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[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing. coming up on today's show, MoneyTalk's Anthony Okolie is going to give us a preview of what to expect from the Bank of Canada rate decision next week.
We will discuss the impact a I might have on the labour market and whether the industry is ready for it. We are going to hear from TD Epoch to Kevin Hebner and TD Cowen Sam Damiani will give us his outlook for the rates.
In today's low broker education segment, Jason Hnatyk will take us through where you can find tax documents on the WebBroker.
It's a timely time to have that conversation.
Before we get to all that and our guest of the day, let's get you an update on the markets.
SPX up more than a full percent. The price of West Texas intermediate benchmark crude and other benchmark foods is soaring today. You're up about 3% on WTI. There is an OPEC meeting coming.
There is a lot of reporting out there based on unconfirmed sources that OPEC is looking to roll over those production cuts.
Seems to be firming up the price of crude.
When I look through the list of the most actively traded names, I try to pick things from different sectors, it's pretty much an energy story today for the TSX.
Let's take a look at Cenovus right now, CVE, on the composite index. It is firmly in positive territory to the tune of almost 3%, $24.33 per share. Crescent Point Energy, is 3 1/3% to $10.22 per share.
South of the border, let's check in on the S&P 500. We had the Fed's preferred gauge of inflation yesterday.
Yes, it ticked higher for January but that was the expectation.
The market got what it expected and we are seeing the S&P 500 back above 5100 points, 5120. Europe 24 points, about half a percent.
Tech heavy NASDAQ, excitement around the chipmakers this week on the promise of AI.
We are hearing from some companies that feed into these bigger AI names that they are seeing opportunity. The NASDAQ is up a little shy of 100 points, a little more than half a percent. AMD, Advanced Micro Devices, made gains yesterday. They are building on it today. At $199 and change per share, it's up almost 4%.
And that's your market update.
March always sneaks up on you. It's the first day of March right now. It means we are in line for another Bank of Canada rate decision coming next Wednesday.
MoneyTalk's Anthony Okolie has been looking at some of the economic data that the BOC will be looking at.
>> One of the big reports they will be looking at his Canada's economy and we saw the Canadian economy bounced back in the fourth quarter. It was of 0.2% after a 0.1% pullback in the third quarter. That came in better than consensus estimates and much better than the BOC is estimate for flat growth. That was helped by a strong spending on autos and exports.
Additionally, the flash estimate for January points to 0.4% rise but I think this return to growth in the fourth quarter was widely expected but the narrative continues to be that higher rates are continuing to hurt the economy.
In terms of international drivers, the economy contracted with GDP per capita falling in five of the last 6/4. I think there's still underlying weakness in that number.
>> There is a distinction to be made in domestic demand. The whole idea of the BOC raise interest rates to tamp down domestic inflation.
Going into that meeting next week, they want to come up with the right decision.
What's the expectation?
>> TD Economics expects the BOC might shift to a more marginally dovish tone next week. We saw January CPI report was encouraging.
More important, the CPI trim and median edged lower in January, those are measures that the Bank of Canada follows closely.
That's trending in the right direction.
TD Economics says that the Bank of Canada needs to see, says they think inflation is too high and that more evidence is needed that it's moving sustainably towards 2%.
TD Economics expects the Bank of Canada will deliver the first rate cut in June of this year.
>> Due to stenciling. Thanks for that.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
We will give you full coverage of the Bank of Canada update next Wednesday.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.Shares of Dell Technologies in the spotlight today. Artificial intelligence is a big part of this story. The company is handing in an earnings beat was strong demand for its servers. The servers are used to handle AI workloads. Dell also says is just beginning to see the benefits of the AI boom when it comes to their business and the streetlights what they are hearing. At $120 and change, Dell is up almost 27%.
It's another story for Hewlett Packard Enterprises. The Infotech company handed out a mixed report for its most recent quarter and is cutting its sales and profit outlook. It is seeing softening demand in the market. The stock is off the lows of the session. At $15.39, it is up about 1%. I want to check in on shares of New York community Bancorp. The beleaguered regional bank says it has an identified material weaknesses in its material controls. Earlier this year, NYCB disclosed they had taken a larger than expected charge against potential low losses. Background this time last year, we were in that ballpark of being concerned about regional banks in the states.
New York Community Bancorp's shares are down 24%.
Let's check in on the markets. We will start here at home on Bay Street.
Energy companies, oil and gas leading the charge day. Crude up about 3%. An OPEC meeting in the offing.
A lot of stories coming out from unconfirmed sources that OPEC is looking to roll those production cuts forward which is supporting the price of crude and the TSX, of a full percent, 227 points.
South of the border, the S&P 500 back above 5100, 5120 on the board. Again over 21 points or half a percent.
There is a lot of excitement around the development of AI technology and there is a lot of concern about how disruptive it could be to the labour market and whether the assets in the space are in a bubble.
Kevin Hebner, global investment strategist at TBF to join me earlier to discuss.
>> When you look at poles where more people are worried than excited about AI because they are concerned about what will happen with their jobs going forward. So in our view, there's going to be about 60% of jobs will be significantly affected by AI. But in fact, that's pretty normal.
If you think right now, 60% of occupations that exist today did not exist in 1950. So the labor market is always very dynamic and lots of change. But the way we come up with these numbers is the US Department of Labor divides the US labor market into 1,000 different occupations. Then each occupation they break into 15 to 20 different tasks. So you have 18,000 tasks overall describing the US labor market.
Then you look at which tasks can be impacted by existing AI-- so not AI as it will be in five years or 10 years but as exists today. And then you get these numbers-- 60% being significantly affected, and for, say, 50% of jobs, over 20% of tasks will be affected. So there will be a lot of jobs being changed and certainly more jobs being changed than displaced by AI. But it means a lot of change going forward, and I think something which we all have to respond to, and I think responding to positively.
