Market Quote: Economic “Landings”, Canada’s “Big Six” Banks
Author: The editor's desk
December 8, 2023
Members of AGF’s Investment Management Team weigh in on the week that was in global financial markets.
Soft or hard, bad or good?
Financial markets were rangebound this week with the S&P 500 Index trading just below its 2023 high of roughly 4,600, after a very strong November. Interest rates declined as economic data continued to soften, with the U.S. 10-year Treasury yield touching 4.10% on Thursday. Oil prices fell for the seventh consecutive week on over-supply worries despite expanded OPEC+ production cuts; while gold briefly spiked to an all-time high before reversing, but continues to trade around US$2,000/ounce.
We expect equity markets to remain choppy into 2024 as investors weigh the economic prospects of a soft landing versus a hard one (recession). Bond yields continue to fall in the face of slowing inflation and weakening economic data, while corporate earnings and the consumer remain strong for now. Seasonality is positive for equity markets in the back-half of December and January, but the big question is if (and when) bad economic data becomes bad news for equity markets?
On tap next week, investors will be paying close attention to the U.S. November Consumer Price Index release on Tuesday and the U.S Federal Reserve’s latest interest rate announcement on Wednesday.
Bank shots
Canada’s “Big 6” banks reported a sixth consecutive quarter of negative year-over-year earnings growth, and based on results and forward-looking statements, we believe yet another round of downward earnings revisions for fiscal 2024 are expected.
The group provided softer revenue growth guidance due to slowing demand and being more selective on how their individual balance sheets are deployed. Expense growth management got an assist from expense efficiency programs and/or restructurings but most of the banks indicated that positive operating leverage will be a challenge in the coming year.
Credit continues to normalize and collective comments from the group on their excess levels of capital suggests some degree of regulatory-driven “thinning” in early 2024.
Softer inflation prints last month fuelled the soft-landing narrative through November and Canadian banks rallied back to modestly below their average historical price/earnings multiples (P/E’s). While we acknowledge a soft landing as a possible outcome, we view modestly cheap valuations as no catalyst while credit continues to normalize and prospects for growth remain anemic.
We remain cautious, preferring “Big 6” names integrating retail banking acquisitions.
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The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
Commentary and data sourced from Bloomberg, Reuters and other news sources unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of December 7, 2023 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.
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