Canadian real estate, utility sectors ride rate cuts to market-beating gains
The real estate and utilities sectors of the Toronto Stock Exchange have been enjoying a rebound with the onset of some interest rate relief, recently outperforming not only the TSX Composite Index itself but also the S&P 500.
“Rate-sensitive sectors of the equity market have been under assault since the tightening cycle began in early 2022,” BMO Capital Markets economist Robert Kavcic wrote in a note on Tuesday. “Since January of that year (the Bank of Canada began to raise rates in March), TSX real estate is down roughly 20 per cent, while utilities are off more than 10 per cent.”
Over the same period, the TSX has gone up around 10 per cent. The Bank of Canada has made two 25-basis-point cuts in that time, bringing its overnight rate down to 4.5 per cent.
“As mature sectors comprising companies with historically higher leverage or debt loads, utilities and real estate have tended to trend in the opposite direction of interest rates, similar to bonds,” Colin Cieszynski, a portfolio manager and chief market strategist at SIA Wealth Management, wrote in a note to Yahoo Finance Canada.
In an email, Kavcic wrote that the telecom sector has also struggled under higher interest rates due to higher debt burdens, “and it is priced for dividend yield, which becomes less attractive as interest rates rise.”
In real estate, he writes, “some areas (office) have fared a lot worse than others (multifamily) because of different demand patterns.”
In the past three months, however, the fortunes of the rate-sensitive sectors showed positive signs in line with the first two Bank of Canada cuts — Kavcic points out that Canadian REITs, which make up the bulk of the real estate sector, have gained eight per cent, while the utility sector as a whole has climbed 10 per cent. The TSX Composite has risen 3.8 per cent in that time, while the S&P 500 has advanced seven per cent.
Cieszynski says that in the months ahead, “these sectors may benefit from the potential for additional interest rate reductions,” as well as possible shifts of capital from “the current concentration in high growth/technology groups either to broader participation or potentially towards defensive areas of the market.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf. Download the Yahoo Finance app, available for Apple and Android.