>> Yeah, because what we hear about it from people who are proponents of it, they say it's going to take away the drudgery work, right?
And I think of some people I talk about in financial services say, I spend a lot of time charting this or putting all these numbers together.
The AI does it for me, frees me up to do other things. I think where people get concerned is that they're worried that I've got one of the drudgery jobs, and that job will just be gone altogether.
>> I think for most of us-- and it's interesting. If we were having this conversation 18 months ago, we would all have agreed, well, AI is first going to affect blue-collar physical occupations, then white collar, and then creative. But with generative AI, OpenAI and such type of models, this has been totally flipped.
And now it's creative jobs, then white-collar jobs, and then blue collar jobs that are being the most impacted.
And so I think it's important to see that, as this evolves, how we view things is going to be changing a lot. But, say, I'm in the white collar sector, and for a lot of us, AI, it's augmenting what we can do.
So the Excel work I do, downloading data, regressions, creating charts, creating pitch books and things-- AI will certainly be improving my productivity, say, by 20%.
So I've got a long to-do list, so that's going to help me get through more things.
And I think, broadly, for white collar workers, that's true. Creative workers, it's even more so.
People who write, it's going to increase your productivity by 40%. Marketing copy is, in fact, the number one use of generative AI so far.
People who create digital economy content animation, if you saw Sola, it's a tool created by OpenAI. It immediately increases the productivity of people in the automation business-- video games and so forth-- by about 90%. So it's pretty dramatic. And so we will see a lot more content, hopefully not just mid content, but excellent, really engaging content coming forward.
>> You gave us some concrete examples there of productivity, whether it's in financial services, the creative arts.
What does that mean on a national level when we start measuring an economy's productivity, when we start measuring GDP output?
Could AI be the thing that sort of starts kickstarting productivity where, perhaps, we have lagged for a while?
>> Yeah, we think that it's going to increase productivity relative to baseline by 10% to 15%.
And we come up with that number by looking at what's happened historically, say, with electricity, or computers, or the internet.
So it's been similar to that.
You can also do it by bottom-up-- what we were mentioning before with the 18,000 tasks and looking at the impact on productivity and output.
But either way, we come up with a number-- say, over the next decade or so-- about 15%. And that's a very big number.
That's similar to, say, the internet boom that it experienced in the late 1990s. So it is a big deal.
>> Now, when we talk about productivity and we talk about it happening across a broad swath of society in different industries, obviously, as investors, we start to think about companies that are more productive would probably make better use of their inputs and then see better profits. I mean, is this the flow-through, then, to the investment community where more productive society, more productive corporations actually produce healthier profits?
>> Well, certainly, if you have higher productivity, higher growth, you're going to have higher topline growth going forward for companies. But we're also seeing right now, at least for companies who are directly benefiting from the buildup of the infrastructure for platforms, the picks and shovels, if you will-- very dramatic increase in margins, return on invested capital, and generating pretty phenomenal free cash flow.
That's for a small number of companies in the overall market.
So we're seeing very concentrated returns as we build out the infrastructure for AI.
>> I think about the chipmakers.
Obviously, in the early innings of our discussions about AI, and we're about a year into the real proper discussion on a broader base in society.
The chipmakers have benefited. There's got to be a bit more here, I imagine, as we go forward, than just playing it through chipmakers.
>> I think, right now, we're building out the infrastructure-- so for the platforms, different places in semis.
But right now, we don't have very much in terms of applications.
And typically, when you have a new disruptive technology, a general purpose technology, we like to say, it takes a long time for it to diffuse across the economy.
Often, it can be 20 to 30 years to get a 50% diffusion rate.
So AI might be a little bit faster because it happens primarily in the world of bits.
But it's still a very slow process.
So right now, we've got this boom as we build out the infrastructure.
But then going forward, we have to get to the point where, where's the beef?
Where are the killer apps that help companies and households going forward?
And I think that's going to take longer than many people think.
So on our view, we're going to keep enjoying the type of returns we've had over the last couple of quarters.
But at some point, there's going to be this chasm where the headlines are going to be saying, where's the beef? Where are the killer apps?
How is this really helping companies and households? And I think that takes a lot longer than the investment community is currently expecting.
>> Now, the investment community, if it's going to take longer than they're currently expecting in terms of us feeling our daily lives changed by these killer apps, as you call them, from AI-- we've seen a big runup in those chip names.
Again, NVIDIA has been a poster child here. It has people saying the word "bubble." If you take a look what's happening AI right now in the market runup, are we in a bubble?
>> Yeah. So there's three reasons to think we might be in a bubble, say, similar to where we were in the 1990s. One reason is the concentration of returns.
And in fact, since 1920 there's, only been two other times when returns have been so concentrated in a small number of names-- the late 1990s and also the late 1920s, and neither of those ended up terribly well.
The second reason is valuations.
Valuations are stretched-- not as much as they were in the 1990s but, clearly, stretched beyond norms.
And the third reason, I think, is the quite euphoric tone of many pundits in a lot of commentary about AI. So that's three reasons to think we might be in a bubble.
But what is different this time is, in the 1990s, companies were burning through a lot of cash.
And ultimately what burst the 1990s bubbles were the headlines and Barron's and things saying, oh, my god, we're running out of cash.
They're all burning money. And this thing can't run very much longer.
Right now, we've got enormous free cash flow generation, great margins, great return on invested capital, at least from Mag Seven and related names.
So that makes it different. And we would say it means that now is more like 1997 than 1999.
>> That was Kevin Hebner, global investment strategist with TD Epoch.
Now, let's get our educational segment today.
Tax season is upon us and joining us now to take us through the tax tools available on the platform is Jason Hnatyk, Senior client education instructor with TD Direct Investing.
Jason, let's talk about the information that we need for our taxes and where to find it on WebBroker.
