about the regional banks and look at our forecast, we do think that earnings will decline sequentially there for the rest of the year and only begin to start recovering next year. But when I think about the business model for the regional banks, we don't think that business model is broken but we do think that it is under stress. And we kind of put that all together, when I look at current valuations, we do think that the market probably has swung too far to the downside and I do think they're going to be some interesting opportunities for investors among those regional.
>> When we think about the regionals and being under stress with income we can take it back to what the Fed had been up to.
There were some decisions the regional banks made in terms of parking money that were not working out for them in the hiking cycle. Once you get past that, the Fed stops and hold for a while, eventually start cutting again, is that some relief for the regional banks?
>> Yeah, and I think that's what we're really looking for in 2024 is a lot of the normalization within the regional bank business model for net interest margins to start coming back and for them to be able to see better improvements in their funding costs.
>> Another question here about a very big topic this year, artificial intelligence.
Viewer wants to know, is the AI hype in the markets overdone?
>> You know, if artificial intelligence is at such a early innings, I think it's too early to tell exactly how AI is going to work out, how it's going to be utilized, when it will be monetized.
I have talked to our equity analysts on a couple of different stocks that are going to benefit from it, so I think about Microsoft, Alphabet, Amazon. We do think that we will be positive for each of the stocks but yet I know we haven't necessarily raised our fair valuations on those individual stocks yet. I think we are waiting for better clarity as far as how that's going to play through the system. For now, I think a lot of investors are much more focused on those companies that will benefit from AI like semiconductors and the equipment to manufacture those chips.
As far as individual stocks go, there is some that we still think are undervalued that will benefit from AI but there is certainly a number that we think are overextended.
Let me just walk you through one example and is going to be Nvidia. That was a stock that certainly has had a huge year thus far this year. When I look at our assumptions, we are looking at 50% growth this year topline and on a compound annual growth rate for the next five years, we are looking for 23% growth.
Essentially over that five year time period, we are already modelling and that revenue is going to almost triple. As far as the operating margin goes, we are looking for strong expansion there, operating margin to double this year from last year and then continuing to expand and get to new all-time highs.
So all in, we are forecasting earnings-per-share to grow from over three dollars per share all the way to over $16 per share in 2028.
So essentially, investors right now that are buying that soccer paying 26×2028 earnings. So even after all of those assumptions we put in, that stock is trading well above what we think the fair value would be.
>> Nvidia has been an interesting one.
That was a great breakdown.
They make the processors.
you talked about trying to figure out the monetization of a ChatGPT or other kind of AI. That made me think about the early days of the Internet when you're dialling on, 14.4 modem, whatever I had, the information superhighway. It was a bit of a free-for-all.
But companies did eventually figure out out how to make money off of it.
Is that what we are waiting for here?
>> I do think it's going to be similar to that but we haven't seen it what that will look like for AI. I think we got someglimpses of it.
we haven't seen how that's going to be monetized over the long term. I think it's more of a supplemental for those businesses and not something that really replaces their business models today.
>> Let's go to another question, this one also focused on tech. The viewer wants to know, are the big tech names the only thing powering markets higher right now?
Will that continue? It seven usual culprits.
>> Well, when we look at the market so far this year, there is what is called the magnificent seven, the seven stocks that have been the biggest beneficiaries from the AI excitement from investors and a lot of these companies at this point, they were significantly undervalued at the beginning of the year and in fact, according to our evaluations, six of those seven were actually undervalued at the beginning of this year.
but as much as they have risen at this point, it seems like to some degree they've already kind of run the race.
At this point, only one of them is still undervalued in our view, another for fairly valued and two are actually now getting into that overvalued territory.
so when I think about the market for it, for the second half of the year for this rally to continue, is going to really need to spread out into the rest of the market.
More specifically, in our view, we think it's going to spread out more into the value category and away from growth and actually down into the capitalization levels, down more to mid-cap and small-cap stocks as opposed to the big growth that we've seen in the large Space.
>> As always, make sure you do your own research before making any investment decisions.
we will get back to your questions for David Sekera on US stocks in just a moment's time.
And a reminder that you can get in touch with us any time.
Just email moneytalklive@td.com.
Now let's get our educational segment of the day.
If you've been researching blue-chip stocks on WebBroker, you may have noticed that they are sometimes listed on more than one exchange.
Jason Hnatyk, Senior client education instructor at TD Direct Investing has more on how these dual listed stocks work.
>> We are all looking to be just as efficient as we can with our money and there are ways when you are using your brokerage account to be smart about that as well.
let's jump into WebBroker and I have a really interesting technique to show everyone here, how to be smart with it and avoid foreign-exchange fees when possible.
So we are looking at a quote here for TD Bank and the interesting thing that I want to show everyone here is right up near the top left of the screen, this is where we can see that we are currently viewing a quote on the TD shares that are trading on the TSX. One of the interesting things here is that Toronto Dominion Bank also trades on the New York Stock Exchange. You can see next to the Canadian like there's a little link that says of you on NYSE. If you click that link, the flag will change over to the US flag and now you're also going to notice that the quote would've changed.
What I want to hide for everyone here is that it's the same stock but it's trading in both currencies, it's effectively going to be the same price, just off by the rate of exchange. At TD Direct Investing, if you're opening up an account in both currencies, you have the opportunity to choose which particular investment will suit you best so you can save on unnecessarily needing to transfer cash around to avoid foreign-exchange fees. You can pick and choose how you want that to be in your account.
If we want to buy TD on the US exchange, right from here we can go ahead and select the buy button. This will bring us up to our order ticket. The one change that you are going to need to make at the top of your screen, you will notice that my Canadian margin has been automatically selected.
That's my default account. All we will need to then go ahead and do is choose from the drop-down menu the corresponding US account and then we will be able to spend US dollars and not worry about having my Canadian changed into US dollars.
So being efficient with my purchases. One thing also want to show you, to really interesting to within WebBroker and that's your opportunity to transfer securities between your accounts that you have in your profile.
