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The Market Transition from COVID-19 has Begun: Belski to BMO Metals and Mining Conference


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After two years of massive uncertainty, the global economy is finally beginning to transition out of pandemic mode and back to normalcy, said Brian Belski, BMO Capital Markets’ Chief Investment Strategist.

Speaking at BMO’s Global Metals and Mining Conference, Belski noted that 2022 is going to be the year of the “second derivative,” which involves investors focusing more on fundamentals than simply going for growth. “It’s where earnings and company management matters, where products and services matter,” he said. “It’s not about momentum.”

It will take time before the transition is complete, but Belski is starting to see people shift into value stocks, while dividend-growing companies continue to do well. His outlook could get derailed if the crisis in Ukraine gets materially worse, but, he said, “I believe the market was already transitioning back into more fundamentals.”

Strong Sectors to Consider

Going forward, investors are going to pay for consistency, he said, with the technology, materials, industrials and bank sectors offering a lot of long-term opportunities.

Towering Tech

While technology stocks have broadly underperformed this year, Belski is bullish on large-cap tech stocks, which, he said, offer extremely predictable earnings. Between 2002 and 2012, many of these companies rebuilt their balance sheets, became cash flow generators and even started paying dividends. They’re now the most consistent earners on the S&P 500.

Amazon, he pointed out, has been the best performing company on the NASDAQ this year, because investors are shifting back into consumer staple-like tech names. Apple, Microsoft, Alphabet and Netflix will also benefit. “Large-cap techs are stable (stocks) and investors are going to seek stability,” noted Belski.

Money in Materials

Similar to technology, materials companies have “gotten religion” over the past few years, said Belski. They’re more prudent with their capital expenditures, they’ve cleaned up their balance sheets, they’re generating more cash flow and many are now paying dividends. “It’s a very different sector than it was 10 years ago,” he explained.

More specifically, Belski is bullish on copper, as interest in battery powered vehicles increases; he’s keen on gold, which “has been doing its job” over the last couple of weeks; while lumber demand is going to rise dramatically with more supply coming to market.

However, while a lot of commodities have jumped in price, including oil, which pushed over $100 a barrel, we’re not in another super-cycle, he said. Prices have moved because demand has outstripped supply for seven consecutive quarters, but these forces are coming back into balance. “Again, supply and demand were roughly matched before the world changed,” he said.

Banks Getting Bigger

It’s always difficult for banks to increase earnings in low-interest rate environments, as interest margins remain compressed. Instead, growth must come through acquisition, which is a major theme in this sector, said Belski. BMO*, TD and RBC have set their sights on U.S. expansion and have bought other institutions to increase scale.

Geopolitical uncertainty has made some investors nervous about the financial sector, with some wondering whether Canada’s banks may have to cut their dividends at some point, but Belski is confident that won’t happen. “Canadian banks are the most conservative managers of capital in the world, and they’ll continue to pay,” he said. “Financials are going to be the poster child for the combination of value, dividend growth and earnings consistency going forward.”

Refocusing on Industrials  

Belski likes industrials largely because of the onshoring movement that’s happening across North America. Businesses had started to diversify their manufacturing away from China and other emerging markets prior to COVID-19, partly as a response to former President Donald Trump’s tariffs. Pandemic-related supply chain issues have made it even more important for some companies to bring production closer to home.

At the same time, the supply issues that impacted companies will start to balance out, which will benefit certain transportation companies. “In the second half of the year, earnings are going to be better than everybody thinks and that will be driven by the unwinding of supply,” he said. “It will be trucks and railways that help get us there.”

Good Growth for 2022

Over the next three to five years, investors will gradually shift into more small cap and value stocks, with Canada and the U.S. continuing to offer the best opportunities. For now, though, investors should consider staying equal weight growth and value, as well as small-, mid- and large-cap. 

Belski is also still optimistic this year will finish off strong, because people are once again considering the fundamentals. He has targets of 5,300 points and $245 in earnings for the S&P 500, and 24,000 and $1,500 in earnings for the S&P/TSX Composite Index.

Interest rates will also climb this year, likely rising by 0.25% at each hike. However, now’s not the time for the central banks to get too aggressive as it would send the wrong message “to the fractured emotional state of not only the stock market and the bond market, but the economy,” he said.

“This transition is going to be a multi-year event,” he added. “We went through our black swan, which was COVID. Now we dropped the bomb from a fiscal and monetary perspective – there’s a lot of cheap money and lot of stupidity. But we’re going to go back to good old fashioned bare bones investing again.”

 

* Note: BMO Capital Markets is restricted on Bank of Montreal (BMO)

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Brian Belski Stratège en chef des investissements

Conférence

Mines et métaux 31e conférence du secteur Mines et métaux

fév. 27, 2022 - mars 2, 2022 Hollywood, Florida

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