National Bank predicts lower house prices, but there is a silver lining for equity investors. Plus, Silver Pros Cut TSX Targets


National Bank’s Chief Rates and Public Sector Strategist, Warren Lovely, released a timely research report titled Canadian housing is leaking Wednesday. The report leaves a lot to the interpretation of the reader, with only a brief description followed by more than 20 graphs.

After studying the charts, my main conclusion is that house prices should decline by around 12% on average over the next 20 or so months.

National Bank expects insured fixed and variable mortgage rates to climb above 2019 highs of nearly 3.75% and 4.25%, respectively, with both reaching 4.5% later this year. So far, mortgage rate hikes, driven in part by the Bank of Canada’s faster monetary tightening than previous cycles, have pulled back about 5% from resale home highs.

The most important chart in the report is Chart 18: How much weakness (and for how long) was last seen? (I posted a copy on social media here). It shows that during the last Bank of Canada tightening cycle in late 2017 and early 2018, the price of the average resale home fell 10% until the bottom was reached 21 months, with rates beginning to rise.

There are reasons to expect the correction to be larger this time. The current cycle has been more bubbly, with house prices rising 10.4%, compared to 3.8% and 3.0% in the previous two cycles.

Mr. Lovely also pointed out that variable rate mortgages have reached record highs as a percentage of total originations, at around 55%. This increases the likelihood of forced sales and downward pressure on house prices as mortgage payments strain household finances.

There are also factors that should mitigate the damage in housing markets. The country’s enviable increase in population growth between 2016 and 2021 will continue to support housing demand, as will the steady rise in immigration.

The internal housing market has always been a catalyst for strong emotions. There have been many pundits warning of a housing slump and almost as many saying the housing market will rise for a reasonable future period – if not forever. Despite this drama, the future for real estate markets could be a bit boring: a painful but superficial correction followed by price stability and more moderate gains.

For the stock markets, there may be a silver lining as the foam and frenzy leaves the property markets. Interest could return to equities as housing looks less bulletproof as an investment option.

— Scott Barlow, Globe and Mail Market Strategist

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actions to ponder

Calian Group Ltd.. (CGY-T) Based in Ottawa, Calian is a company that operates four lines of business: health, advanced technology, information technology and cyber solutions, and learning. The stock was a solid outperformer, rising 14% year-to-date through Friday’s close. On May 19, its stock price closed at an all-time high of $71.58. Calian has a unanimous buy recommendation from seven analysts, but as Jennifer Dowty tells us, the stock price is vulnerable to a near-term pullback.

Beyond Meat Inc. (BYND-Q) Three years ago this month, the plant-based meat company went public on the Nasdaq with much fanfare and speculation. His burgers, sausages and other products designed to look and taste like meat would revolutionize the way people eat, disrupt the food industry and reduce the environmental impacts associated with meat-rich diets. Fast forward today, and you’ll see a stock price down 90% from the all-time high. What happened – and is there now a buying opportunity? Philip MacKellar of The Contra Guys shares his thoughts.

The summary

Based on earnings, stocks could fall further

For students of stock market disasters, this is where things get interesting. So far, the crash has been largely predictable – a simple but painful demonstration of what happens when inflated stock prices collide with the buzz of rising interest rates. But this simple story now becomes more complicated. What happens next will largely depend on whether companies are able to generate the profits expected by investors in the coming months. If they can, the market carnage should be all but over. If they can’t? Prepare for more bloodshed to come. Ian McGugan explains.

Also see: As bear market looms, struggling Wall Street seeks elusive ‘Fed put option’

David Rosenberg explains how to know when it’s time to start buying stocks again

Economist David Rosenberg believes the stock market is far from bottoming out. He says the market is following a familiar bear market pattern in recession, and that gives clues as to when it will be time to start buying.