You're going to find that tool up on the accounts tab at the top of the page and under the transfer and withdrawals column in the middle of the screen, there is a transfer securities section. This can be useful to transfer between your multiple accounts, whether you're making contributions to your TFSA RRSP, it can also be used when we are trying to be efficient with our foreign exchange transactions as well.
For instance, in my scenario, I bought TD in my US account. At the end of the day, if I want Canadian dollars back for my trade, I could transfer it. I could simply select my from account as my.
.
.
I could trade them in the Canadian side and I'm effectively getting Canadian dollars back for my transaction because I transferred the stock andI'm not being saddled with the foreign exchange transaction. I walk away and I'm a happy camper. Being efficient with the use of my capital.
>> Our thanks to happy camper, Jason Hnatyk, his senior client education instructor at TD Direct Investing. And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Before we get back to your questions about American equities for David Sekera, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.
com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back now with David Sekera, taking your questions about US stocks. This one just coming in. What does your guest think of US consumer Staples going forward?
This is our viewer Jeff who has been sending in questions. Jeff, good to hear from you. Let's take the question.
>> Yeah, I mean, inflation has certainly be net pressuring consumers and what we are seeing is that those on the low end are getting the most pressure. What we are seeing is that trade down, essentially consumers moving into generic brands and away from branded items as well as buying smaller quantities.
So the consumer defensive sector,it held up pretty well last year when the market was falling but never really got down into that undervalued category level, so I think it's probably pretty fairly valued overall. I think the opportunities are going to be for investors to find those companies that I think have greater than average exposure to the emerging markets where we are still seeing consumption as a long-term secular trend continue to grow and that's what I would be focus on.
>> That's interesting because every time I think about consumer staples, I think about here at home in Canada or in the states or domestically, during the pandemic, the stocks or beneficiaries because we stayed at home and bought their goods.
I know they went through a period where they were saying, compared to last year when everyone was at home, our sales weren't as good.
is that starting to get into the past?
>> I think at this point we are getting past a lot of that.. Early in the pandemic you had the pantry loading where people were buying lots and lots of food for at home but we are certainly past that at this poignant and what we are now seeing is that we are so far past the pandemic at this point, a lot of consumer spending has been shifting and we continue to see that shift going forward, going more into services and away from goods. Starting to see a lot more people eating out at restaurants and going out more often but again when I'm just trying to think about the sector and trying to think about where the most value in the consumer discretionary in the consumer areas going to be, it would be looking for those companies that had that exposure to the emerging markets where we see the best growth.
>> Very interesting. Let's take another question about dividend stocks. The viewer wants to know what is the outlook for dividend stocks in the current environment?
>> yeah. A high dividend paying stocks certainly got left behind in this rally.
When I think abouthi dividend paying stocks, more often than not, those are going to be in the value category and the value category has been out of favour thus far. I do see a lot of value here and I do think about it from a couple of different perspectives. One just from a valuation perspective, thinking about the intrinsic value of the company is a long-term investor versus the price today. We see a lot of opportunities there.
But I also suspect that the market returns in the second half of this year probably going to be a lot more muted than what we saw at the beginning of the year and so I do like these hi dividend yield stocks that do help provide some return as we get back to the point where the market can really kind of take that higher, probably not until earlier next year.
>> When I think about the rally we have seen in the mega-cap tech stocks, some of them don't pay dividends but it's usually not the play fora big stock to pay out a dividend. What about competition from other products? What do you think about interest rates being elevated? Maybe many investors who started several years ago or a decade ago I've never seen an interest rate is high on a money market fund. Are they competing?
>> I'm not really seeing that much crossover generally. You have some investors who are looking for yield that in the past probably were buying stocks because interest rates… Interest rate policy was just so low across the entire yield curve but I do think that from a portfolio allocation perspective, we are now seeing it people who are looking for that fixed income, people who are still looking for that equity exposure and staying equities, I don't see that same kind of crossover that we had two years ago or even three years ago.
>> Another question here, this one about the Fed. What is next from the Fed?Will good economic news start being good news for the markets?
>> I think there's really two things that we are going to need to see. One is just that ongoing moderation and inflation.
inflation has not been falling as fast as the Fed would prefer so they've still been tightening monetary policy. I think the market is really looking for an indication that the Fed is going to be done tightening for this policy cycle and I thinkwe probably want to see that over the next couple of months and then second is as I noted before we do expect the economy is going to slow sequentially for the next three quarters. We are still looking for growth but a slowing rate of growth. So again, no recession.
I think that the market is going to be looking for a turnaround in leading economic indicators as far as when they're going to start looking for earnings to start paying him back up again.
I think that's not going to be until well into the second half of this year, looking for those leading economic indicators to start moving back up.
>> We are going to get back to your questions for David Sekera on US equities in just a moment's time. As always, make sure you do your own research before making any investment decisions. Since David Sekera is from Morningstar Research, you probably know this, but if you are on the markets overview page right now watching the show, you just go to that reports tab of the top and it will take you through Morningstar Research in different categories.
Of course, when it comes to getting questions onto the show, you can get in touch with us at any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
It has been a challenging first half of the year for Canadian real estate investment trusts has higher short-term interest rates are weighing on stock valuation. Our Anthony Okolie has been digging into a TD Securities outlook on the sector for the rest of the year. What you have there?
>> It's been a pretty turbulent start to the year for the Canadian REITs sector, TD Securities is lowering its target price by 6% for the Canadian REITs coverage universe on a weighted average basis in its most recent report. Even though asset values appear to be holding up in most sectors here today, TD Securities said that the REITs trading prices continue to be driven by what they call yield curve inversion and over the past year.
as a result, we have seen in things like GICs and term deposits attracting a lot of inflow from investors as they chase the higher yields.
Now it TD Economics, in the latest forecast, call for two year bond yields to be 120 basis points higher on average through the fourth quarter of 2024.
Of course, we know that rising bond yields would make the dividend yields of the real estate Index less attractive when compared to bonds. So on that basis, TD Securities did lower its target price across their coverage universe.
