Even though the Bank of Canada recently cut its overnight rate for the second time this year, investors shouldn’t be worried about Canada’s lower-growth environment.
So says Stephen Carlin, head of equities and managing director at CIBC Asset Management. He manages the Renaissance Canadian Dividend Fund.
In fact, since interest rates aren’t expected to rise any time soon, sectors traditionally viewed as interest-rate sensitive have actually become more attractive. “Historically, those include utilities stocks, telecom stocks, some pipelines, and real estate companies.”
Carlin is currently bullish on pipelines because he expects they’ll be able to grow their asset bases and profitability over the next few years. He notes, “We see attractive dividend yields, and the potential to increase those dividends over time.”
The stock market has been a little cautious in its outlook for pipeline companies. “But we believe these businesses, whether you’re looking at crude or natural oil, represent a wonderful growth opportunity.”
Investors can also look to companies in the utilities sector, but Carlin says the outlook for these companies is somewhat muted. “As an alternative to a fixed-income investment, [investors] just have to consider a lower overall return within the framework of a very attractive dividend yield. So when you look at the combination of the dividend yields and slightly lower organic growth in the businesses—that’s looking at total return—that still looks like a very attractive overall investment return.”
However, there are sectors that will offer better total returns, given “utilities are rate-based businesses […] Most of the increase we’d see in a rising rate environment would be a pass through to customers. So, we don’t feel [these businesses] are as interest-rate-sensitive as the stock market is discounting right now.”
Meanwhile, the loonie is in a downward spiral, and that will continue if Canada continues to lower rates as the U.S. hikes them. Carlin says, “I think [that] while the Bank of Canada [is] not specifically stating so, [it] is not uncomfortable with a lower Canadian dollar.”
He predicts the Bank of Canada is also waiting for the U.S. Federal Reserve to make a first move, in order to gauge how markets might react to rising rates. When the Fed does hike rates, he suggests the BoC may use our comparative lower rates as a tactic to help boost Canada’s growth prospects.