Barlow’s Research Roundup: Why higher rates won’t derail utilities stocks

TOP LINKS Barlow’s Research Roundup: Why higher rates won’t derail utilities stocks SCOTT BARLOW MARKET STRATEGIST PUBLISHED 32 MINUTES AGO COMMENTS SHARE SAVE FOR LATER Listen to this article Learn more about audio Log in or create a free account to listen to this article. Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow UTILITIES AND YIELDS CIBC analyst Mark Jarvi assesses whether rising bond yields will derail utilities stocks, “U.S. and Canadian long-term bond yields have risen materially, while … stronger oil prices and improving economic indicators have weighed on performance and valuations, consistent with the sector’s historical relationship to macro factors. Utility valuations for TSX-listed stocks have fallen from a 44-per-cent premium to the broader market in June to 27 per cent (still not cheap), while U.S. utilities now trade at a 15-per-cent discount. Current valuations are consistent with historical relationships to bond yields, suggesting a meaningful re-rating likely requires yields to moderate or other risk-off signals to emerge … We see modest impacts on utilities’ EPS from higher bond yields. Operating company debt costs are recoverable through customer rates, leaving holdco refinancing [ a corporate structure whereby a holding company owns shares in an operating company] and external funding as the primary headwinds. Formulaic ROE mechanisms tied to long bond yields provide a potential offset for ACO.X/CU (annual adjustment for AB distribution utilities), a small impact for FTS, and could benefit H if yields stay elevated through Q3/27. Overall, impacts are neutral to slightly positive, with only EMA facing a slight net negative impact” U.S. PERSPECTIVE ON CANADIAN GROWTH New York-based BofA Securities economist Carlos Capistran provided a U.S. perspective on Canadian growth, “Canada has responded on two fronts: diversifying economic partnerships beyond the US and pushing to attract investment at home. Externally, Canada signed a security and defense partnership with the EU in June … The Build Canada agenda seeks to shorten approval timelines for large infrastructure and energy projects, complemented by accelerated depreciation and immediate-expensing provisions that lower the cost of capital … Efforts to diversify are welcome but unlikely to lift growth significantly. We see them primarily as a way to gain leverage and time in the negotiation with the U.S., for instance to…