Now, they do say that despite the challenging first half of the Canadian REITs market, TD Securities believes the index can still make the bottom end of their original total return forecast if short-term rates cooperate. That's a big if. But we will take you to some of the target prices. I will focus on five main sectors. We will start off with residential.
There is a modest 3% reduction by TD Securities. They continue to see residential as benefiting from heightened demand for rental housing as well as worsening housing of her ability. We've all heard about the population growth here in Canada, that continues to fuel a lot of demand for housing. That is again driving up new leases and operating income. TD Securities again notes that rental affordability is emerging as a core concern here in Canada.
Turning to the industrial space, there again a modest reduction of 3% of the target price by TD Securities. They do say that the demand remains elevated, limited supply resulting in strong albeit moderating growth in the industrial space.
Taking a look at the retail space, they cut their target price thereby 8% but they believe that the sector continues to see strong leasing momentum despite macroeconomic concerns.
Taking a look at seniors, a cut about 4% of the target price and TD Securities is starting to see some evidence of a more sustained recovery in the seniors reach space. Like Canadian apartments, keep in mind that retirement homes in Canada benefit from the availability of CM HC insurance.
Finally, the office space.
They saw the steepest target price reduction of 15% by TD Securities.
TD Securities highlights that well office fundamentals will likely remain under pressure in the near term, they still see value in the sector at current levels.
>> Perhaps some regions for optimism there. At the same time, risks.
>> yes, slowing rent growth and higher vacancies compared to supplied, operating costs as well as demand swells.
there are also potential risks to the general economic conditions including but not limited to interest rate fluctuations as well as unemployment levels.
Other key risks include foreign exchange, the inability to maintain occupancy levels, general tenant credit risk as well as loss of key management personnel.
>> Interesting stuff. Thanks, Anthony.
That's my pleasure.
>> MoneyTalk's Anthony Okolie.
Now let's get you updated on the markets.
we are having a look at TV's advanced dashboard, the platform designed for active traders available through TD Direct Investing. This is the heat map function, giving you a view with the market movers.
We are looking at the TSX 60, we are looking at price and volume. Let's start with some green on the screen.
We do have some.
We will also take a look at the energy space. IMO, if I'm right, that would be Imperial oil, up to the tune of about 2%.
It's a neighbour, Cenovus Energy, up a little more than 1%. Suncor, C and Q, a nice green patch there talking about the energy sector. If we take a look at Shopify, it's up about 1 1/2% there. you can see some lower volume stocks are trading to the downside. Dollarama right at the bottom of the screen, it's it down about 2% at this hour.
there are a lot of different drawdowns there. You can take a look at the S&P 100.
Right now, you can see it's taking up a fair amount of real estate, MD, semiconductor name,down to the tune of almost 3%. The Amazon, as a start on their today prime sale, you can see it up a little more than 1%. You can find more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
We are back now David Sekera, chief US market strategist at Morningstar Research, we are talking about US equities. David, we have someone who wants to get your thoughts on the energy sector.
>> Energy has been highly volatile, not just recently a but over the last couple of years.
it was one of the sectors that we thought was most undervalued, skyrocketed, ended up the most overvalued coming into your.
The MorningStar US energy Index is now down about 6% year to date so it's now fallen to the point where we think it's getting to be slightly undervalued although we are looking for individual stock opportunities there.
It's not necessarily in the oil companies themselves but in some of the service companies and some of the pipeline companies.
when I think about energy and talk to our team, I know our forecast for oil prices remains unchanged.
So we do think that over the long term, prices for oil will continue to keep coming down. We are looking for $55 per barrel for West Texas intermediate and $60 for Bench over the long term.
>> I want to ask you about the framework .
Trying to figure out whether these stocks are fairly valued or not. Does it start with the price of oil and then everything flows from it, what OPEC and its partners will do, what global demand is going to be like, if the economy slows down?
>> when we look at the supply and demand curve, we think it's going to meet over the long term. Thinking about going to happen with the demand for oil, we do expect that demand will continue to increase over the next couple of years but as things like electric vehicles start to becomea greater percentage of the number of vehicles on the road and people are looking to conserve energy and specifically compactor oil usage, we do think that oil prices will follow that lower and lower demand over time, so it does become a portion of the top-down approach and then looking at the individual companies, looking at the specific oil-producing assets that they own and coming up with an asset value, compiling that to drive our fair valuation.
>> We are going to switch gears. We have of you are saying they are investing in agricultural fertilizer stocks. They want to get your take on a potential opportunity with fertilizer pricing moving to the downside.
>> This is an area where investors really have to have the long term view. Here in the short term, a lot of the stocks are under pressure.
A lot of agricultural prices have been coming down over the past couple of months.
But I think that's actually going to provide investors with some opportunities, specifically those long-term investors that are willing to ride out the short-term volatility.
over the long term, we remain relatively positive on the sector. We do think that from a long-term secular perspective, we are looking for increases in food consumption, specifically the emerging markets over time.
And especially for means and that is expensive.
Reading that will be a long term tailwind.
With fertilizer stocks,you have to be able to write out the short-term volatility but as long-term tailwinds and lower natural gas costs work their way through the different business models, we do think there are a lot of long-term undervalued opportunities there.
>> This is an interesting one to considering we are heading into another earnings season. A viewer wants to know what should investors be expecting out of this earnings season?
>> I think earnings in and of themselves are looking pretty good. The economy held a better than expected, even better than we had expected and we were on the high side of expectations.
it should be relatively easy for most management companies to meet or beat expectations they have put out there. Most management teams gave relatively conservative guidance coming into the second quarter.
thinking about some of the different sectors, the cyclical's probably will have the most benefit with the economy remaining hotter than expected and some of the body language I think that we've been hearing from the tech companies, they've been giving implications that I think they are going to have a pretty good earnings season as well, so that's going to come down to you third-quarter guidance and what management teams are willing to put out there.
If they are seeing the same things we are, they're probably affecting the economy to continue to grow but grow at a slower rate in the third and fourth quarters so they are not going to want to give it to positive of a guidance,at the same point in time, with the economy holding out, they are not necessarily going to want to downplay their guidance either so they are going to have a pretty delicate balancing act there and if any management teams really do try and cut their guidance, I think those stocks are going to be at risk of having some selloffs in the short term.
