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Canadian Strategy Snapshot: Real Estate and Utilities in Low Rates Environment

 

Thirst for Yield = Real Estate > Utilities

While the thirst for yield is a traditionally dominant theme in periods of low interest rates, the playbook has been very different the past three to four months following the precipitous drop in bond yields and interest rates. For instance, price performance of Canadian equities since the market’s trough has been more skewed toward COVID-19 thematic names and growthier-oriented companies. However, our work shows this thirst for yield often manifests once cash flow uncertainty subsides. Furthermore, while both Real Estate and Utilities tend to outperform when interest rates are low and declining, Utilities’ outperformance historically occurs during the earlier part of recessions when interest rates are declining rapidly. Meanwhile, although Real Estate does benefit from bond proxy characteristics, it traditionally has posted its best relative performance during more moderate growth environments and range-bound interest rates. This is likely even more prominent when interest rates remain low and a thirst for yield is likely to grow. As such, while we remain market weight Utilities given the low interest rate environment but high valuations, we continue to favour Real Estate given its historical ability to continue to outperform in more range-bound interest rate environments.

Main Points:

  • Thirst for Yield Has Been Limited, but Likely Coming Soon

  • Real Estate and Utilities Usually Outperform During Periods of Declining Rates

  • Real Estate Offers Significantly Better Value and Yield

  • Real Estate Growth Risks Remain, but Revisions Trends Have Troughed

  • Real Estate Has the Largest Weight in Our Dividend Growth Screen: Screen Attached

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Brian Belski Chief Investment Strategist



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