It has been a while since we have done a deep dive into network quality. Although network quality and test results do not necessarily affect near-term results, we believe network quality is one the most important leading indicators for medium- to long-term wireless subscriber share, average revenue per user (ARPU), margins, and capex. In late August, we took a snapshot of the Canadian wireless networks using Open Signal’s app. Last week, PCMag published its annual network tests. The results were similar. In this edition of Converging Networks, we highlight some of our results and the implications for capex and potential for network sharing in Canada.
Markets have recovered from a recent bout of weakness but signs of hesitation and uncertainty remain. Risks surrounding geo-political events (North Korea nuclear weapons testing), domestic U.S. politics (widening Russia – White House probe, gridlock in Congress on health care and tax reform), natural disasters (Hurricanes Harvey and Irma), commodity price swings (oil falling/rising 10%), impending changes to monetary policy (Fed starting to shrink its balance sheet), etc. have resulted in markets trading in wider ranges over the late summer in thin trading conditions. These important event risks and the lack of a meaningful market correction of 7% or more for over a year-and-a-half while the S&P500 trades near recent all-time highs leaves the market susceptible to a pullback during the seasonally weaker September-October period. We would view a sizeable pullback in markets as an opportunity to put any cash overweights to work given strong corporate fundamentals and low year-ahead recession risks.
OUR TAKE: We continue to prefer equities to bonds, but the magnitude of our equity confidence has moderated following 2016/1H17 double-digit equity gains. We entered 2017 with a recommended equity weighting of 66%, and we lowered our equity exposure to 62% in July (Cash has gone up to 6% from 2%). We expect modest equity performance in 2H17/2018 as sentiment is challenged by fading global PMI momentum, tougher year-over-year earnings comparisons, and broadening policy normalization. Our EM/Europe OW recommendation remains unchanged, and we expect Canada/TSX to catch up with the S&P 500 in the latter part of 2017. LatAm usually outperforms in periods of Fed tightening, and LatAm has been leading since the first Fed rate hike in December 2015. In our opinion, LatAm will maintain its edge until the end of the cycle. Stay OW.
Global markets have traded with a defensive tone over the past month as investors have been confronted by a series of geo-political headwinds triggering a wave of mild profit-taking in recent weeks. Events emanating out of Washington have dominated market sentiment thus far in August including intensifying tensions with North Korea, terrorist attacks in Europe as well as the White House’s response to the events in Charlottesville, Virginia. Amidst the reduced liquidity of late-August, we expect markets to remain hesitant as investors could look to lock in profits (one- year total return in local currency terms: S&P500: +13.4%, S&P/TSX: +4.7%) ahead of September’s important event risk. In particular, markets will be keenly focussed on the upcoming end-September deadline to lift the U.S. government’s debt ceiling and approve a new budget spending bill.