>> We have run out of time for questions before I let you go, may be around back to the top part of the show. Obviously, the equity markets perform better than some have been expecting heading into 2023.what do we need to watch for for the second half?
>> I think we are going to see relatively muted gains in the second half of the year.
A lot of the drivers that really propelled the market forward in the first half of the year have run their course.
those big mega-cap tech stocks have moved from being undervalued into fair value territory, that tailwind is no longer going to be behind us.
But I do think that for investors, you should be looking at where the market is now overextended and overvalued, reallocating some of those profits into those areas that were left behind, such as like the value category and some of the cyclical sectors.
>> Always a pleasure having you on a and getting your insights.
>> Thank you, Greg.
>> How are things to David Sekera, chief US market strategist. As always, make sure you do your own research before making any investment decisions.
stay tuned for tomorrow, Andrew Kelvin, head of Canadian and global rate strategy at TD Securities will be taking your questions about the economy.
Plenty to talk about. Get a head start with those questions.
Email moneytalklive@td.com. That's all the time have for the show today. Thanks for watching and take care.
[music]
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, we will discuss whether it's time to batten down the hatches or raise the sails when it comes to the market. MorningStar's chief US market strategist David Sekera joins us.
MoneyTalk's Anthony Okolie is going to have a look at a new TD Securities report on real estate investment trusts. And in today's WebBroker education segment, Jason Hnatyk will walk us through how dual listed stocks work. So here's how you can get in touch with us. Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Before we get our guest of the day, let's get you an update on the markets. We'll start you at home with the TSX Composite Index. Right now we are at 28 points in the green, pretty modest,A little more than 1/10 of a percent. Among the most actively traded names when TSX at this hour includes a TransAlta Renewables.
TransAlta says it's going to buy the minority stake in TransAlta Renewables that it doesn't already own. You can see it they are up a little more than 18%.
TransAlta Renewables was spun out of TransAlta back in 2013. 10 years later, the stock is on the move. Athabasca Oil getting a bit today as well on fairly strong volume. At three bucks and $0.18 per share, you got Athabasca up a little more than 5%.
South of the border, of course we are going to get a pretty key read on inflation tomorrow. The key read, the inflation report coming out from the stateside.4427, Europe 18 points on the S&P 500, a gain of almost half a percent.
A lot can happen on the other side of that CPI print that's coming up tomorrow morning before the markets open.
Let's check in on the tech heavy NASDAQ.
What is going on there in terms of the tax base?
About five points, pretty modest but it is upside green, but not a lot. An Amazon, the Prime Days sales have begun.
There was one item I had my own, checked in this morning, wasn't on sale.
So I don't know, I'm not impressed.
We will see what other people have to say.
Amazon up right now 1 1/4%.
And that's your market update.
The first half of the year saw equity markets perform stronger than some had anticipated. But could that trend continue with central banks poised to continue raising rates? Joining us after the house is David Sekera, chief US market strategist with Morningstar Research.
Great to have you on the show.
>> Good afternoon. Good to see you.
>> Stocks in the first half of the year perform better than some had anticipated.
He recently came in with a note were you raised the question, is a time to batten down the hatches or raise the sales? How should we read this market?
>> During the second quarter, there was a big rise. It's an indicator of what's considered a new bull market. Once that happened, I started hearing a lot of market commentators in two different camps.
one was saying that this is the indication of a second bull market and you should be putting out more money into stocks.
the other camp being this is a bull trap in a longer-term bear market you should be getting out while the getting is good.
But I think both of these camps really missed the point and thinking about investing, it's really about where you should be putting your money to work where you see the best valuations.
so at the beginning of the year, without the markets are trading at a pretty significant discount to a composite of the fair values of the stocks that we cover.
But now following this rally, we do continue to see the market slightly undervalued but now trading at much less of a margin of safety. Now thisis the time for investors to be looking at their portfolios and thinking about where they should be making changes. I think that they need to look at what's overextended, look to take profits. For example, in the growth stock area and the tech sector, those are two areas that we think have become overvalued. And then reinvest those proceeds in those sectors that are a bit left behind, those that we think remain undervalued and still see opportunities for investors, such asvalue category and a lot of the cyclical sectors.
>> Not so much of a dire situation or off to the races situation but really tactical thinking about the markets and how you should be allocating funds.obviously, this market is very dependent on big events. I think the terms of inflation reports which we will be getting another one tomorrow. I do feel though that the market last summer, things got very wacky. You gotta print that was either hotter or colder and markets would go to her three point's in one direction in an afternoon. Things seem to have calmed. What will be the impact of these events now?
>> Probably lower volatility now and I think people are looking at the longer term as opposed to any individual economic print.
but today it has the feel that it could be the lull before the storm over the next couple of weeks and for earnings season.
So as you mentioned, we do have CPI coming out tomorrow.
PPI later this week. It now interesting yesterday, we saw a big decrease in used car prices and I think that now the market expectation is that CPI will probably come out lower than what consensus is right now.
so the market is still fully expecting the Fed is going to raise another 25 basis points at their meeting later this month, but if the CPI does come out lower than consensus, I think that will take some of the pressure off the Fed from having to raise the federal funds rate any further thereafter. Now, we actually project that inflation will continue to keep moderating and our economics team forecasts that this hike in July should be the last hike of this monetary policy tightening scenario.
Now we are looking at earnings season starting at the end of the week. We have the big megabanks reporting and then some of the regional banks early next week.
And then, we will wrap that all up on the 25th and 26 with the Fed meeting and see what chair Powell has to say at his press conference.
>> When it comes to earnings season, the fact that, I've been told by other guests on the show, when you think about the reason why we are still seeing central banks hiking rates or threatening to hike rates further is that the economy has been stronger-than-expected and then that could feed through into corporate earnings, because things weren't quite as bad as perhaps they thought they would be. Is that the right mindset to enter this earnings season with?
