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‘Don’t fight the Bank of Canada’: stocks may get a boost following rate cut

Wednesday\'s rate cut saw the Bank of Canada lower its benchmark interest rate from 75 basis points to 50.

Investors are hoping that the Bank of Canada\’s rate cut on Wednesday will prove to add some life to Canada\’s moribund stock exchange.

The S&P/TSX Composite is down 3.13 per cent in the past Twelve months, significantly underperforming the S&P 500, that has gained roughly seven per cent in that time. The index has been hammered with a collapse in oil prices, especially as energy stocks constitute roughly 20 per cent of the market.

Wednesday\’s rate cut saw the financial institution lower its benchmark rate from 75 basis points to 50, providing additional stimulus to an economy it says likely entered an economic downturn in the first 1 / 2 of the year. The TSX perked up by 0.43 per cent on the news.

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One area of the market that could be rewarded for that cut is Canadian dividend stocks, which have been stuck in neutral for much of this year.

\”Anything that pays a dividend and has a history of raising dividends ought to be worth a lot more today than it was yesterday, for that reason rate cut,\” said Barry Schwartz, partner and chief investment officer at Baskin Wealth Management in Toronto.

Dividend paying stocks tend to be sensitive to rate of interest moves, with investors piling into such names when rates drop as an alternative yield play to bonds.

Most of the traditional dividend sectors on the TSX are down or flat this year. The S&P/TSX Capped Utility Index has fallen 5.60 % year-to-date, while the S&P/TSX Capped Financials Index is down 3.42 per cent. The S&P/TSX Capped REIT Index was flat until now, and is now up 1.76 percent.

\”Clearly the market isn\’t rewarding these businesses, which have deep underperformance – Enbridge Inc., TransCanada Corp., for example. The REITs have delivered nothing but their yields this year,\” said Schwartz.

But with two interest rate cuts to date this year, Schwartz said dividend stocks could lift the TSX. He explained he wouldn\’t be surprised to see a 10 per cent rally among the non-commodity segments from the TSX.

\”It\’s going to take a moment for the medicine to operate its way through the economy, but we had how wonderful those rate cuts worked for the United States,\” said Schwartz. \”It\’s likely to work. They say don\’t fight the Fed, don\’t fight the financial institution of Canada.\”

Murray Leith, executive v . p . and director of investment research at Odlum Brown Ltd. in Vancouver, said as they sees the potential for dividend stocks to get a bump, he doesn\’t think the current environment provides a buying opportunity.

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\”People have been chasing those stocks for some time,\” he said. \”And so the prices of interest-sensitive stocks, with the exception of banks…, are at our prime end of reasonable.\”

Of particular focus will be Canada\’s bank stocks. The S&P/TSX Capped Financials index was up 0.7 percent on Wednesday, led by Toronto Dominion Bank, which climbed 1.05 per cent on the day.

But make no mistake, say analysts. Reduced rates are not good news for the country’s “Big 6” ?and also the BoC’s decision to reduce them further is a huge potential headwind for his or her share prices continuing to move forward.

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