JMRD Market Observer for April 7th, 2017 – Strong data cast doubts about Bank of Canada’s stance

In This Week’s JMRD Market Observer



  • NBFM Forex (April 2017) – Strong data cast doubts about Bank of Canada’s stance

  • Asset Allocation Strategy: Never cut what you can untie

  • Diversified & Real Estate Income Equities: Calendar Q4 2016 Earnings Recap

  • Canadian Real Estate Q4 2016 Earnings Post-View: Investors Gravitate Towards Apartments, Industrial and Special Purpose Real Estate; Defensive Retail Provides a Value Trade

  • JMRD Basket Corner

  • Retirement Corner

  • Reads of the week

  • Economic Calendar

  • Earnings Reports



NBFM Forex (April 2017) – Strong data cast doubts about Bank of Canada’s stance



  • While the U.S. dollar just registered its worst quarterly performance since 2010, we haven’t lost faith in the currency, expecting it to bounce back sooner rather than later. Diverging monetary policies between the Fed and other central banks, and upcoming fiscal stimulus could boost confidence and have markets price more Fed hikes this year.


  • The euro has taken off in recent weeks as markets celebrated improving Eurozone economic data and the defeat of the far-right at the Netherlands elections. But we’re still unenthusiastic about prospects for the common currency considering major uncertainties related to Brexit, upcoming elections in France and Germany, and changing U.S. trade policy. And with the European Central Bank still in easing mode, one should not rule out a euro closer to parity with the greenback come year-end.


  • Unless there is a change in stance from the Bank of Canada, the loonie should remain under pressure. The persistence of soft oil prices and dovish BoC rhetoric could cause a further widening of U.S.-Canada interest rate spreads. A likely moderation in foreign portfolio inflows could weigh further on the loonie. As such, we continue to expect USDCAD to head towards the upper end of the 1.30-1.40 range in the coming months. But that’s based on our forecast the central bank will delay interest rate hikes to early 2018. In other words, the loonie could do better if the Bank of Canada acknowledges the abundance of positive economic data and mounting financial stability risks and puts forward the possibility of an earlier rate hike.


See the full article.



Asset Allocation Strategy: Never cut what you can untie



  • Monetary policy tightening was largely discounted for the March meeting as most economic numbers painted a picture that the timing was right. The main point of uncertainty was the dot plot and the FOMC’s plans regarding potential future hikes in 2017. The “no change” on the March summary of economic projections (SEP) compared to December 2016 helped assuage those fears.


  • We suggest treading cautiously on the duration-side and investing in shorter-term securities or products offering better protection in a rising yield environment (such as non-traditional fixed income), as we still think yields will have a tendency to appreciate by the end of the year. However, the method will be as important as the direction. If we reach 2.60% without any real catalyst such as surprise inflation or a hawkish Fed, we would buy fixed-income products or lengthen the duration of our portfolio, as we think the resistance will hold once again.


  • For now, the greenback is stuck in limbo, waiting to see how the rest of the U.S. administration will now be able to shift away from the Affordable Care Act repeal debacle to implement other projects on the agenda, such as tax reform and infrastructure spending. Any failure on that front would put a serious dent not only in the GOP administration’s credibility but also in the “Trump trade” projections.


  • By digging a little deeper we find that the energy sector currently has an outsized effect on earnings growth, as the sector will contribute 35% of the total S&P 500 earnings. As one would expect, the situation is even worse in Canada as energy represents 50% of the change for 2017. Europe seems to offer better prospects on that front as the sources of growth seem more diversified. Consequently, we still suggest a neutral exposure to equities, but also reduce our negative bias towards Europe.


See the full article.



Diversified & Real Estate Income Equities: Calendar Q4 2016 Earnings Recap


With calendar Q4 reporting behind us we highlight which equities in our diversified coverage list: 1) had the best/worst earnings momentum in the quarter; 2) offer the most compelling yield opportunities; 3) provide the most attractive relative valuation; and from this, 4) are the best positioned to Outperform going forward.


We increased target prices on six equities that reported net favourable Q4 updates:

Crown Capital: Target to $12 from $11.50 (March 23rd); Reiterate Outperform.

Enercare: Target to $23 from $22.50 (March 7th, subsequently to $25); Reiterate Outperform.

Morneau Shepell: Target to $22.50 from $21.50; Reiterate Outperform.

New Flyer: Target to $60 from $55; Reiterate Outperform.

Tricon Capital: Target to $13.50 from $13 (Feb. 24th, subsequently to $14); Reiterate Outperform.

WPT Industrial: Target to US$14 from US$13; Reiterate Outperform.


The most compelling opportunities for income-oriented investors include:

Crius Energy: 7.9% yield / 54% 2018e DCPS payout.

AHIP: 8.0% yield / 72% 2018e AFFO payout.

Exchange Income: 5.5% yield / 43% 2018e DCPS payout

Alaris Royalty: 7.3% yield / 76% 2018e DCPS payout.

WPT Industrial: 5.9% yield / 83% 2018e AFFO payout.


Equities providing attractive forward relative valuations include:

Crius Energy: 4.6x EV/EBITDA & 6.9x P/CF (sharp discount to comps & TSX income peers).

Exchange Income: 6.7x EV/EBITDA & 7.9x P/CF (too low given organic + M&A growth profile).