>> yeah, generally I think this earnings season is going to look pretty good and I think about the set up, coming into this earnings season, as you mentioned, a lot of people thought the economy is going to be weaker than what it turned out to be.
I think a lot of management teams gave pretty conservative guidance for the second quarter, so I think it generally is going to be pretty easy to meet or beat those expectations. Now the hard part is what management teams are going to be coming out with with their third-quarter earnings expectations.
So on the one hand, we still do expect the economy will continue to slow. We are looking for sequentially slower growth rate for the next three quarters until the first quarter of next year that we expected to re-accelerate thereafter.
Management teams may not necessarily want to get out over their skis and give to strong and earnings guidance. At the same point in time, with the economy holding a better-than-expected, they can't really cut their guidance too much.
If anyone comes out and really disappoints the market with lower-than-expected guidance, I do think those stocks will be at risk of having some pretty severe selloffs in the short term.
>> I feel like what we've been hearing from corporations and through their earnings in the last bit of the cycle, a lot of warnings about storm clouds on the horizon, recession fears, worried about the consumer.
sort of a recession that never shows up.
We talked about a slowdown in the economy but that's different than an actual recession. How do we feel about the prospects for the economy?
>> Our US economics team has really helped to view all year that they did not see a recession.
It was a relatively high probability compared to the past. We are looking at potentially a 30% probability of a recession, but our base case was never that we were going to be in a recession.
But we think that the rate of economic growth will slow in the next couple quarters, but we are not looking for any type of contractionthis year or next, so I do think that the economy should kind of almost get to this not too hot, not too cold area and I do think that that will take a lot of the pressure off the inflationary rate. In fact, on a year-over-year basis, we expect inflation will end this year at 2% and on average inflation in the US according to our projections will be slightly under 2% in 2024.
>> So we do have a Fed rate decision, as you know, later this month.
and then we will get another decision until he had into the fall.
I used to feel sort of sleepy. I made a big deal about it and then it didn't happen.
Last year, Jerome Powell decided to lay down. So between that rate decision and then another Jackson Hole event, what are you listening for and watching for with the Fed?
>> I think it's much different set up for Jackson hole.
Last year inflation was ramping up much higher than the Fed expected and markets had been pricing in. It peaked and only just started coming down early fall last year, so I think that was much moretop of mind for everybody. Inflation granted hasn't come down as fast as I think the Fed would prefer but it is still on a downward trend. We are still seeing a lot of indications of some of those things that really caused inflation to ramp up last year continuing to moderate.
So I don't think we still have that same kind of set up where we could potentially have Terry Powell coming out really with any new changes to his outlook for monetary policy.
>> interesting stuff in a great start to the program. We'll get to your questions about US stocks for David Sekera in just a moment time.
And a reminder that you can get in touch with us any time.
Just email moneytalklive@td.
com or fill out the viewer response box under the video player on WebBroker.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Nutrien says it is curtailing production at one of its potash mines in Saskatchewan because of the strike at the Port of Vancouver.
In a release, the company says that adjusted earnings will come in below the low end of its previous estimates.
It is pointing to that Port strike in Vancouver, also a terminal outage in Portland and lower global potash prices.
You see Nutrien right now flat on the day at $0.52 per share.
Shares of MTY Food Group on the rise following its latest earnings release. The casual dining and food court operator handed in sales growth that was much stronger than anticipated. Canada actually stood out for its performance.
Recent acquisitions by MTY also contributed to revenue and improve margin.
MTY you can see up almost 5% on the TSX.
Cineplex saying box office receipts are nearing pre-pandemic levels at least for the month of June. The theatre operator says revenue was $56 million for the month, that represents 90% of box office sales from June 2019 levels before the pandemic. Cineplex is also counting on some high-profile releases coming out including Barbie and Oppenheimer to boost Summer to ticket sales.
Now we'll check in on the stock markets.
The TSX Composite Index, a modest gain of 18 points, little shy of 1/10 of a percent. South of the border, one day away from the inflation printed out of the US.
It's up about 18 points as well a little bit less than 1/2 of a percent.
We are back with David Sekera, chief US strategist with Morningstar Research, taking your questions about American stocks.
got someone wondering where your outlook is for the banks. It was quite a dramatic turn of events especially for the regionalsin the spring.
>> I think with the banks is going to have to be separated into the megabanks versus the regionals. I think there's going to be a big difference in what people are listening for this earnings season.
The megabanks were not all that worried about deposit flight and I do think that earnings for the megabanks generally are probably going to lookgood. The economy has held up well and is going to keep the faults in bankruptcy is relatively low and interest margins should remain high.
I think we are going to be in the clear for the megabanks. For the regional banks, we could see some earnings pressure there and a lot of that is going to depend on how much deposit flight we saw on how much that has increased their funding costs.
So when I think about the regional banks and look at our forecast, we do think that earnings will decline sequentially there for the rest of the year and only begin to start recovering next year. But when I think about the business model for the regional banks, we don't think that business model is broken but we do think that it is under stress. And we kind of put that all together, when I look at current valuations, we do think that the market probably has swung too far to the downside and I do think they're going to be some interesting opportunities for investors among those regional.
>> When we think about the regionals and being under stress with income we can take it back to what the Fed had been up to.
There were some decisions the regional banks made in terms of parking money that were not working out for them in the hiking cycle. Once you get past that, the Fed stops and hold for a while, eventually start cutting again, is that some relief for the regional banks?
>> Yeah, and I think that's what we're really looking for in 2024 is a lot of the normalization within the regional bank business model for net interest margins to start coming back and for them to be able to see better improvements in their funding costs.
>> Another question here about a very big topic this year, artificial intelligence.
Viewer wants to know, is the AI hype in the markets overdone?
>> You know, if artificial intelligence is at such a early innings, I think it's too early to tell exactly how AI is going to work out, how it's going to be utilized, when it will be monetized.
