Loonie trade among Morgan Stanley’s top 20 investment ideas for 2022

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

Morgan Stanley’s global strategy team, led by U.K.-based Andrew Sheets, published their outlook for markets in 2022, including a bullish view on the loonie,

“For 2022, we think that this ‘hotter and faster’ recovery continues, powered by strength in consumer spending and capital investment. We are above-consensus on 2022 growth in the US, Europe, and China … Good growth and moderating inflation would seem like another version of ‘Goldilocks’, and for some assets we think that the backdrop does look benign. But we think that 2022 is really about ‘mid-to-latecycle’ challenges: better growth squaring off against high valuations, tightening policy, rambunctious investor activity, and inflation being higher than most investors are used to … After two years of the most aggressive QE ever recorded, central bank balance sheets start a peaking process as buying slows, then stops in the face of rising inflation … Fundamentals matter more when ‘the [ central bank] training wheels come off’”

The report includes a list of the firm’s top 20 cross asset trade ideas in an unfortunately small font. The trades likely to be of most interest to Canadian investors include: buy U.S. financials, European and Japanese equities, long the trade weighted U.S. dollar index, long Brent cruse versus a short position in gold and most importantly, buy the Canadian dollar against the Swiss franc.

In the case of the loonie, the research team sees it as the winner among dollar bloc countries thanks to a hawkish Bank of Canada, rising commodity prices, and a Swiss currency that is overvalued in terms of real yields.

“@SBarlow_ROB MS’s top 20 cross-asset trades for 2022″ – (table) Twitter

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BofA Secutities U.S. quantitative strategist Savita Subramanian published a new edition of her Relative value cheat sheet,

“Our long-term valuation model based on price to normalized earnings (explained ~80% of 10yr S&P 500 price returns) forecasts -0.5%/year over the next 10 years, putting the S&P 500 at 4420 by 2031. Dividends are close to record lows, and payout ratios are depressed. But if companies increase payout ratios to average levels and grow dividends at trend growth, reinvesting dividends would yield a decade’s total return equivalent to the S&P 500 above 6000 (see 10 reasons for dividend growth). The S&P 500 is statistically expensive on 15 of 20 metrics we track, only attractive vs. bonds and on long-term growth (LTG) … The attractive P/E to LTG ratio, or “PEG ratio”, of the S&P 500 is due to lofty growth expectations, not low valuations. Consensus expects S&P 500 LTG of 19%, well above lofty Tech Bubble expectations … Our tactical quant model ranks Energy #1 (and #1 on all three metrics – EPS revisions, valuation & price momentum) for the 5th mth and 7 of the last 8 months. Staples, Comm. Services and Utilities rank lowest.”

“@SBarlow_ROB BofA (U.S. quant): ‘Our tactical quant model ranks Energy #1 (and #1 on all three metrics – EPS revisions, valuation & price momentum)” – (research excerpt) Twitter

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The Financial Times report “The hidden ‘replication crisis’ of finance” is getting a lot of attention this morning which is not surprising in that it implies that a lot of what we know about investing is bunk,

“Campbell Harvey, professor of finance at Duke university… reckons that at least half of the 400 supposedly market-beating strategies identified in top financial journals over the years are bogus… Getting a paper with a sensational finding published in a prestigious journal can earn an ambitious young professor the ultimate prize — tenure… It is therefore tempting to torture the data until it yields something interesting …”

I wish there were more detail on which academic finance theories are most at risk of wrong-ness.

“The hidden ‘replication crisis’ of finance” – Financial Times (paywall)

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Diversion: “The blue-green planet: How hydrogen can transform the global energy trade” – Wood Mackenzie

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