>> Yeah, absolutely. Let's do that.
Our species and has just finished. It's not even cold yet. We are on to the next season.
It may not be everybody's favourite season but it's one we all participated nonetheless, and as you pointed out, it's tax season.
Let's take those tools and resources in WebBroker so we know it support we've got from the platform.
The first thing I would like to show everybody is the access to our tax information section. It go to accounts, under the self-service tax information Centre.
Go ahead and launch this.
There's a lot of information here to help file your taxes, key information, what you can expect to find on your tax documents as well as other important documents here, registered account information, information about reporting. It get in there and take a look for yourself. One thing I want to point out on this page is really nice time frames to expect for filing as well as the document that you're going to be receiving. We choose the top link here under filing taxes.
We can see a few dates, as I mentioned. As we scroll down, it's when you can expect to receive those documents. With those documents in mind, let's go ahead and take a look at where you can find those here in the platform itself.
The eServices section can be found also going back to accounts. Under account details, you will see documents and eServices at the bottom. Alternatively, you can find that by clean your name in the top right hand corner and the documents eServices can be found there.
Tax documents is here. We've got your back here.
Here, we have all data going back up to seven years so you don't need to be having some creaky filing cabinet. This will all be stored in a nice convenient place for you to find for you to go back and choose the different years.
I will choose all and run a search and then it will appear all the relevant documents.
Somebody's personal account will have more documents available than just my demo, but this is where you will find your income summaries, trade summaries, as well as all of your tea slips that you need. WebBroker has that part sorted out so you just have to worry about making sure you make the appropriate filings with the government.
>> Much cleaner ways to file those documents other than a creaky filing cabinet, which I have in my 100-year-old house.
What about other supports for our taxes?
The stresses of people.
>> You're right. They're just so much information to know about taxis and and this one of those things where we do want to make mistakes.
We've got support therefore YouTube.
Let's jump in and find out where you can learn more about your responsibilities, where you can learn some strategies to make taxis and easier for yourself. From WebBroker again, we are going to go to the learn tab at the top of the page.
From here, there are a couple different resources I want to highlight.
The first will be our video lessons. From video lessons, we are going to choose the filter on the far right hand side.
We have a section under how to invest, called managing taxes, you can quickly find all sorts of different great material to learn about mistakes to avoid, boosting RSP strategies and so on.
Outside of that, I want to highlight something we are running specifically for tax season, it's a master class, a live interactive session where instructors like me are here to run through nice no information and walk you through the platform and a hopefully interactive and engaging manner.
We are going to go dim master classes. We run these on a weekly basis. We ran on today at 11 o'clock.
We can see that next Friday, we are running this again. Come join us for that informative session. We will be able to take you through the tax resources we have available for you here at TD Direct Investing.
>> Appreciate you walking us through those resources.
>> my pleasure.
>> Jason Hnatyk, senior client education instructor at TD Direct Investing. And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
We all know that rate sensitive sectors like real estate investment trust have had a tough ride amid the recent central bank hiking cycle. But with the interest rate cuts expected by many this year, could things be turning around to the sector?
Sam Damiani, director for equity research at TD Cowen and 20 earlier to discuss.
>> The REIT index, if we look at that, is down about 25% from pre-COVID. We made it all back by the end of 2021, but 2022 was a big down year. And last year was flat.
But that masks the story of huge volatility. I think at one point, the REIT index was down 25%, and then up 25%, finished the year flat.
And so we're still down 25% from pre-COVID. And the big challenge over the last couple of years has been the rising interest rates, for sure.
>> Because when you think about it, you start thinking about REITs, and you can break them down, whether it's office, or industrial, or residential. But in the end, when you talk about distributions, just like a yielding stock, if you're starting to get money market rates of 5%, that is a challenge, I'd imagine.
>> Yeah, that's a huge challenge. We looked at the Bank of Canada information, and they show the inflows into GICs and term deposits is about $250 billion over the last two years.
And you layer on top of that the money market funds, which aren't captured by that Bank of Canada data, that's a massive flow of funds.
And obviously, a good chunk of that would have come out of yield-oriented sectors of the equity market like REITs. So the overall REIT index has a market float of $50 billion. So $250 billion just into GICs and term deposits, maybe another $200 billion, who knows, into money market funds-- even a small fraction of that would have a massive impact on price. And we're sure it has.
>> So you already have that sort of challenge for the sector where people want those distributions. They're looking at yield.
They're looking at money market funds. And then we start to break it down. As we're saying, through the pandemic, office has obviously struggled. Does that become more challenging-- first headwind here is high interest rates, and then we started thinking about, how are we living life post-pandemic?
Office seems to be the most glaring one.
>> Office is tough. And it gets a disproportionate amount of attention.
Especially when you turn on a US TV channel, you'll see US commercial real estate in trouble.
But really what they mean is office properties.
And so the fortunate thing for the Canadian market is that the REIT index today just has one REIT in it specializing in office properties.
So 85% of our coverage universe is shopping centers, warehouses, and apartments.
And all those three sectors are doing much better than office.
And so the return to office, I think the outlook has gotten a little more clear.
There's kind of a consensus forming as to how it's going to evolve.
But it's going to be a very bifurcated market.
And the good buildings are going to hold up just fine.
Some of them will actually do better than they would have pre-COVID. But there's probably a bottom-- whatever it is-- 10% or 20% of the buildings or the space in the market that becomes functionally obsolete.
And some of it will be converted to residential.
Some of it will be just outright demolished or repurposed in other ways.
So it's been a challenging sector, and we've seen distribution cuts out of that sector, in particular, over the last four years.
>> Now, as we assess the health of the REITs as we head through this year, we actually have some earnings.
I don't think we've got them all in for the most recent quarter, but we've got a handful of them.
What are you starting to see? Are there themes that we're picking up on here?
>> Yeah. Yeah. We're about 3/4 of the way through earnings season for the REITs. The REITs, some of them tend to report quite late.
So we'll be talking Q4 results in the middle of March, unfortunately.
You're well into thinking about Q1. But overall, it's been, on balance, a good quarterly report so far.
We were looking for 4.5% AFFO growth year over year.
>> That's funds from operations, right?
That's the key metric when we're talking about-- >> Adjusted funds from operations. So it's kind of a smoothed measure that's comparable across all REITs.
So it takes out the noise that sometimes gets reported from quarter to quarter. And so on that measure, we were looking for the fastest growth in two years.
So that's reflective of the interest rate headwind that has obviously increased interest expense.
That impact has started to taper off.
And so now the strong underlying property performance is now able to flow through to the bottom line and to this 4.5% AFFO growth that we were looking for in Q4.
And for the most part, we're seeing more beats than misses.
I think, on average, we're seeing results about 1% ahead of forecast.
So that's good. Particular strength is being demonstrated in the apartment sector.
Particularly any apartment with Alberta exposure is seeing very, very strong demand, big, big rental uplifts.
And Boardwalk was one that reported recently and put out guidance that was very, very strong.
>> Now, when we think about that rental space that Boardwalk is in, obviously, we've had very robust immigration in this country.
So it always seems like-- it's interesting when you talk about real estate.
You talk about the challenge of a higher borrowing environment, but then we also have other factors in play including a growing population that makes some of these sectors, I think, a little more interesting than others.
>> Absolutely. Over the last two years, Canada's population is up 5%.
And that's an astounding number, I think, that probably surprised every level of government.
And I think we can read the papers and conclude that the country wasn't really prepared for that level of population growth.
And so the first thing people need is a place to sleep.
They also need to feed themselves, go shopping for the basic essentials. And so in apartment leasing and in essential-oriented retail property like grocery-anchored shopping centers, we've seen very, very strong demand, occupancies at peak levels, and rental spreads that are to the positive more than we've seen in a long, long time.
So it's really a strong tailwind for the sector. And this is offsetting the impact of interest rates.
I just want to get back to that because we talk about the funds flow.
Hopefully that sort of reverts, or stabilizes, and eventually reverses. The interest cost burden is significant.
But when we put it into context, our coverage universe saw interest expense equal to 28% of EBITDA two years ago.
That's increased to 31%. So interest expense has eaten up 3% of EBITDA over the last two years.
The good news is our forecasts, which capture the consensus TD Economics view for interest rates over the next couple of years, we don't see that 31% going any higher.
So going forward, the strong operating environment should be able to flow through to the bottom line and allow the REIT sector to report accelerating bottom line AFFO per unit growth this year and next year.
>> Interesting perspective on there. Of course, for full disclosure on the companies covered by TD Cowen, see the link to the TD Securities website at the end of this program. I've got to ask you one more thing. So this is the setup, and you're saying we think we've peaked out in terms of the effect that interest rates are having.
Of course, the market is pricing in interest rate cuts from both the Bank of Canada and the Fed this year.
Once those begin, what are we thinking about in terms of the REIT sector?
>> So it could be a setup for a positive finish to the year.
And I say that because one of the biggest challenges has been the absolute level of interest rates, but also the volatility.
And this has resulted in many companies deferring capital decisions. So we talk about the leasing market for apartments.
That's a no-brainer, if you will.
But on the industrial side, even the office-- some companies are still thinking about expansions or relocations.
But they don't really know what their cost of capital is.
And so they're hesitant. And so as interest rate volatility settles out, and even more so we start to see these cuts, I think you'll have a return of confidence in businesses deploying that capital. And that should result in acceleration of expansionary moves by companies.
>> That was Sam Damiani, Dir. for equity research at TD Cowen.
Now, for an update on the markets. We are having a look at TD's Advanced Dashboard, a PlatForm designed for active traders available through TD Direct Investing.
Let's jump into the heat map function here, gives you a view of the market movers.
We are looking at the TSX 60 by Price and volume. A lot of green on that screen to round out the trading week.
Indeed, we've got West Texas intermediate, American benchmark crude, a lot of the global benchmark crudes up today.
There are rumours that OPEC will go into a meeting next week and come out in further support this production cuts. Seems to be giving a boost to the price of a lot of energy names.
Cameco is in that group. It's on oil and gas but uranium and it's up to the tune of about 4%.
We have had a full slate of bank earnings this week from the biggest financial institutions in this country. Got green on the screen and the financial space and basic materials too. A lot of mining stocks rallying. Let's check at the price of gold.
Broad oil to the upside, also gold up about 40 bucks an ounce, almost a full 2%, to $2093. Definitely benefiting the big sectors in Toronto.
The S&P 100 back above 5100 on the S&P 500, digging down into the S&P 100, the chipmakers in the last couple of days, particularly AMD, a lot of excitement around them. It's up another 4% today.
Even Intel is feeling the uplifts here.
There is not as strong growth across the market creating a more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
We have been talking about rates, we got the Bank of Canada next week. The big question is one of the cuts coming from the Fed and the BOC?
Rate sensitive sectors like utilities and had a rough ride amid the recent central bank hiking cycle. Both interest-rate cuts expected by many this year, could that turn things around for the sector?
Marie Ferguson, analyst with Argus Research, joined be earlier to discuss.
>> They have historically been seen as a defensive stock, meaning they will have more stable earnings and consistent returns during a weaker economy and market downturn. Typically, defensive stocks relate to well known companies that provide goods, services, what consumers need regardless of what consumer spending is. And so utilities fit the bill.
Another reason utilities often trade as a defensive stock is that they are regulated.
So most public utilities are highly regulated in an effort to remain stable and typically have year-over-year growth around 3% to 5%.
Regulators, they don't just set what our electric and natural gas rates are.