I have talked to our equity analysts on a couple of different stocks that are going to benefit from it, so I think about Microsoft, Alphabet, Amazon. We do think that we will be positive for each of the stocks but yet I know we haven't necessarily raised our fair valuations on those individual stocks yet. I think we are waiting for better clarity as far as how that's going to play through the system. For now, I think a lot of investors are much more focused on those companies that will benefit from AI like semiconductors and the equipment to manufacture those chips.
As far as individual stocks go, there is some that we still think are undervalued that will benefit from AI but there is certainly a number that we think are overextended.
Let me just walk you through one example and is going to be Nvidia. That was a stock that certainly has had a huge year thus far this year. When I look at our assumptions, we are looking at 50% growth this year topline and on a compound annual growth rate for the next five years, we are looking for 23% growth.
Essentially over that five year time period, we are already modelling and that revenue is going to almost triple. As far as the operating margin goes, we are looking for strong expansion there, operating margin to double this year from last year and then continuing to expand and get to new all-time highs.
So all in, we are forecasting earnings-per-share to grow from over three dollars per share all the way to over $16 per share in 2028.
So essentially, investors right now that are buying that soccer paying 26×2028 earnings. So even after all of those assumptions we put in, that stock is trading well above what we think the fair value would be.
>> Nvidia has been an interesting one.
That was a great breakdown.
They make the processors.
you talked about trying to figure out the monetization of a ChatGPT or other kind of AI. That made me think about the early days of the Internet when you're dialling on, 14.4 modem, whatever I had, the information superhighway. It was a bit of a free-for-all.
But companies did eventually figure out out how to make money off of it.
Is that what we are waiting for here?
>> I do think it's going to be similar to that but we haven't seen it what that will look like for AI. I think we got someglimpses of it.
we haven't seen how that's going to be monetized over the long term. I think it's more of a supplemental for those businesses and not something that really replaces their business models today.
>> Let's go to another question, this one also focused on tech. The viewer wants to know, are the big tech names the only thing powering markets higher right now?
Will that continue? It seven usual culprits.
>> Well, when we look at the market so far this year, there is what is called the magnificent seven, the seven stocks that have been the biggest beneficiaries from the AI excitement from investors and a lot of these companies at this point, they were significantly undervalued at the beginning of the year and in fact, according to our evaluations, six of those seven were actually undervalued at the beginning of this year.
but as much as they have risen at this point, it seems like to some degree they've already kind of run the race.
At this point, only one of them is still undervalued in our view, another for fairly valued and two are actually now getting into that overvalued territory.
so when I think about the market for it, for the second half of the year for this rally to continue, is going to really need to spread out into the rest of the market.
More specifically, in our view, we think it's going to spread out more into the value category and away from growth and actually down into the capitalization levels, down more to mid-cap and small-cap stocks as opposed to the big growth that we've seen in the large Space.
>> As always, make sure you do your own research before making any investment decisions.
we will get back to your questions for David Sekera on US stocks in just a moment's time.
And a reminder that you can get in touch with us any time.
Just email moneytalklive@td.com.
Now let's get our educational segment of the day.
If you've been researching blue-chip stocks on WebBroker, you may have noticed that they are sometimes listed on more than one exchange.
Jason Hnatyk, Senior client education instructor at TD Direct Investing has more on how these dual listed stocks work.
>> We are all looking to be just as efficient as we can with our money and there are ways when you are using your brokerage account to be smart about that as well.
let's jump into WebBroker and I have a really interesting technique to show everyone here, how to be smart with it and avoid foreign-exchange fees when possible.
So we are looking at a quote here for TD Bank and the interesting thing that I want to show everyone here is right up near the top left of the screen, this is where we can see that we are currently viewing a quote on the TD shares that are trading on the TSX. One of the interesting things here is that Toronto Dominion Bank also trades on the New York Stock Exchange. You can see next to the Canadian like there's a little link that says of you on NYSE. If you click that link, the flag will change over to the US flag and now you're also going to notice that the quote would've changed.
What I want to hide for everyone here is that it's the same stock but it's trading in both currencies, it's effectively going to be the same price, just off by the rate of exchange. At TD Direct Investing, if you're opening up an account in both currencies, you have the opportunity to choose which particular investment will suit you best so you can save on unnecessarily needing to transfer cash around to avoid foreign-exchange fees. You can pick and choose how you want that to be in your account.
If we want to buy TD on the US exchange, right from here we can go ahead and select the buy button. This will bring us up to our order ticket. The one change that you are going to need to make at the top of your screen, you will notice that my Canadian margin has been automatically selected.
That's my default account. All we will need to then go ahead and do is choose from the drop-down menu the corresponding US account and then we will be able to spend US dollars and not worry about having my Canadian changed into US dollars.
So being efficient with my purchases. One thing also want to show you, to really interesting to within WebBroker and that's your opportunity to transfer securities between your accounts that you have in your profile.
You're going to find that tool up on the accounts tab at the top of the page and under the transfer and withdrawals column in the middle of the screen, there is a transfer securities section. This can be useful to transfer between your multiple accounts, whether you're making contributions to your TFSA RRSP, it can also be used when we are trying to be efficient with our foreign exchange transactions as well.
For instance, in my scenario, I bought TD in my US account. At the end of the day, if I want Canadian dollars back for my trade, I could transfer it. I could simply select my from account as my.
.
.
I could trade them in the Canadian side and I'm effectively getting Canadian dollars back for my transaction because I transferred the stock andI'm not being saddled with the foreign exchange transaction. I walk away and I'm a happy camper. Being efficient with the use of my capital.
>> Our thanks to happy camper, Jason Hnatyk, his senior client education instructor at TD Direct Investing. And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Before we get back to your questions about American equities for David Sekera, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.
com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back now with David Sekera, taking your questions about US stocks. This one just coming in. What does your guest think of US consumer Staples going forward?
This is our viewer Jeff who has been sending in questions. Jeff, good to hear from you. Let's take the question.
>> Yeah, I mean, inflation has certainly be net pressuring consumers and what we are seeing is that those on the low end are getting the most pressure. What we are seeing is that trade down, essentially consumers moving into generic brands and away from branded items as well as buying smaller quantities.
