Global bond yields surged to levels last seen during the Taper Tantrum of 2013 and, thanks to continued strong U.S. economic performance, the 10-year Treasury yield of about 3.2 per cent is the highest since late 2011.
Rising bond yields are bad for stock values for numerous reasons. The time value of money formula dictates that equities are automatically worth less as risk-free bond yields rise. (In simple terms, time value of money uses a risk-free rate to answer questions like ‘would I rather have $100 now, or $140 in three years?’).
Higher yielding bonds provide competition for equities as investors lock in the certain returns of government bonds instead of accepting the higher risks and less dependable benefits of equity ownership. Higher bond yields often signal inflation and the possibility that rising wages cut in to corporate profit margins.
Investors have been confronted with numerous false alarms on bond yields in recent years. From 2012 to 2015, the consensus economist forecast for yields pointed to sharply higher levels only to see rates remain stubbornly low across the board. This could be yet another head fake.
More generally, I’m concerned investors have become too complacent about interest rates and yields. Bond yields have been dropping for 35 years, since September of 1981, and most of us have never experienced a market environment where yields move steadily higher.
There is almost a blind faith that the investments that have worked in the past – dividends, fixed income, real estate – will outperform forever. As a result, most Canadians are overweight in these assets, particularly those investors attempting to install an income stream that will last them through retirement.
I’m certainly not suggesting anyone immediately sell their house and all their REITs, utility stocks and bonds. What I am advising is to pay attention to the evidence and not take an extended future of low rates for granted.
Signs of a rising rate environment are visible in domestic asset prices as dividend-heavy utilities stocks, down over 12 per cent year to date, are the worst performing sector in the S&P/TSX Composite Index. The Bank of Canada and the U.S. Federal Reserve have started a monetary tightening cycle that has included a number of rate hikes, and unequivocal signals of more to come. The five-year government of Canada bond has already climbed from 1.6 per cent in November of 2017 to 2.45 per cent now.
Again, I’m not saying the low-rate environment is over, although there’s a non-trivial chance it might be. One day it will end, however, and many investor portfolios will be hit hard if they ignore the signs out of habit.
-- Scott Barlow, Globe and Mail market strategist
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
Walgreens Boots Alliance Inc. (WBA-N). This latest addition to the Dow Industrial Average (in June) is worth a look, says Gordon Pape. It’s actually the fifth-largest retailer in the world, based on 2017 retail revenue. Walgreens Boots is the dominant player in the retail pharmaceutical sector in the U.S. and Europe. With its associated companies, it has a presence in 25 countries and employs more than 385,000 people. The stock has a trailing 12-month price/earnings ratio of 20. That’s much lower than competitor CVS, at 26.8. The forward p/e (based on projected earnings) is 11.44. The market cap is US$73.25-billion. (For subscribers)
Pollard Banknote Ltd. (PBL-T). A bet on lottery ticket provider Pollard Banknote Ltd. has been paying off for investors as the Winnipeg-based company continues to gobble up industry players to capture a larger share of the market. Pollard shares have jumped about 20 per cent since the company announced on Sept. 25 it was buying Schafer Systems Inc., an Iowa-based global provider of lottery ticket dispensers, for US$23.5-million. Pollard stock hit an all-time high of $25.70 on Sept. 27. Brenda Bouw explains (for subscribers).
The Rundown
The TSX has never looked worse relative to U.S. stocks by this measure – and the trade deal isn’t helping
Canada’s stock market continues to drift sideways, frustrating investors who expect that the home team must deliver returns that match or even exceed U.S. stocks. But is this a reasonable expectation? This question has taken on some urgency this week after Canada agreed to a tentative new trade agreement with the United States and Mexico, only to see its stock market shrug off the upbeat news. Since Monday, the S&P/TSX Composite Index has zigzagged. It ended the three-day period on Wednesday where it began the week, and is down nearly 1 per cent in 2018. More importantly, Canadian stocks have lagged U.S. stocks: The S&P 500 has risen 12 points or 0.4 per cent over the past three days, and the Dow Jones Industrial average has surged a record 370 points, or 1.4 per cent, stretching year-to-date gains and underscoring Canada’s dismal underperformance. David Berman explains (for subscribers).
Take heart investors: Even RBC’s six Canadian stock picks performed dismally last quarter
Canada, you have some explaining to do. When RBC Dominion Securities selected its best stocks for its Top 30 Global Ideas for 2018, in December, Canadian companies were well-represented within an international roster that included U.S. and European names. Six Canadian stocks made the exclusive list, giving Canada an impressive 20-per-cent weighting. But this confidence in the home team hasn’t paid off. According to the Royal Bank of Canada’s update for the third quarter, all six Canadian stocks are down, by an average of 8.2 per cent (including dividends), trailing the overall performance of RBC’s Top 30 Global Ideas by nearly 14 percentage points. David Berman explains (for subscribers)..
