One sector which has generally traded sideways since financial markets got the word that the Bank of Canada would begin its interest rate hiking schedule is utilities.
As interest rates have made the move from 0.5% to 1%, speculation as to how aggressive the Bank of Canada will be in moving ahead with additional rate hikes is now beginning to spur conversation that more increases are yet to come, something which could potentially be very bad for the utilities sector overall.
Utilities, as with a few other interest rate-sensitive sectors, tends to be inversely related to interest rates. As interest rates rise, the allure of high-yielding, safe, long-term investment vehicles such as utilities equities become devalued due to the rise in yields (and reduced sticker price) of bonds.
With interest rates now appearing to have bottomed, it makes sense that many investors continue to stay on the sidelines with respect to utilities, preferring instead to trust their money to long-term government bonds or short-term corporate debt, or some combination of the two.
Here's why I think what would appear to be a contrarian strategy in betting on the utilities sector may actually pay off handsomely for investors in the coming years.
First of all, I have continued to be of the mindset that central banks around the world understand how fragile the global economy is. In repeatedly raising rates, these central banks risk bursting some of the very bubbles which have been created by the cheap money which has been floating around for nearly a decade now.
Secondly, in the case of the Bank of Canada, raising rates has resulted in a rising Canadian dollar relative to other currencies, something which has the potential to stunt some of the growth the country has just begun to experience for the first time in a long time.
Companies like Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) and Fortis Inc. (TSX:FTS)(NYSE:FTS) are two companies which have been hit hard of late on recent news of interest rate hikes, and are two companies which are set to rebound as the market re-adjusts toward longer-term fundamentals.
Invest wisely, my friends.