AHIP: 9x P/AFFO & 9.1x EV/EBITDA (conservative given NAV and relative hotel valuations).


Our top picks at current prices are:

Crius Energy: earnings momentum, valuation & dividend growth profile continue to track well.

Parkland Fuels: meaningful CST opportunity + capacity for ongoing accretive M&A.

Tricon Capital: Sum-of-parts NAV valuation suggests shares are undervalued.

Alaris Royalty, American Hotels, Boyd Group, Crown Capital, Enercare, Exchange Income, Morneau Shepell, New Flyer and WPT Industrial all well-positioned to move higher. (Full report attached)


Among the holdings mentioned in this report that are held in JMRD’s baskets, they include Boyd Group (BYD.un), Enercare (ECI), New Flyer (NFI) and Parkland Fuels (PKI)


See the full article.



Canadian Real Estate Q4 2016 Earnings Post-View: Investors Gravitate Towards Apartments, Industrial and Special Purpose Real Estate; Defensive Retail Provides a Value Trade


Investors seem to have brushed off higher interest rate expectations post Q4 with the TSX Capped REIT Index up 3.3% (in spite of weaker trading from its largest component RioCan, -0.6% YTD). Yield spreads have compressed on a brighter outlook and improving sentiment in Alberta (although performance metrics from this market continued to deteriorate in Q4, particularly with regards to Calgary office and multi-family more generally, both of which have been dogged by new supply). Non-traditional real estate entities (healthcare, storage, cross-border, etc.) have been the main beneficiaries of positive funds flow (post the Milestone transaction), with multi-family (non-Alberta) and industrial owners also benefitting. Although at this point our total return expectations for the sector have broadly contracted (~12% for our coverage universe), we see overall trading weakness in the retail REITs (particularly those with a grocery / lifestyle focus and downtown locations) as the most compelling near-term buying opportunity. From a broader valuation perspective yield spreads have compressed but still remain around 100 bps above longer-term averages.


On this basis, First Capital screens very well given its high-quality portfolio with a decidedly urban geographic focus (and a significant concentration in the extremely strong GTA market) and primarily grocery-anchored / lifestyle tenancies. FCR has been one of the weakest trading real estate entities YTD. In terms of other top picks we continue to like WPT Industrial, which owns a portfolio of U.S. distribution / warehousing facilities and is well positioned to capture e-commerce driven growth in that market (as opposed to Canada, penetration of online shopping has been more significant south of the border). Finally on the special purpose real estate front, we see StorageVault as a unique vehicle for gaining access to the highly fragmented storage segment while also benefiting from a captive related party pipeline, low payout dividend model and minimal capex requirements.


See the full article.



JMRD Basket Corner


DIG Basket


Dollarama (DOL) – Dollar Stores’ Struggles Eluded by One That Accepts Loonies

SNC-Lavalin – SNC-Lavalin confirms that it has made an approach to WS Atkins


All-Cap Growth Basket


CCL Industries (CCL.b) – CCL Industries Announces Two European Acquisitions for Avery


North American Energy Partners (NOA) – North American Energy Partners Inc. Announces Partnership with Dene Sky Site Services Ltd. Providing Unique Platform for Growth



Retirement Corner







Reads of the Week




  • NBF Hot Charts: Canada Watch – We recently argued that the Bank of Canada’s concern about the weakness in total hours worked was misplaced. At the time, we pointed to the whopping disconnect between full-time employment and total hours worked (a 4-standard deviation divergence from the mean) and argued that hours could be on the cusp of a rebound. The March employment report showed just that: total hours jumped 1.1% on the month, the biggest monthly increase since Canada emerged from recession in 2009. As today’s Hot Chart shows, total hours now stand at a new all-time high. Despite the rebound, there is still a two-standard deviation divergence between the level of hours and full-time headcounts which incidentally surged by the most in a decade in Q1 2017. In other words, hours are likely to continue catching-up to jobs in the coming months, even more so now that employment creation in Alberta is resuming: the province boasted its biggest quarterly increase in full-time positions in nearly two years in Q1 2017 (16 thousand jobs). With labour market conditions tightening (the employment/population ratio for primed-aged workers is an all-time high), with GDP growth above potential in Q4 2016 and Q1 2017, and with home prices surging, we think it is time for the Bank of Canada to acknowledge that the economy is doing better than expected perhaps as soon as next week in its Spring Monetary Policy Report. If we are right, expect to see rising odds of a rate hike in 2017. See the full article.












Economic Calendar


Monday April 10th – Canada Housing Starts

Tuesday April 11th – None

Wednesday April 12th – Canada Teranet/National Bank Home Price Index, Bank of Canada Interest Rate Announcement,

Thursday April 13th – Canada New Home Price Index; US Initial Jobless Claims

Friday April 14thGOOD FRIDAY – North American Markets Closed; US Inflation, US Consumer Sentiment



Earnings Reports


Monday April 10th – None

Tuesday April 11th – Corus Entertainment

Wednesday April 12th – None

Thursday April 13th – Citigroup, JP Morgan

Friday April 14thGOOD FRIDAY – North American Markets Closed



Have a good weekend!

By | 2017-04-10T15:07:44+00:00 April 7th, 2017|JMRD Updates|0 Comments

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