They actually work with the utilities to set rates that will help the utility meet their revenue requirements for the year.
Regulators also have oversight as to items on the balance sheet.
They overlook debt cap ratios, and they set return on equity on capital investments.
So utilities are known to have a little lower risk, more modest equity return.
But they're also low beta.
And they also usually provide a stable dividend income, often importantly qualified dividends, which are taxed at a lower long-term capital gain rate than other income-- rather than normal income.
This can appeal to certain investors who are willing to accept the total return of equity growth and the dividend contribution. It's interesting. Right now, the average dividend yield in the S&P 500 is about 1.6%. The average dividend yield for utilities is 4%. So if we're looking at 2% to 3% earnings growth, stable growth, a defensive stock, we're looking at 4% income growth.
So not all utilities pay equally or raise their dividends equally.
So not all utilities pay equally or raise their dividends equally.
But they're typically very stable.
And we very rarely see dividends suspended.
Duke Energy in the utility sector has been paying dividends for 99 years without missing a year.
Con Ed, our local New York utility, has had 50 consecutive years with annual rate hikes.
So typical rate hikes are 2% to 3%. But in our sector and in the stock side cover, we'll see-- this year, we expect some rate hikes close to 7% or 8%. For instance, from Nextera and from Wisconsin Energy, we expect much higher than peer dividend increases.
>> So we got a nice rationale there as to why investors look to the utility space as part of a portfolio.
What does it mean, though, when we hear that utilities are sensitive to interest rates?
Because obviously, interest rates are pretty much all we've been talking about for the past year and a half or so.
>> That is a well followed, pretty well proven historical trend that utility stocks decline in price when interest rates rise, or in periods of prolonged high interest rates.
The reasoning behind this is that when rates interest rates go up, large institutional investors will leave the equity market and sell their shares and move over to the fixed income market.
So while interest rates rise, share prices can remain sluggish. But conversely, dividend yields also rise.
So when rates are high, share prices often decline.
And for interested investors, you can follow the timing.
It could provide an opportunity to enter the sector.
The benchmark, I just want to point out that we typically use in the sector to gauge rates is not really just mortgage rates, but the 10 year treasury yield.
So that's been hovering around 4.3%.
So we're almost equaling that with our dividend yield in the sector.
>> And we do have expectations of rate cuts, right?
>> Better performance. I'm sorry?
>> was just saying, and we do have expectations this year of rate cuts from the Fed at some point. It's still early in the year. I feel like the market's a little impatient. But there's still expectations that we'll get these cuts. So what would you expect from utilities this year in the way of their earnings?
>> OK. Well, I just want to say what we're expecting-- I think almost all economists on the street are projecting that interest rates are going to ease some point in 2024. Our Argus economists are projecting that they're going to probably have three quarter point down ticks in the second half of 2024 with some continued easing in 2025. So with rates going down, I just want to point out some historical facts to prove up this theory that it could be a good time to get into the utility sector.
So since 2007, we've had roughly about five periods of interest rates, a continued declining treasury yield and rates that are going down. In 2011 when rates were going down, utilities were the best performing sector. In 2014 when treasury yields were declining, utilities were the second best sector. And in 2018, they were also the second best performing sector as rates were declining. Conversely in 2020 to 2023, rates have been up and utilities have been a bottom five performing sector.
>> So that's a nice historical context for it. Obviously, if we do see the rate cuts coming this year, as you said economists are expecting, we can start to see some share price movement. What about the actual earnings? I mean, utilities are also sort of capital-intensive industries.
And well, they have to borrow, right? Just like anybody else.
>> They do have to borrow. Interest rate pressure has been a headwind to earnings.
There are some generalizations we make about the sector.
In a more sluggish economy, stocks tend to follow and trade on news of interest rates.
As the economy improves, we see the stronger and larger companies starting to trade on news of earnings growth and dividend hikes.
Very generally, customer growth adds to the top line.
New asset development adds to the top line whereas regulatory increases energy prices, cost savings, that adds to earnings.
So what are we going to expect for earnings in 2024?
I think we need to look at two things that have happened.
So in 2022, we saw soaring energy prices.
Wholesale electricity costs were high across the country.
Natural gas prices were high. We were seeing-- my benchmark is the Henry hub spot price.
We were seeing prices above $5 for million BTU over much of the year.
We were seeing prices as high as eight during the summer.
Going forward in 2024 and 25, we're expecting to see prices closer to $3.
We're not expecting to see prices-- natural gas prices go up and approach $5 until 2025.
So we're going to see cost savings. That is going to drive earnings. And the other thing is weather.
Most of the US, most utilities had substantially milder temperatures.
The mildest temperatures on decade. And so we saw earnings drop, not just what would be usual.
In one quarter, we'd see 3%, 4%.
We were seeing 8%, 9%, 10%, even as much as 15% or 20%.
So the good news is most weather forecasts are saying we're returning to normal weather in 2024.
So I think we can expect our utilities to have substantial earnings growth in the first quarters and the third quarters.
And that's from the favorable comparisons when they suffered so much last year.
>> That was Marie Ferguson, analyst with Argus Research.
As always, make sure you do your own research before making any investment decisions.
stay tuned for next week. We are going to hear from noted hedge fund manager Cliff Asness of AQR Capital on Monday.
You are going to get his take on the markets and whether the 6040 portfolio strategy works in this environment.
That's all the time we have the show. On behalf of me and Anthony in front of the camera and everyone behind-the-scenes who brings you the show on a daily basis, thanks for watching and you will see you tomorrow.
[music]
We will discuss the impact a I might have on the labour market and whether the industry is ready for it. We are going to hear from TD Epoch to Kevin Hebner and TD Cowen Sam Damiani will give us his outlook for the rates.
In today's low broker education segment, Jason Hnatyk will take us through where you can find tax documents on the WebBroker.
