Ouch, what a brutal Wednesday it was for Canada’s Big Six banks. For the most part, there was no hiding from the pain as the pressure on the big banks dragged the broad TSX Index 1.7% lower on the day. For such a calm, smooth bull market in Canadian stocks, this kind of single-day sell-off is quite rare. And while the TSX Index is still up comfortably on the year (up close to 10%), it’s hard not to feel as though the Canadian stock market is feeling a bit toppy.
Whenever you’ve got a nice, smooth ride higher, any bumps in the road (or even flatlining) can feel brutal. Perhaps this latest roadbump (and it might be, or maybe something a bit worse; nobody knows!) should serve as a reminder that markets don’t always move higher.
The good news is that the latest 5.2% drop (halfway to a correction already!) will allow yield seekers to get more for their investment dollar. Underneath the surface of the TSX Index, there are some notable names that might be worth picking up for a TFSA for the tax-free passive income and capital gains.
Source: Getty Images
Bank of Nova Scotia
These days, Bank of Nova Scotia (TSX: BNS) looks like a tempting buy as shares get dragged lower on the rise in global bond yields and the still-lofty price of oil. As the Bank of Canada (BoC) looks to consider rate hikes (maybe a handful of hikes) as inflation persists, perhaps that “higher for longer” mindset could act as a major overhang on the big banks, incentivizing profit-taking after what’s been a remarkably strong year for Canadian financials.
Are higher bond yields and rate hike expectations something to fear when it comes to banks?
For long-term thinkers with money to invest into year’s end, it’s my view that the latest collective drop is less of a reason to hit the panic button and more of a chance for investors who’ve been meaning to boost their positions in some of Canada’s most profitable dividend growers.
The banks have been firing on all cylinders, but, as I noted in prior pieces, expectations (and multiples) grew a bit too high. The latest plunge, I think, is more than healthy, even if rates do head higher and stay there longer while the world awaits the productivity gains and deflationary potential of AI, which has been quite inflationary (at least when it comes to electronics!) in these earlier days of the data centre buildout.
Bank of Nova Scotia could be the bank to buy
As the banks come in further, Bank of Nova Scotia is a name at the very top of my watchlist. Shares got clobbered on Wednesday, shedding more than 3% of their value in a day. It felt like a bloodbath, but, believe it or not, it was just a blip as far as the year-to-date chart is concerned. The name is still up over 21%, far more than the TSX Index.
The international exposure (though Bank of Nova Scotia has begun to pivot away from the Latin American region) and slightly heavier mortgage books tend to make the bank a more jittery name on the way down. And considering the impressive quarterly results, even relative to rivals this year, it’s only natural to see a more painful reversion to the mean.
In many ways, it feels like jumping into the deep end of the bank sell-off. But, in my view, I like where the banks are headed and think that the combination of AI investments and buyback boost (to 40 million shares for Bank of Nova Scotia) suggests value still to be had for long-term thinkers. At 13.7 times forward price-to-earnings (P/E) with a 3.6% yield, BNS stock is a cheaper, more bountiful bank, and one that I think could offer the best deal once this TSX sell-off settles.