The bullish view on the TSX has tempered as analysts worry about growth

Canada’s main stock market index is expected to rise less than previously thought this year as economic growth slows and central banks raise interest rates, according to a Reuters poll. Some even expect that the outperformance of the S&P/TSX Composite Index against most major global markets will soon come to an end and struggle to return to record highs anytime soon.

See also: After a turbulent period, US equities will end the year up from current levels: poll

What a $225M Canadian fund manager bought and sold as stocks flirt with a bear market

Shane Obata sees plenty of buying opportunities in the markets these days as higher quality stocks are dragged down along with riskier names amid the selloff. Mr Obata, who manages nearly $225 million in assets as part of the firm’s $2.3 billion under management, says his team is first and foremost a “long-term boutique”, which means that it generally uses a “buy and hold” strategy. He has actively deployed cash and is almost fully invested following the current market volatility. The Globe recently spoke to Mr. Obata about what he buys and sells.

Beaten by bonds and trampled by stocks? Calm your mind with these long-term return projections

Guidelines for financial planners on long-term investment performance, inflation and more are published annually by the FP Canada Standards Council and the Institut québécois de planification financière. This year’s edition is a must-read due to the abnormality of recent returns. As Rob Carrick writes, use these guidelines to set your future performance expectations over the next 10+ years.

Also see:

Divergence in stocks and bonds offers hope for a battered 60/40 portfolio

Understand the stock market through the laws of nature

Elon Musk criticizes the ESG. Maybe he should take a closer look at Tesla

When S&P Dow Jones Indices removed Tesla Inc. from an influential index of companies based on environmental, social and governance principles, some investors may have scratched their heads last week. The source of their confusion: If a company dedicated to making electric vehicles and reducing fossil fuel emissions can’t qualify for the S&P 500 ESG Index – but an oil producer like Exxon Mobil Corp. the can – what’s the use of embracing sustainability? But David Berman has an idea: maybe ESG investing principles do exactly what they should.

Is the end of bitcoin winter near?

The crypto winter is in its ninth week and bitcoin can’t shake the chills. From technical data to revenue, market indicators are flashing red or orange for the biggest cryptocurrency, which has lost a third of its value in just two months. And now ? Reuters is reporting signs that the crypto king is plotting his comeback.

Equity ETFs for Investors Nervous about Getting Stock Burned

Although equities have looked dangerous this year, most investors will still need to be exposed to them to achieve their financial goals. Rob Carrick has a suggestion for staying in stocks while mitigating downside risk a bit: Consider a low-volatility exchange-traded fund that tracks Canadian, US, or international markets.

Others (for subscribers)

As the exceptionalism of the US economy fades, so does the dollar

Dividend payouts hit a record high in the first quarter, but the outlook is challenging

Wednesday analyst upgrades and downgrades

Tuesday analyst upgrades and downgrades

Wednesday’s Insider Report: CFO invests over $540,000 in this stock with an expected return of over 60%

Tuesday’s Insider Report: CEO and Chairman Buy This Dividend Stock After It Drops Into Oversold Territory

Globe Advisor

How to play the bullish case for agricultural stocks

How retail stocks went from ‘recessionary playbook’ to market loss

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Ask Globe Investor

Question: How can I invest in the John Heinzl Model Dividend Portfolio?

To respond: You can not. It is a model wallet that uses virtual dollars, not real money. If you’re looking for a dividend fund to invest in, there are plenty of ETFs to choose from. You will need to open a discount brokerage account to gain access.

Noteworthy examples include BMO Canadian Dividend Index ETF (ZDV), iShares Canadian Select Dividend Index ETF (XDV), and Invesco Canadian Dividend Index ETF (PDC), among others. There are also many dividend ETFs that cover the US market, including the iShares Core Dividend Growth ETF (DGRO), which I hold in my model portfolio.

–John Heinzl

What’s up in the coming days

Dr. George Athanassakos will tell us why his value investing students think Malibu Boats is a stock with considerable upside potential.

Click here to view Globe Investor’s earnings and economic news calendar.

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