It's a timely time to have that conversation.
Before we get to all that and our guest of the day, let's get you an update on the markets.
SPX up more than a full percent. The price of West Texas intermediate benchmark crude and other benchmark foods is soaring today. You're up about 3% on WTI. There is an OPEC meeting coming.
There is a lot of reporting out there based on unconfirmed sources that OPEC is looking to roll over those production cuts.
Seems to be firming up the price of crude.
When I look through the list of the most actively traded names, I try to pick things from different sectors, it's pretty much an energy story today for the TSX.
Let's take a look at Cenovus right now, CVE, on the composite index. It is firmly in positive territory to the tune of almost 3%, $24.33 per share. Crescent Point Energy, is 3 1/3% to $10.22 per share.
South of the border, let's check in on the S&P 500. We had the Fed's preferred gauge of inflation yesterday.
Yes, it ticked higher for January but that was the expectation.
The market got what it expected and we are seeing the S&P 500 back above 5100 points, 5120. Europe 24 points, about half a percent.
Tech heavy NASDAQ, excitement around the chipmakers this week on the promise of AI.
We are hearing from some companies that feed into these bigger AI names that they are seeing opportunity. The NASDAQ is up a little shy of 100 points, a little more than half a percent. AMD, Advanced Micro Devices, made gains yesterday. They are building on it today. At $199 and change per share, it's up almost 4%.
And that's your market update.
March always sneaks up on you. It's the first day of March right now. It means we are in line for another Bank of Canada rate decision coming next Wednesday.
MoneyTalk's Anthony Okolie has been looking at some of the economic data that the BOC will be looking at.
>> One of the big reports they will be looking at his Canada's economy and we saw the Canadian economy bounced back in the fourth quarter. It was of 0.2% after a 0.1% pullback in the third quarter. That came in better than consensus estimates and much better than the BOC is estimate for flat growth. That was helped by a strong spending on autos and exports.
Additionally, the flash estimate for January points to 0.4% rise but I think this return to growth in the fourth quarter was widely expected but the narrative continues to be that higher rates are continuing to hurt the economy.
In terms of international drivers, the economy contracted with GDP per capita falling in five of the last 6/4. I think there's still underlying weakness in that number.
>> There is a distinction to be made in domestic demand. The whole idea of the BOC raise interest rates to tamp down domestic inflation.
Going into that meeting next week, they want to come up with the right decision.
What's the expectation?
>> TD Economics expects the BOC might shift to a more marginally dovish tone next week. We saw January CPI report was encouraging.
More important, the CPI trim and median edged lower in January, those are measures that the Bank of Canada follows closely.
That's trending in the right direction.
TD Economics says that the Bank of Canada needs to see, says they think inflation is too high and that more evidence is needed that it's moving sustainably towards 2%.
TD Economics expects the Bank of Canada will deliver the first rate cut in June of this year.
>> Due to stenciling. Thanks for that.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
We will give you full coverage of the Bank of Canada update next Wednesday.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.Shares of Dell Technologies in the spotlight today. Artificial intelligence is a big part of this story. The company is handing in an earnings beat was strong demand for its servers. The servers are used to handle AI workloads. Dell also says is just beginning to see the benefits of the AI boom when it comes to their business and the streetlights what they are hearing. At $120 and change, Dell is up almost 27%.
It's another story for Hewlett Packard Enterprises. The Infotech company handed out a mixed report for its most recent quarter and is cutting its sales and profit outlook. It is seeing softening demand in the market. The stock is off the lows of the session. At $15.39, it is up about 1%. I want to check in on shares of New York community Bancorp. The beleaguered regional bank says it has an identified material weaknesses in its material controls. Earlier this year, NYCB disclosed they had taken a larger than expected charge against potential low losses. Background this time last year, we were in that ballpark of being concerned about regional banks in the states.
New York Community Bancorp's shares are down 24%.
Let's check in on the markets. We will start here at home on Bay Street.
Energy companies, oil and gas leading the charge day. Crude up about 3%. An OPEC meeting in the offing.
A lot of stories coming out from unconfirmed sources that OPEC is looking to roll those production cuts forward which is supporting the price of crude and the TSX, of a full percent, 227 points.
South of the border, the S&P 500 back above 5100, 5120 on the board. Again over 21 points or half a percent.
There is a lot of excitement around the development of AI technology and there is a lot of concern about how disruptive it could be to the labour market and whether the assets in the space are in a bubble.
Kevin Hebner, global investment strategist at TBF to join me earlier to discuss.
>> When you look at poles where more people are worried than excited about AI because they are concerned about what will happen with their jobs going forward. So in our view, there's going to be about 60% of jobs will be significantly affected by AI. But in fact, that's pretty normal.
If you think right now, 60% of occupations that exist today did not exist in 1950. So the labor market is always very dynamic and lots of change. But the way we come up with these numbers is the US Department of Labor divides the US labor market into 1,000 different occupations. Then each occupation they break into 15 to 20 different tasks. So you have 18,000 tasks overall describing the US labor market.
Then you look at which tasks can be impacted by existing AI-- so not AI as it will be in five years or 10 years but as exists today. And then you get these numbers-- 60% being significantly affected, and for, say, 50% of jobs, over 20% of tasks will be affected. So there will be a lot of jobs being changed and certainly more jobs being changed than displaced by AI. But it means a lot of change going forward, and I think something which we all have to respond to, and I think responding to positively.
>> Yeah, because what we hear about it from people who are proponents of it, they say it's going to take away the drudgery work, right?
And I think of some people I talk about in financial services say, I spend a lot of time charting this or putting all these numbers together.
The AI does it for me, frees me up to do other things. I think where people get concerned is that they're worried that I've got one of the drudgery jobs, and that job will just be gone altogether.