So the consumer defensive sector,it held up pretty well last year when the market was falling but never really got down into that undervalued category level, so I think it's probably pretty fairly valued overall. I think the opportunities are going to be for investors to find those companies that I think have greater than average exposure to the emerging markets where we are still seeing consumption as a long-term secular trend continue to grow and that's what I would be focus on.
>> That's interesting because every time I think about consumer staples, I think about here at home in Canada or in the states or domestically, during the pandemic, the stocks or beneficiaries because we stayed at home and bought their goods.
I know they went through a period where they were saying, compared to last year when everyone was at home, our sales weren't as good.
is that starting to get into the past?
>> I think at this point we are getting past a lot of that.. Early in the pandemic you had the pantry loading where people were buying lots and lots of food for at home but we are certainly past that at this poignant and what we are now seeing is that we are so far past the pandemic at this point, a lot of consumer spending has been shifting and we continue to see that shift going forward, going more into services and away from goods. Starting to see a lot more people eating out at restaurants and going out more often but again when I'm just trying to think about the sector and trying to think about where the most value in the consumer discretionary in the consumer areas going to be, it would be looking for those companies that had that exposure to the emerging markets where we see the best growth.
>> Very interesting. Let's take another question about dividend stocks. The viewer wants to know what is the outlook for dividend stocks in the current environment?
>> yeah. A high dividend paying stocks certainly got left behind in this rally.
When I think abouthi dividend paying stocks, more often than not, those are going to be in the value category and the value category has been out of favour thus far. I do see a lot of value here and I do think about it from a couple of different perspectives. One just from a valuation perspective, thinking about the intrinsic value of the company is a long-term investor versus the price today. We see a lot of opportunities there.
But I also suspect that the market returns in the second half of this year probably going to be a lot more muted than what we saw at the beginning of the year and so I do like these hi dividend yield stocks that do help provide some return as we get back to the point where the market can really kind of take that higher, probably not until earlier next year.
>> When I think about the rally we have seen in the mega-cap tech stocks, some of them don't pay dividends but it's usually not the play fora big stock to pay out a dividend. What about competition from other products? What do you think about interest rates being elevated? Maybe many investors who started several years ago or a decade ago I've never seen an interest rate is high on a money market fund. Are they competing?
>> I'm not really seeing that much crossover generally. You have some investors who are looking for yield that in the past probably were buying stocks because interest rates… Interest rate policy was just so low across the entire yield curve but I do think that from a portfolio allocation perspective, we are now seeing it people who are looking for that fixed income, people who are still looking for that equity exposure and staying equities, I don't see that same kind of crossover that we had two years ago or even three years ago.
>> Another question here, this one about the Fed. What is next from the Fed?Will good economic news start being good news for the markets?
>> I think there's really two things that we are going to need to see. One is just that ongoing moderation and inflation.
inflation has not been falling as fast as the Fed would prefer so they've still been tightening monetary policy. I think the market is really looking for an indication that the Fed is going to be done tightening for this policy cycle and I thinkwe probably want to see that over the next couple of months and then second is as I noted before we do expect the economy is going to slow sequentially for the next three quarters. We are still looking for growth but a slowing rate of growth. So again, no recession.
I think that the market is going to be looking for a turnaround in leading economic indicators as far as when they're going to start looking for earnings to start paying him back up again.
I think that's not going to be until well into the second half of this year, looking for those leading economic indicators to start moving back up.
>> We are going to get back to your questions for David Sekera on US equities in just a moment's time. As always, make sure you do your own research before making any investment decisions. Since David Sekera is from Morningstar Research, you probably know this, but if you are on the markets overview page right now watching the show, you just go to that reports tab of the top and it will take you through Morningstar Research in different categories.
Of course, when it comes to getting questions onto the show, you can get in touch with us at any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
It has been a challenging first half of the year for Canadian real estate investment trusts has higher short-term interest rates are weighing on stock valuation. Our Anthony Okolie has been digging into a TD Securities outlook on the sector for the rest of the year. What you have there?
>> It's been a pretty turbulent start to the year for the Canadian REITs sector, TD Securities is lowering its target price by 6% for the Canadian REITs coverage universe on a weighted average basis in its most recent report. Even though asset values appear to be holding up in most sectors here today, TD Securities said that the REITs trading prices continue to be driven by what they call yield curve inversion and over the past year.
as a result, we have seen in things like GICs and term deposits attracting a lot of inflow from investors as they chase the higher yields.
Now it TD Economics, in the latest forecast, call for two year bond yields to be 120 basis points higher on average through the fourth quarter of 2024.
Of course, we know that rising bond yields would make the dividend yields of the real estate Index less attractive when compared to bonds. So on that basis, TD Securities did lower its target price across their coverage universe.
Now, they do say that despite the challenging first half of the Canadian REITs market, TD Securities believes the index can still make the bottom end of their original total return forecast if short-term rates cooperate. That's a big if. But we will take you to some of the target prices. I will focus on five main sectors. We will start off with residential.
There is a modest 3% reduction by TD Securities. They continue to see residential as benefiting from heightened demand for rental housing as well as worsening housing of her ability. We've all heard about the population growth here in Canada, that continues to fuel a lot of demand for housing. That is again driving up new leases and operating income. TD Securities again notes that rental affordability is emerging as a core concern here in Canada.
Turning to the industrial space, there again a modest reduction of 3% of the target price by TD Securities. They do say that the demand remains elevated, limited supply resulting in strong albeit moderating growth in the industrial space.
Taking a look at the retail space, they cut their target price thereby 8% but they believe that the sector continues to see strong leasing momentum despite macroeconomic concerns.
Taking a look at seniors, a cut about 4% of the target price and TD Securities is starting to see some evidence of a more sustained recovery in the seniors reach space. Like Canadian apartments, keep in mind that retirement homes in Canada benefit from the availability of CM HC insurance.
Finally, the office space.
They saw the steepest target price reduction of 15% by TD Securities.
TD Securities highlights that well office fundamentals will likely remain under pressure in the near term, they still see value in the sector at current levels.
>> Perhaps some regions for optimism there. At the same time, risks.
>> yes, slowing rent growth and higher vacancies compared to supplied, operating costs as well as demand swells.
there are also potential risks to the general economic conditions including but not limited to interest rate fluctuations as well as unemployment levels.
Other key risks include foreign exchange, the inability to maintain occupancy levels, general tenant credit risk as well as loss of key management personnel.
>> Interesting stuff. Thanks, Anthony.
That's my pleasure.
>> MoneyTalk's Anthony Okolie.
Now let's get you updated on the markets.
we are having a look at TV's advanced dashboard, the platform designed for active traders available through TD Direct Investing. This is the heat map function, giving you a view with the market movers.
We are looking at the TSX 60, we are looking at price and volume. Let's start with some green on the screen.
We do have some.
We will also take a look at the energy space. IMO, if I'm right, that would be Imperial oil, up to the tune of about 2%.
It's a neighbour, Cenovus Energy, up a little more than 1%. Suncor, C and Q, a nice green patch there talking about the energy sector. If we take a look at Shopify, it's up about 1 1/2% there. you can see some lower volume stocks are trading to the downside. Dollarama right at the bottom of the screen, it's it down about 2% at this hour.
there are a lot of different drawdowns there. You can take a look at the S&P 100.
Right now, you can see it's taking up a fair amount of real estate, MD, semiconductor name,down to the tune of almost 3%. The Amazon, as a start on their today prime sale, you can see it up a little more than 1%. You can find more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
We are back now David Sekera, chief US market strategist at Morningstar Research, we are talking about US equities. David, we have someone who wants to get your thoughts on the energy sector.
>> Energy has been highly volatile, not just recently a but over the last couple of years.
it was one of the sectors that we thought was most undervalued, skyrocketed, ended up the most overvalued coming into your.
The MorningStar US energy Index is now down about 6% year to date so it's now fallen to the point where we think it's getting to be slightly undervalued although we are looking for individual stock opportunities there.
It's not necessarily in the oil companies themselves but in some of the service companies and some of the pipeline companies.
when I think about energy and talk to our team, I know our forecast for oil prices remains unchanged.
So we do think that over the long term, prices for oil will continue to keep coming down. We are looking for $55 per barrel for West Texas intermediate and $60 for Bench over the long term.
>> I want to ask you about the framework .
Trying to figure out whether these stocks are fairly valued or not. Does it start with the price of oil and then everything flows from it, what OPEC and its partners will do, what global demand is going to be like, if the economy slows down?
>> when we look at the supply and demand curve, we think it's going to meet over the long term. Thinking about going to happen with the demand for oil, we do expect that demand will continue to increase over the next couple of years but as things like electric vehicles start to becomea greater percentage of the number of vehicles on the road and people are looking to conserve energy and specifically compactor oil usage, we do think that oil prices will follow that lower and lower demand over time, so it does become a portion of the top-down approach and then looking at the individual companies, looking at the specific oil-producing assets that they own and coming up with an asset value, compiling that to drive our fair valuation.
>> We are going to switch gears. We have of you are saying they are investing in agricultural fertilizer stocks. They want to get your take on a potential opportunity with fertilizer pricing moving to the downside.
>> This is an area where investors really have to have the long term view. Here in the short term, a lot of the stocks are under pressure.
A lot of agricultural prices have been coming down over the past couple of months.
But I think that's actually going to provide investors with some opportunities, specifically those long-term investors that are willing to ride out the short-term volatility.
over the long term, we remain relatively positive on the sector. We do think that from a long-term secular perspective, we are looking for increases in food consumption, specifically the emerging markets over time.
And especially for means and that is expensive.
Reading that will be a long term tailwind.
With fertilizer stocks,you have to be able to write out the short-term volatility but as long-term tailwinds and lower natural gas costs work their way through the different business models, we do think there are a lot of long-term undervalued opportunities there.
>> This is an interesting one to considering we are heading into another earnings season. A viewer wants to know what should investors be expecting out of this earnings season?
>> I think earnings in and of themselves are looking pretty good. The economy held a better than expected, even better than we had expected and we were on the high side of expectations.
it should be relatively easy for most management companies to meet or beat expectations they have put out there. Most management teams gave relatively conservative guidance coming into the second quarter.
thinking about some of the different sectors, the cyclical's probably will have the most benefit with the economy remaining hotter than expected and some of the body language I think that we've been hearing from the tech companies, they've been giving implications that I think they are going to have a pretty good earnings season as well, so that's going to come down to you third-quarter guidance and what management teams are willing to put out there.
If they are seeing the same things we are, they're probably affecting the economy to continue to grow but grow at a slower rate in the third and fourth quarters so they are not going to want to give it to positive of a guidance,at the same point in time, with the economy holding out, they are not necessarily going to want to downplay their guidance either so they are going to have a pretty delicate balancing act there and if any management teams really do try and cut their guidance, I think those stocks are going to be at risk of having some selloffs in the short term.
>> We have run out of time for questions before I let you go, may be around back to the top part of the show. Obviously, the equity markets perform better than some have been expecting heading into 2023.what do we need to watch for for the second half?
>> I think we are going to see relatively muted gains in the second half of the year.
A lot of the drivers that really propelled the market forward in the first half of the year have run their course.
those big mega-cap tech stocks have moved from being undervalued into fair value territory, that tailwind is no longer going to be behind us.
But I do think that for investors, you should be looking at where the market is now overextended and overvalued, reallocating some of those profits into those areas that were left behind, such as like the value category and some of the cyclical sectors.
>> Always a pleasure having you on a and getting your insights.
>> Thank you, Greg.
>> How are things to David Sekera, chief US market strategist. As always, make sure you do your own research before making any investment decisions.
stay tuned for tomorrow, Andrew Kelvin, head of Canadian and global rate strategy at TD Securities will be taking your questions about the economy.
Plenty to talk about. Get a head start with those questions.
Email moneytalklive@td.com. That's all the time have for the show today. Thanks for watching and take care.
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