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The
BoC last Wednesday became the first G7 central bank to ease
monetary policy, lowering its benchmark rate by 25 basis points
to 4.75%. Roughly 150 basis points of additional cuts are priced
into the bond market over the next couple of years.
Interest rate-sensitive sectors such as utilities, real estate
investment trusts, or REITs, and financials account for 35% of
the weighting on Canada's main stock index, the S&P/TSX
Composite.
"They've started cutting rates, there's more to come," said
Joseph Abramson, co-chief investment officer at Northland Wealth
Management. "The two big sector plays on that are REITs and
utilities ... they're both income plays and they also have a lot
of debt."
REITs own income-producing real estate, while utilities include
high-dividend paying pipeline companies such as Enbridge Inc and
TC Energy Corp.
"The defensive parts of the market - think REITs, utilities and
telecom - those areas have been hit particularly hard as rates
have gone up," said Mike Archibald, a portfolio manager at AGF
Investments. "If rates go as consensus is thinking ... those
sectors I think would start to play a little bit of catch up."
Canada's economy is particularly sensitive to the level of
borrowing costs. The mortgage cycle is shorter than in the
United States, while household debt as a share of disposable
income, at 174%, is much higher than the U.S. share of about
100%, OECD data shows.
The six major Canadian banks set aside loan loss provisions in
their second-quarter results that were up 26% from the year
before. Still, most lenders beat earnings expectations.
A move to lower rates "should spur demand for credit, which is
clearly what drives the banks," Archibald said. "We should in
theory see an environment where banks start to attract a little
bit more capital."
The TSX has climbed 4.4% since the start of the year, helped by
gains for energy and metal mining shares. But those sectors tend
to be dependent on the global economic outlook, which has become
more uncertain as the Federal Reserve delays the start of its
rate-cutting campaign.
"Within Canada, I think you want those domestic interest rate
plays. Utilities and pipelines, they're not global. Those
pipelines are right here and they're very tied to rates."
Abramson said.
(Reporting by Fergal Smith; Editing by Andrea Ricci)
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