>> I think for most of us-- and it's interesting. If we were having this conversation 18 months ago, we would all have agreed, well, AI is first going to affect blue-collar physical occupations, then white collar, and then creative. But with generative AI, OpenAI and such type of models, this has been totally flipped.
And now it's creative jobs, then white-collar jobs, and then blue collar jobs that are being the most impacted.
And so I think it's important to see that, as this evolves, how we view things is going to be changing a lot. But, say, I'm in the white collar sector, and for a lot of us, AI, it's augmenting what we can do.
So the Excel work I do, downloading data, regressions, creating charts, creating pitch books and things-- AI will certainly be improving my productivity, say, by 20%.
So I've got a long to-do list, so that's going to help me get through more things.
And I think, broadly, for white collar workers, that's true. Creative workers, it's even more so.
People who write, it's going to increase your productivity by 40%. Marketing copy is, in fact, the number one use of generative AI so far.
People who create digital economy content animation, if you saw Sola, it's a tool created by OpenAI. It immediately increases the productivity of people in the automation business-- video games and so forth-- by about 90%. So it's pretty dramatic. And so we will see a lot more content, hopefully not just mid content, but excellent, really engaging content coming forward.
>> You gave us some concrete examples there of productivity, whether it's in financial services, the creative arts.
What does that mean on a national level when we start measuring an economy's productivity, when we start measuring GDP output?
Could AI be the thing that sort of starts kickstarting productivity where, perhaps, we have lagged for a while?
>> Yeah, we think that it's going to increase productivity relative to baseline by 10% to 15%.
And we come up with that number by looking at what's happened historically, say, with electricity, or computers, or the internet.
So it's been similar to that.
You can also do it by bottom-up-- what we were mentioning before with the 18,000 tasks and looking at the impact on productivity and output.
But either way, we come up with a number-- say, over the next decade or so-- about 15%. And that's a very big number.
That's similar to, say, the internet boom that it experienced in the late 1990s. So it is a big deal.
>> Now, when we talk about productivity and we talk about it happening across a broad swath of society in different industries, obviously, as investors, we start to think about companies that are more productive would probably make better use of their inputs and then see better profits. I mean, is this the flow-through, then, to the investment community where more productive society, more productive corporations actually produce healthier profits?
>> Well, certainly, if you have higher productivity, higher growth, you're going to have higher topline growth going forward for companies. But we're also seeing right now, at least for companies who are directly benefiting from the buildup of the infrastructure for platforms, the picks and shovels, if you will-- very dramatic increase in margins, return on invested capital, and generating pretty phenomenal free cash flow.
That's for a small number of companies in the overall market.
So we're seeing very concentrated returns as we build out the infrastructure for AI.
>> I think about the chipmakers.
Obviously, in the early innings of our discussions about AI, and we're about a year into the real proper discussion on a broader base in society.
The chipmakers have benefited. There's got to be a bit more here, I imagine, as we go forward, than just playing it through chipmakers.
>> I think, right now, we're building out the infrastructure-- so for the platforms, different places in semis.
But right now, we don't have very much in terms of applications.
And typically, when you have a new disruptive technology, a general purpose technology, we like to say, it takes a long time for it to diffuse across the economy.
Often, it can be 20 to 30 years to get a 50% diffusion rate.
So AI might be a little bit faster because it happens primarily in the world of bits.
But it's still a very slow process.
So right now, we've got this boom as we build out the infrastructure.
But then going forward, we have to get to the point where, where's the beef?
Where are the killer apps that help companies and households going forward?
And I think that's going to take longer than many people think.
So on our view, we're going to keep enjoying the type of returns we've had over the last couple of quarters.
But at some point, there's going to be this chasm where the headlines are going to be saying, where's the beef? Where are the killer apps?
How is this really helping companies and households? And I think that takes a lot longer than the investment community is currently expecting.
>> Now, the investment community, if it's going to take longer than they're currently expecting in terms of us feeling our daily lives changed by these killer apps, as you call them, from AI-- we've seen a big runup in those chip names.
Again, NVIDIA has been a poster child here. It has people saying the word "bubble." If you take a look what's happening AI right now in the market runup, are we in a bubble?
>> Yeah. So there's three reasons to think we might be in a bubble, say, similar to where we were in the 1990s. One reason is the concentration of returns.
And in fact, since 1920 there's, only been two other times when returns have been so concentrated in a small number of names-- the late 1990s and also the late 1920s, and neither of those ended up terribly well.
The second reason is valuations.
Valuations are stretched-- not as much as they were in the 1990s but, clearly, stretched beyond norms.
And the third reason, I think, is the quite euphoric tone of many pundits in a lot of commentary about AI. So that's three reasons to think we might be in a bubble.
But what is different this time is, in the 1990s, companies were burning through a lot of cash.
And ultimately what burst the 1990s bubbles were the headlines and Barron's and things saying, oh, my god, we're running out of cash.
They're all burning money. And this thing can't run very much longer.
Right now, we've got enormous free cash flow generation, great margins, great return on invested capital, at least from Mag Seven and related names.
So that makes it different. And we would say it means that now is more like 1997 than 1999.
>> That was Kevin Hebner, global investment strategist with TD Epoch.
Now, let's get our educational segment today.
Tax season is upon us and joining us now to take us through the tax tools available on the platform is Jason Hnatyk, Senior client education instructor with TD Direct Investing.
Jason, let's talk about the information that we need for our taxes and where to find it on WebBroker.
>> Yeah, absolutely. Let's do that.
Our species and has just finished. It's not even cold yet. We are on to the next season.
It may not be everybody's favourite season but it's one we all participated nonetheless, and as you pointed out, it's tax season.
Let's take those tools and resources in WebBroker so we know it support we've got from the platform.
The first thing I would like to show everybody is the access to our tax information section. It go to accounts, under the self-service tax information Centre.
