Retail sector most at risk as wage inflation looms. Plus, the REIT with a safe 7% yield and why utility stocks are a smart bet on EVs

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CIBC economist Benjamin Tal published Where have all the workers gone? Surging job vacancy rates post-pandemic on Wednesday, providing important guidance for inflation watchers and investors. The report highlights a remarkable dislocation in U.S. labour markets whereby job openings are plentiful, but workers aren’t applying.

This worker reluctance could translate into a bidding war for labour and sharply higher wage costs. Wage inflation, a welcome development where overall wealth inequality is concerned, will have an overall negative effect on corporate profit margins that will afflict some industries a lot more than others.

Mr. Tal combs through the possible causes for the worker shortage, beginning with child care. Surprisingly, CIBC concludes that the need for some potential workers to stay home with school-less or remote-schooled offspring is less of a factor than often publicized. He writes, “analysis by [Peterson Institute for International Economics] suggests that, overall, [American] parents of young children did not leave the workforce substantially more than other comparable individuals during the crisis.”

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Government fiscal support is the main reason for the labour shortage and the degree of effect varies by type. In countries like Israel and the U.S., where more money was sent directly to the unemployed, the worker shortages are more acute. In Australia and New Zealand, where wage subsidies maintaining the link between employer and employee were implemented, job openings are far less apparent.

Mr. Tal notes that the Canadian fiscal response to the pandemic was a hybrid of both wage subsidies and direct support. He does not expect extreme labour shortages domestically – Canadians showed a willingness to return to the workplace before the most recent lockdowns.

CIBC does, however, see potential problems. “Under the CRB [the plan providing direct payments to the unemployed], people have an incentive to return to work, but that incentive diminishes the more they earn,” Mr. Tal writes, “[and] furthermore, the current systems benefit disproportionally the low earning self-employed — a factor that is no doubt at least partly behind the fact that self-employment has been very slow to recover.”

The consumer discretionary sector is the one to watch. In a report last week, B of A Securities U.S. quantitative strategist Savita Subramanian emphasized that wage inflation was the main reason she downgraded the retail sectors.

She said margins today are elevated for consumer discretionary sub-sectors like Multiline Retailers, Household Durables and Leisure Products, suggesting they are at risk of normalizing lower. Consumer discretionary is also expensive and skewed towards goods versus services, she adds.

The strategist points to energy, utilities and health-care sectors as those where profit margins are least at risk.

— Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Plaza Retail Real Estate Investment Trust (PLZ-UN-T) This REIT has a 7-per-cent yield – high enough to often signal caution. But John Heinzl says investors don’t need to be overly concerned. Plaza’s distribution isn’t likely to grow for the next couple of years, but given its stable tenant mix, strong rent collection, comfortable payout ratio and solid growth opportunities, the yield looks very safe.

ECN Capital Corp. (ECN-T) Our Jennifer Dowty calls this a “triple-threat stock” thanks to its robust earnings growth, reasonable valuation, and dependable dividends. ECN Capital is a business services provider that hit a record high on the TSX earlier this month. Read her profile of the stock here.

The Rundown

She’s 50, single and expects $500,000 from the sale of a house – what should she do with the money?

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The question of the year in personal finance is shaping up to be this: What do you do with the proceeds from selling a house after the stunning price increase of the past 12 months? Rob Carrick is seeing a definite uptick in the number of readers asking about this. The most recent inquiry comes from a 50-year resident of a city just outside Toronto who expects to have $500,000 from the sale of her home. Here is Rob’s response.

Carson Block on Canadian stocks, broken markets and the stress of selling short

When Carson Block, founder of San Francisco-based Muddy Waters Research, published a report in June, 2011, alleging Sino-Forest Corp. was a fraud, seven analysts rated it a buy and hedge-fund legend John Paulson held a major stake. Within a year, Sino-Forest was bankrupt. Since then, Mr. Block has analyzed and sold short many other stocks. Several bets paid off, providing testament to his knack for uncovering questionable corporate activities overlooked by others. But despite believing that corporate fraud and malfeasance in Canada “is right up there with other countries,” he’s been staying clear of bets against Canadian firms over the past few years. Meanwhile, he argues that the rise of passive investing is working against the interest of both short sellers and investors alike. Larry MacDonald spoke with the short seller to understand why.

