What started out as a dismal year for utility stocks has suddenly turned around.
Thank the bout of stock market volatility we’ve seen in the past few months. While the overall market sinks, utility stocks have been an island of stability. In fact, they’ve been bond-like in their lack of correlation to the broader market.
Utility stocks spent much of the year under pressure thanks to an outlook for interest rates to climb steadily higher in the months ahead as a result of growing economic stability. To their consternation, dividend-focused investors re-discovered the vulnerability of utilities, as well as pipelines, telecom and real estate stocks, in a rising rate world.
The investing outlook has changed somewhat in recent months. There’s growing talk of a global economic slowdown and investors are starting to wonder just how many more interest rate increases we’ll see. The Bank of Canada passed on a chance to raise its benchmark rate earlier this week, and rates in the bond market have been in decline for a few weeks.
The S&P/TSX Capped Utilities Index has been pretty bad over the past 12 months – the total return to Nov. 30 was a loss of 5.6 per cent, compared to a loss of 2.5 per cent for the S&P/TSX composite index. But in the most recent three months, the utilities index managed a gain of 0.5 per cent while the S&P/TSX composite fell 5.8 per cent.
As for bonds, the FTSE TMX Canada Universe Bond Index has a 12-month total return of minus 0.4 per cent and a three-month decline of 0.6 per cent. Utilities have played a better game of defence in this small sample.
Looking ahead, the outlook for utilities stocks depends a lot on what happens with the economy, inflation and interest rates. The more uncertainty we see, the more appetite there may be for old reliables like the utility sector. And what if the economy firms up again and rates continue higher? If you buy utility stocks today, you’ll have to console yourself with dividend yields in the 3.6 to 6 per per cent range.
Final thought: You can buy the utility index directly through the BMO Equal Weight Utilities Index ETF (ZUT) or the iShares S&P/TSX Capped Utilities Index ETF (XUT). Even after fairly stiff fees of around 0.6 per cent, you get a yield around 4.3 per cent.
-- Rob Carrick
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you, you can sign up for Globe Investor and all Globe newsletters here.
Stocks to ponder
Bank of Montreal (BMO-T). This stock is the focus this week of Scott Barlow’s RSI (Relative Strength Index) column. There are 25 oversold, technically attractive index stocks trading below the RSI buy signal this week. Energy companies dominate the list, but major banks – Canadian Western Bank, Canadian Imperial Bank of Commerce and Bank of Montreal – are also on the list. The good news is that RSI buy signals have generally worked well in uncovering profitable entry points for BMO over the past three years. The bad news is that buy signals have not worked at all more recently. Scott Barlow explains (for subscribers).
The Rundown
Vanguard, the global low-cost investing giant, is set to launch a robo-adviser service in Canada
Global investment giant Vanguard Group is set to launch a Canadian robo-adviser service within the next 18 months in a move that will bring a formidable new competitor to the increasingly crowded field of digital portfolio management. Vanguard Investments Canada Inc., the third largest provider of exchange-traded funds in the country by assets, will introduce a digital online advice platform for retail investors, according to three sources with knowledge of the plans. The online platform would be the first digital advice service launched by a major independent asset manager in Canada, and the first in-house direct-to-consumer offering for Vanguard Canada. Currently, Vanguard mostly sells its products in Canada through financial advisers. Clare O’Hara reports.
Canadian oil prices are suddenly on a tear
Weeks after hitting an all-time low, Canada’s heavy-oil benchmark is on a roll, surging again on Friday and narrowing its discount to U.S. crude. Western Canadian Select was trading for US$38.12 a barrel on Friday mid-afternoon, up 15.6 per cent from Thursday’s close, marking the latest round of gains after Alberta Premier Rachel Notley announced production cuts, to take effect in January, aimed at lifting rock-bottom prices. Faced with a pipeline bottleneck and rising inventories, Alberta’s oil prices had plummeted in recent months, with WCS hitting a record low of less than US$14 in November. Matt Lundy reports.
Licking their wounds, U.S. fund managers prep for rally in 2019
With bond and equity markets from the United States to emerging markets all on pace to lose money this year, investors have not seen this much red on their screens since 1972, the last time no asset class returned at least 5 per cent. Yet fund managers are finding things to like despite the recent market volatility, which sent the Dow Jones Industrial Average down more than 2 per cent this week. As they start to position their portfolios for 2019, fund managers, from firms including ValueWorks, Sierra Investment Management and Federated Investors, say they are looking at sectors that could snap back next year thanks to a combination of more attractive valuations and a decline in the U.S. dollar. David Randall from Reuters reports (for subscribers).
The U.S. economy faces big risks in 2019. Markets are only now facing up to them
After another week of exceptional volatility on Wall Street that has pummeled stock portfolios, there are two closely related questions worth asking. First, why is this happening when the economy is so strong? The November jobs numbers released Friday showed the unemployment rate remains at a rock-bottom 3.7 per cent amid healthy job creation, just the latest piece of economic data to come in relatively strong. Second, what took so long? Why are markets just now recognizing the risks the economy faces in 2019, which have been obvious for months to anyone paying attention? Neil Irwin from the New York Times News Service reports (for subscribers).
Mawer Investment Management to stay independent, rules out sale
Calgary’s Mawer Investment Management, which oversees $50-billion of client money, has decided not to sell itself. Instead, it will forge ahead as an independent firm. For more than 40 years, Mawer has operated as an independent that is free from bank ownership. In November, however, the company revealed that it had hired bankers to consider a sale amid a frothy market for asset managers. At the time, Mawer stressed that a sale was not guaranteed. On Friday, the firm formally ruled one out. Tim Kiladze reports (for subscribers).
Rob Carrick’s 2018 robo-adviser guide: Find the right firm for you
Rob Carrick takes a look at all the robo-advisers platforms available to Canadians and explains the ins and outs of each of them in this year’s comprehensive guide. For all readers.
Others (for subscribers)
9 ways to tell when the sell-off is really over and it’s time to buy stocks again
Low-volatility strategy seeks out strong, secure dividend payers
Friday’s analyst upgrades and downgrades
Friday’s Insider Report: Director invests in this stock yielding 7.7% with a payout ratio of 98%
Canadian ETFs: November’s launches and terminations
Others (for everyone)
As bitcoin trading shifts shape, big money stays away
Ask Globe Investor
Question: If I buy a U.S. stock like Coca Cola and own it in a Canadian registered retirement savings plan (RRSP) in Canadian dollars, with there be non-residency withholding tax?
Answer: If you own a U.S. stock like Coca-Cola inside your RRSP whether it be in Canadian dollars or U.S., there is not a non-resident withholding tax deducted from the dividend.
Canada has a tax treaty with the U.S. that allows U.S. companies that are publicly traded to not be subject to non-residency taxes providing that they are held in an account that is for retirement purposes, (such as RRSP, RRIFs and pension plans). I will point out that if you owned Coca-Cola in your tax-free savings account (TFSA), there would be a non-residency withholding tax deducted from the income. That is because a TFSA is not specifically used only for the purpose of providing income for retirement. To summarize: RRSP – no tax on income from companies that are headquartered in the U.S.; TFSA – yes there is tax on this income.
--Nancy Woods
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What’s up in the days ahead
When everything else is faltering, that’s when cash becomes king. And that’s sure happening right now. Tim Shufelt looks at the options for cash holdings at a time when it’s become the best performing asset class.
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
Click here share your view of our newsletter and give us your suggestions.
Want to subscribe? Click here to sign up or visit The Globe’s newsletter page and scroll down to the Globe Investor Newsletter.
Compiled by Gillian Livingston