Small dividend-paying companies are worth a look
Investors dream big when looking for dividends. They love large stocks with generous yields. But big isn’t always better because small dividend payers have plenty to offer. To highlight the advantages of thinking small, it’s useful to look at past returns. A fortunate investor would have gained an average of 12.8 per cent annually by buying an equal amount of all-Canadian dividend stocks on the TSX with market capitalizations between $200-million and $2-billion over the 16 years through to the end of 2017. Norman Rothery takes a look at the small cap space (for subscribers).
One year along, this dividend-growth portfolio is bruised, but hardly broken
With apologies to Charles Dickens, it was the best of times, and the worst of times, for John Heinzl’s model Yield Hog Dividend Growth Portfolio. Now that the portfolio has marked its one-year anniversary, he reviews what worked – and what didn’t – over the past 12 months. tgam.ca/dividendportfolio
Investment banks reap rewards with $2.8-billion in cannabis equity deals
Canada’s burgeoning cannabis sector is helping to fill the gap created by a slowdown in capital raising by energy and mining companies. In the first nine months of the year, investment bankers helped a slew of Canadian medical marijuana producers – including Canopy Growth Corp., ABcann Global Corp. and Aphria Inc. – raise a total of $2.8-billion to help finance their expansion plans, according to data from Refinitiv. Alexandra Posadzki reports (for subscribers).
Here’s the proof that diversity and inclusion can be good for your portfolio
It is generally agreed, and bemoaned, that the vast majority of traditional mutual-fund managers fail to outperform their respective benchmarks after fees. The past decade has seen a huge rise in quant funds that scour every quantitative piece of information from company financial statements to try to find factors that might allow them to beat the overall market. But perhaps there is a simpler answer, and one you wouldn’t find on a company’s balance sheet. The Thomson Reuters Diversity & Inclusion Index is a simple, market-cap weighted index of the 100 companies globally with the highest Thomson Reuters Diversity and Inclusion Score, which comprises four pillars – diversity, inclusion, people development and reported controversies related to these values. Hugh Smith explains.
These one-year GICs are inflation-busters
Interest rates on guaranteed investment certificates are on the rise, but so slowly and incrementally you can easily miss the action. So let’s update you on the latest in the one-year GIC, where there continues to be value for investors who want a safe parking place for money they’ll need in the medium term. Rob Carrick explains (for subscribers).
Listen to Rob Carrick’s new three-part podcast series on the retirementality
How much money are you saving for your retirement? Will it do the job? Will your money be working hard even once you’re not? Looking Ahead: The Retirementality is a personal look at the challenges of retirement planning by Rob Carrick, who tackles retirement from the point of view of millennials, Gen Xers and baby boomers using his own experiences and advice from financial planners. You can listen to the entire three-part series now at tgam.ca/lookingahead. You can also listen on Apple, Google, Spotify or wherever you get your podcasts. Want to tell us what you think? Email the show at podcasts@globeandmail.com
Others (for subscribers)
The ‘Eeyore trade’: Toronto stock market is such a downer, but BMO awaits Tigger (and 17,600)
U.S. bond yields jump on strong economy, Fed hawkishness
Stocks dip as bond yields approach ‘Rubicon’ levels
Canadian mortgage growth plumbs 40-year lows
Sixteen oil and gas companies for the safety and value-focused investor
These 20 Canadian stocks surface in search for value
Thursday’s analyst upgrades and downgrades
Wednesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: A $22-million trade in this pot stock
Others (for everyone)
Oil prices enter the danger zone for consumers
Market ‘discipline’ on Italy? Be careful what you wish for
Sohn Conference: Hedge funds recommend Japanese equities, Germany’s E.ON, selling AT&T debt
Ask Globe Investor
Question: I want to help my daughter out by giving her money for her registered retirement savings plan (RRSP). She is an only child and she will get all of my assets in my estate later on anyways. I think she would be better off to get some of it now. She has room to contribute $30,000. What is the best way to go about this?
Answer: It is a wise decision to pass some of your assets on to her now if it will not be a negative to your financial health later on. You can give her the $30,000 in either cash or securities. If you give it to her in the form of security, just be aware that if there is a capital gain then you will need to declare it as a disposition. Also check that the security is a suitable addition to her existing portfolio if she has one.
This maybe the time for both of you to have a financial planner look at your situations. I would also suggest that you consult an estate lawyer to see what actions can be taken now to plan for your estate. Specifically, look at ensuring that the assets are free from division if there is any future marital breakdown. You don’t want the chance that they could be at risk if you gift now versus her receiving later as an inheritance. There can be a difference.
--Nancy Woods, a vice-president, portfolio manager and investment adviser with RBC Dominion Securities Inc.
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
Bond yields are rising again, hitting fresh multiyear highs on Thursday and sending ripples of concern through the global stock market. But there’s a bright side to this turbulence. David Berman will explain.
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
Scott Barlow