Making sense of the markets this week: March 5, 2023

Canadian banks take rising costs and recovery dividend in stride

There is no shortage of headwinds for Canadian banks at the moment. Uncertainty around interest rates is holding back economic activity and causing Canada’s lenders to increase loan-loss provisions. The Canadian government is charging banks an extra 15% tax for the year in order to take $3 billion in earnings. Finally, employees want a lot more money to pay for things that cost a lot more to live.

Oh, and it turns out the North American courts don’t like it when banks are involved with “shady activity,” such as selling 2008 fraudulent U.S.-housing securities or taking part in Ponzi schemes. I mean, as long as you pay for a settlement, the courts will say “there was no admitted wrongdoing,” but it still does sting a bit.

So, what do you do if you’re a Canadian bank?

Well, you simply get down to business and earn more money of course.

Despite all six referring to higher loan-loss provisions and increased cost pressures in their earnings announcements, the big picture looks relatively bright (as it usually does) for big-bank shareholders. While Scotiabank and BMO did underperform slightly, the markets appeared to have largely baked in any earnings ahead of time, as share prices remained pretty stable over the week-long period when banks reported earnings. Scotia shares were down 3.18% over the week, while National Bank led the pack up 3.57%, with the other four banks falling in between.

The major questions for the sector still revolve around TD’s massive acquisition of First Horizon Corp. and BMO’s acquisition of Bank of the West. These two American expansions will dominate the companies’ respective abilities to grow in the short- and medium-term. While it looks like BMO’s acquisition in on track, TD’s acquisition isn’t exactly seeing the light at the end of the tunnel. You can read more of my thoughts on Canadian bank stocks and specifically National Bank on MillionDollarJourney.ca.

The American consumer looks fine to me

There’ve been many news headlines about how high interest rates are going to kill U.S. consumer spending. A “hard landing”—where rising interest rates were supposed to arrest all economic growth and send both consumers and business owners spiralling into bankruptcy—was considered to be inevitable.

Much like the broken clock, I assume the naysayers will be right eventually, but I wouldn’t bet on it being any time soon.

Given how strong U.S. labour numbers are, I don’t know that the “landing” is going to be all that “hard.” The earnings numbers for big U.S. retailers continue to tell a positive story, although it’s noteworthy that several of the companies listed below did try to temper shareholder expectations for the rest of 2023. (Values below all in U.S. currency.)

However, investors remain leery of jumping on board too quickly when it comes to these retail heavy hitters. Despite its first earnings beat in a year, Target shares were down 3.6% on Wednesday, and similarly Lowe’s was down 5.56% despite its good earnings news.

Warren Buffett still loves cash, America and his company—possibly in that order

Every year many investors wait for the “Oracle of Omaha”—ahem, Warren Buffett—to make his pronouncements on how he and his colleagues see the state of the markets. He usually does this through an in-depth shareholder letter and a press conference. Ostensibly, he writes the letter to shareholders of his company Berkshire Hathaway (BRK.B/NYSE) but, at this point, it’s more of a treatise to the broader investing public. (All values in this section are in U.S. currency.)

Buffett kicked off his state of the markets for 2023 by revealing that Berkshire Hathaway’s fourth quarter adjusted earnings per share came in at $3.01 (versus $3.57 predicted) and overall revenue was $78.18 billion (versus 79.93 billion predicted). 

It’s not exactly great news for the last few months of last year, but it was quickly pointed out that 2022 still a great year with operating profits reaching a record $30.8 billion compared to $27.5 billion in 2021. 

However, Berkshire’s underachieving quarterly earnings report did nothing to dampen Buffett’s spirits, as he decisively stated:

“The amount of investment gains/losses in any given quarter is usually meaningless and delivers figures for net earnings (losses) per share that can be extremely misleading to investors who have little or no knowledge of accounting rules.”

The 92-year-old investing legend was proud to sum up the year for his company by saying: “Berkshire now enjoys major ownership in an unmatched collection of huge and diversified businesses.” Buffett even got a touch poetic. “The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.”

Russian war machine runs on gas and oil

While day-to-day news coverage of the Russia-Ukraine war tends to focus on the battlefield and visits from big-name politicians, it may eventually be economics that bring these countries to the negotiating table.

While Russia’s economy has avoided the collapse that some had predicted, there’s no denying the negative budgetary realities that will dramatically affect the government’s bottom line if fossil fuel prices continue their current trajectory.

Start date adjusted from prior posting of this chart:
1 year after Russia’s invasion of Ukraine, Brent crude oil is down by 17% … at worst point, it was up by 29% from start of invasion pic.twitter.com/FJrM63FduQ

— Liz Ann Sonders (@LizAnnSonders) February 24, 2023

Given that Urals crude (Russia’s dominant crude export) is going for about a 40% discount (see tweet above) against the Brent benchmark, that price plunge means there’s decisively less treasure flowing in to pay for the war these days. Market realities and price caps might do what tanks and artillery have not—caused Vladimir Putin to consider war-ending options.

HSBC Asset Management recently closed its Russian ETF, leaving only the FinEx Capital Russian RTS Equity ETF (FXRL/MCX)—which has been suspended since March—still available to European investors. Pre-war there were eight ETFs that tracked the Russian market and traded on exchanges around the world, but they have largely been discontinued due to, “extended lack of accessibility in the Russian equity market.” Anecdotally, I know someone who bought the iShares MSCI Russia ETF (ERUS) just before the 2022 invasion. The fund promptly fell to zero, where it still sits. The brokerage disabled both the buy and sell buttons for the asset. In August 2022, BlackRock announced it will be liquidated. In the meantime, it sits there as a painful reminder of the political risk of investing in regional ETFs. 

You’d think it’s not a great sign for Russia’s economy and long-term country-building prospects when the rest of the world decides its companies are not worth enough to bother listing as an ETF. I mean Belgium and Norway have their own exchange-traded funds (ETFs), despite having 7% and 4% of Russia’s population respectively.

Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com and the Canadian Financial Summit.

About Kyle Prevost

Kyle Prevost is a financial educator, author and speaker. He is also the creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course.

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