Power play: Why Canadian utility stocks look like a smart bet on EVs and a new age of electrification

The number of electric vehicles on the road is going to soar over the next decade, putting far more strain on our electric grid. Investors looking for a way to capitalize on the trend might want to take a closer look at utilities. David Berman explains.

Poll: TSX seen topping 20,000 on higher commodity prices

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Canada’s main stock index is forecast to climb above the 20,000 threshold for the first time by the end of this year as a recovery in the global economy from the coronavirus crisis boosts the outlook for resource stocks, a Reuters poll found. Meanwhile, a separate poll found market pros predicting that the S&P 500 will end the year only about 2.5 per cent above its current level, with concerns over increasing inflationary risks likely to temper some of the enthusiasm for U.S. stocks this year

Floundering U.S. dollar falls to bottom of global currency heap

A dovish Federal Reserve and accelerating growth abroad are weighing on the dollar, a move that could be a boon for stocks and other assets.

Japanese stock investors talk up benefits of shelving Olympics

In a world ravaged by the COVID-19 pandemic, going ahead with the Tokyo Games is starting to look like a dangerous gamble on both counts. Ominously, a growing number of investors in Japanese stocks now believe that cancelling the Games is better for the market, intensifying the pressure on Prime Minister Yoshihide Suga who is already facing stiff public opposition to the global showcase event.

Others (for subscribers)

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Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: Company leaders are trading these six dividend stocks

Tuesday’s Insider Report: CEO invests over $6.8-million in this REIT yielding 5.4%

The highest-yielding stocks on the TSX, plus risk data

The most oversold and overbought stocks on the TSX

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Number Cruncher: Ten companies that could benefit from rising inflation

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Ask Globe Investor

Question: My daughter’s employer will be offering a defined contribution pension plan soon, and I wanted to do some research to help her choose investments. I know mutual funds can have high costs, so I am a bit wary. What do you suggest?

Answer: With a defined contribution plan, the employee contributes a specific amount each year, often with matching amounts from the employer. While the contribution amount is defined, the value of the pension at retirement depends on the performance of the investments. This differs from a defined benefit plan, in which the employer guarantees a set retirement pension based on the employee’s salary and years of service. Because the employee bears all the risk in a DC plan, choosing the right investments is important.

Your daughter’s company will provide her with a menu of funds to choose from. The specific funds, and their costs, vary widely by employer, but the list typically includes a mix of actively-managed and index-tracking products. I would stick with index funds, whose lower costs give them an edge, especially over long periods.

To help employees construct well-balanced portfolios, most DC plans now offer several “target date” funds whose assets – usually other index funds – are diversified globally and get more conservative as the employee’s retirement date approaches. If your daughter expects to retire in 30 years, for example, she could choose a fund with a target date of 2050.

A target date fund would be the simplest solution, but without knowing the specific options available to your daughter, I can’t comment on whether it would be her best choice. For what it’s worth, I was able to obtain a list of funds, and their associated management expense ratios, from one of my moles inside a mid-sized company with a DC plan.

A few examples: BlackRock LifePath Index 2050 Fund (MER: 0.54 per cent); BlackRock LifePath Index 2030 Fund (0.42 per cent); TD Asset Management U.S. Index Fund (0.26 per cent); TD Asset Management Canadian Equity Index Fund (0.26 per cent); MFS Canadian Equity Fund (0.44 per cent); Invesco Global Company Fund C (0.78 per cent).

As you can see, the plain-vanilla index funds have a clear cost advantage, but the MERs of the other funds are still reasonable. It’s possible, however, that the funds in your daughter’s DC plan will have higher MERs. Keep in mind that, if your daughter is several decades from retirement, a portfolio tilted heavily toward equities will offer the most potential for growth.

–John Heinzl

What’s up in the days ahead

Tim Shufelt tells us why Heroux-Devtek, which makes landing gear, is a tempting aviation-related reopening play.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff