Good morning. Meme stock buyers, quant traders and short sellers all have one thing in common: they’re after short-term gains. It’s not a new phenomenon by any stretch. One-time Rotman School of Management dean Roger Martin in 2015 used a then 30-year-old quote from American management consultant, educator and author Peter Drucker to prove that point: “Everyone who has worked with American management can testify that the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top managements toward decisions they know to be costly, if not suicidal, mistakes.”
Whatever the reason — executive compensation metrics, pressure to meet quarterly earnings guidance and increased shareholder turnover are all often cited — short termism is rooted in our psyche, and it’s a big reason why investors get divorced from the fundamentals and pile in on trades they know don’t make any sense. An April 2021 survey by the Yale International Center for Finance found that 67 per cent of U.S. retail investors said they thought the stock market was too high, but 76 per cent said they also believed the market would rise over the next year. The greater fool theory in practice.
It’s hard not to jump in on a hot trend — the fear of missing out — and it’s hard not to bail when things look bad. A few big Canadian bank stocks took a little tumble this week as their earnings didn’t meet expectations even though they continue to raise dividends or buy back shares, and their capital ratios look solid.
For example, Bank of Montreal shares dropped 3.9 per cent on Wednesday after its second-quarter results came out, and are now down 7.9 per cent for the year, most of the decline coming after a few U.S. regional banks went belly-up. That same day, Bank of Nova Scotia shares dipped as much as 1.7 per cent after its earnings call, and are now just up 0.6 per cent for the year. Despite missing expectations, Scotiabank increased its dividend by three cents to $1.06 per share and BMO raised its quarterly dividend by four cents to $1.47 per share. And on Thursday, Toronto-Dominion Bank shares dropped 4.2 per cent despite announcing a buyback program representing 1.6 per cent of its outstanding shares, using the money from its failed acquisition of First Horizon Corp.
But even though the S&P/TSX composite index’s banking group is down 4.72 per cent for the year, it’s still up an annualized 5.3 per cent on a 10-year basis. And that’s just on price. The industry group’s total return is up annualized 9.8 per cent over 10 years, which is better than the parent index’s total return of almost eight per cent, though the banks are trailing the broader index this year. Staying patient works.
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Dividends can help smooth out some of the troubles, but they don’t solve everything. The energy, mining and financial sectors have trailed the market this year despite their big payouts as investors rotate away from cyclicals into defensive and growth sectors. That’s made dividend yield among the worst-performing investing factors in Europe and the United States, according to data compiled by Bloomberg.
There’s no doubt banking stocks in general are suffering because of the troubles that the smaller banks down south are facing as the U.S. Federal Reserve weighs the impact of its interest rate hikes on banks against its coveted two-per-cent goal for inflation. But big Canadian banks are not small American ones, though they sometimes buy the latter — or not, as the case may be. “We do not believe Canadian banks are vulnerable to the same liquidity/deposit concerns currently weighing on U.S. banks,” Raymond James Ltd. analysts noted back in March. Scotiabank’s capital equity tier 1 ratio — which compares a bank’s capital against its risk-weighted assets to gauge its resilience — is 12.3 per cent, above the regulatory requirement of 12 per cent, while BMO’s capital buffer is 12.2 per cent.
There has been and will continue to be some fallout. “With recent banking failures in the U.S., the banks are likely to be more cautious on loan growth in the near term,” Canadian Imperial Bank of Commerce analyst Paul Holden said in a May 15 note. That will make it harder for businesses and individuals to get loans, possibly dampening the post-pandemic economic engine, but that seems like a reasonable short-term response to maintain longer-term safety, which is something we should crave for our own portfolios.
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Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected].
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Don’t trust anything you can’t prove and other lessons from an investing legend
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With 70 years of investing industry experience, Michael Ryan has learned a few things in his 93 years on the planet. Financial Post columnist Tom Bradley shares a few of those lessons as the CFA Society Vancouver launches an award in Ryan’s honour.
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The rising interest in companies using and promoting artificial intelligence is hard to miss, so much so that it’s all starting to remind economist David Rosenberg and market strategist Marius Jongstra of the dotcom bubble. As a result, they say investors should use some caution when exploring this theme.
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Two-thirds of mutual fund managers are underperforming their passive benchmarks, according to Bank of America Corp., partly because pre-programmed trading bots are herding into the megacaps despite so-so financial results. Portfolio manager Martin Pelletier says it’s key to not get caught up in the flow.
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FP 500 — The most authoritative survey of corporate Canada: The 2022 FP 500 is the only national ranking of the country’s public, private and Crown corporations, making it an indispensable research tool with vital data on Canada’s top companies across all sectors. Order your copy here.
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Good news for all of us: The Canadian Pension Plan Investment Board posted a net return of 1.3 per cent for the fiscal year ending March 31 despite market pressures such as higher interest rates and inflation, and Russia’s war on Ukraine. That pales in comparison to the 6.8-per-cent return it reported a year ago, but many investors would have been pleased with any kind of growth in their portfolios last year.
Bad news if you’re a fan of Dr. Copper: The price of the metal dropped below US$8,000 for the first time in six months due to the economic slowdown in China, despite the long-term prospects for growth due to the green-energy transition. Goldman Sachs Group Inc. previously called for copper to hit an all-time high within a year.
Good news if you’re a fan of oil: Saudi Arabia’s energy minister Prince Abdulaziz bin Salman is warning oil speculators to “watch out,” which could be an implied threat that the Organization for the Petroleum Exporting Countries and its allies will cut production again to drive prices higher when they meet on June 4.
Bad news if you don’t like competition: Real estate investors can expect to find more bids from foreign investors in Nova Scotia, New Brunswick and British Columbia than in Ontario and Quebec, according to Statistics Canada. At least 20 per cent of residential real estate was owned by foreign investors in each of those five provinces at the beginning of 2020.
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Even more bad news if you don’t like competition: About 4.4 million Canadians currently invest in residential real estate, with more than half of them saying they are likely to purchase an additional residential investment property in the next five years, according to a survey by real estate firm Royal LePage.
Good news for mining and metals company investors: The materials sector has raised $1.6 billion on the Toronto Stock Exchange since the beginning of 2023, or about 71 per cent of the total brought in by all companies on the exchange, and 75 per cent of the total $1.6 billion raised so far this year on the TSX Venture Exchange. “We are in the early stages of a new mining cycle,” says Jeremiah Katz, PI Financial’s managing director of capital markets.
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What should I look for when analyzing mining sector ETFs?
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Despite a recent price drop, the long-term prospects for copper look good, which is why one reader wants to find some related exchange-traded funds to buy. Chartered investment manager Andrew Dobson says ETFs are a convenient, simple way to invest, but there are some tricks to the trade when it comes to metals.
GET THE ANSWER
If you have an investing or personal finance question, hit us up at [email protected].
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Making a deliberate TFSA overcontribution is never a good idea — ever
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Regular readers may recall last week’s story about a Vancouver man who tried to put about $640,000 into his tax-free savings account and got dinged by the taxman for his efforts. Tax expert Jamie Golombek takes another look at the case to answer some questions you all had.
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Early retirement just a dream for couple who want to buy new home in Vancouver
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A couple in their 40s think they could make early retirement a reality for one of them if they turn their current home into a rental and use their savings to buy a new home, but it turns out that’s not enough. We asked financial planner Ed Rempel and investment adviser Allan Small to help them adjust their dreams to reality.
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Many Canadians are leaving this registered savings plan’s money on the table
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Around 6.2 million Canadians over the age of 15 have one or more disabilities, but less than a third of those under the age of 59 have opened a registered disability savings plan (RDSP). Wealth adviser Susan O’Brien gives us the details on what the program offers and who can apply.
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