Go ahead and launch this.
There's a lot of information here to help file your taxes, key information, what you can expect to find on your tax documents as well as other important documents here, registered account information, information about reporting. It get in there and take a look for yourself. One thing I want to point out on this page is really nice time frames to expect for filing as well as the document that you're going to be receiving. We choose the top link here under filing taxes.
We can see a few dates, as I mentioned. As we scroll down, it's when you can expect to receive those documents. With those documents in mind, let's go ahead and take a look at where you can find those here in the platform itself.
The eServices section can be found also going back to accounts. Under account details, you will see documents and eServices at the bottom. Alternatively, you can find that by clean your name in the top right hand corner and the documents eServices can be found there.
Tax documents is here. We've got your back here.
Here, we have all data going back up to seven years so you don't need to be having some creaky filing cabinet. This will all be stored in a nice convenient place for you to find for you to go back and choose the different years.
I will choose all and run a search and then it will appear all the relevant documents.
Somebody's personal account will have more documents available than just my demo, but this is where you will find your income summaries, trade summaries, as well as all of your tea slips that you need. WebBroker has that part sorted out so you just have to worry about making sure you make the appropriate filings with the government.
>> Much cleaner ways to file those documents other than a creaky filing cabinet, which I have in my 100-year-old house.
What about other supports for our taxes?
The stresses of people.
>> You're right. They're just so much information to know about taxis and and this one of those things where we do want to make mistakes.
We've got support therefore YouTube.
Let's jump in and find out where you can learn more about your responsibilities, where you can learn some strategies to make taxis and easier for yourself. From WebBroker again, we are going to go to the learn tab at the top of the page.
From here, there are a couple different resources I want to highlight.
The first will be our video lessons. From video lessons, we are going to choose the filter on the far right hand side.
We have a section under how to invest, called managing taxes, you can quickly find all sorts of different great material to learn about mistakes to avoid, boosting RSP strategies and so on.
Outside of that, I want to highlight something we are running specifically for tax season, it's a master class, a live interactive session where instructors like me are here to run through nice no information and walk you through the platform and a hopefully interactive and engaging manner.
We are going to go dim master classes. We run these on a weekly basis. We ran on today at 11 o'clock.
We can see that next Friday, we are running this again. Come join us for that informative session. We will be able to take you through the tax resources we have available for you here at TD Direct Investing.
>> Appreciate you walking us through those resources.
>> my pleasure.
>> Jason Hnatyk, senior client education instructor at TD Direct Investing. And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
We all know that rate sensitive sectors like real estate investment trust have had a tough ride amid the recent central bank hiking cycle. But with the interest rate cuts expected by many this year, could things be turning around to the sector?
Sam Damiani, director for equity research at TD Cowen and 20 earlier to discuss.
>> The REIT index, if we look at that, is down about 25% from pre-COVID. We made it all back by the end of 2021, but 2022 was a big down year. And last year was flat.
But that masks the story of huge volatility. I think at one point, the REIT index was down 25%, and then up 25%, finished the year flat.
And so we're still down 25% from pre-COVID. And the big challenge over the last couple of years has been the rising interest rates, for sure.
>> Because when you think about it, you start thinking about REITs, and you can break them down, whether it's office, or industrial, or residential. But in the end, when you talk about distributions, just like a yielding stock, if you're starting to get money market rates of 5%, that is a challenge, I'd imagine.
>> Yeah, that's a huge challenge. We looked at the Bank of Canada information, and they show the inflows into GICs and term deposits is about $250 billion over the last two years.
And you layer on top of that the money market funds, which aren't captured by that Bank of Canada data, that's a massive flow of funds.
And obviously, a good chunk of that would have come out of yield-oriented sectors of the equity market like REITs. So the overall REIT index has a market float of $50 billion. So $250 billion just into GICs and term deposits, maybe another $200 billion, who knows, into money market funds-- even a small fraction of that would have a massive impact on price. And we're sure it has.
>> So you already have that sort of challenge for the sector where people want those distributions. They're looking at yield.
They're looking at money market funds. And then we start to break it down. As we're saying, through the pandemic, office has obviously struggled. Does that become more challenging-- first headwind here is high interest rates, and then we started thinking about, how are we living life post-pandemic?
Office seems to be the most glaring one.
>> Office is tough. And it gets a disproportionate amount of attention.
Especially when you turn on a US TV channel, you'll see US commercial real estate in trouble.
But really what they mean is office properties.
And so the fortunate thing for the Canadian market is that the REIT index today just has one REIT in it specializing in office properties.
So 85% of our coverage universe is shopping centers, warehouses, and apartments.
And all those three sectors are doing much better than office.
And so the return to office, I think the outlook has gotten a little more clear.
There's kind of a consensus forming as to how it's going to evolve.
But it's going to be a very bifurcated market.
And the good buildings are going to hold up just fine.
Some of them will actually do better than they would have pre-COVID. But there's probably a bottom-- whatever it is-- 10% or 20% of the buildings or the space in the market that becomes functionally obsolete.
And some of it will be converted to residential.
Some of it will be just outright demolished or repurposed in other ways.
So it's been a challenging sector, and we've seen distribution cuts out of that sector, in particular, over the last four years.
>> Now, as we assess the health of the REITs as we head through this year, we actually have some earnings.
I don't think we've got them all in for the most recent quarter, but we've got a handful of them.
What are you starting to see? Are there themes that we're picking up on here?
>> Yeah. Yeah. We're about 3/4 of the way through earnings season for the REITs. The REITs, some of them tend to report quite late.
So we'll be talking Q4 results in the middle of March, unfortunately.
You're well into thinking about Q1. But overall, it's been, on balance, a good quarterly report so far.
We were looking for 4.5% AFFO growth year over year.
>> That's funds from operations, right?
That's the key metric when we're talking about-- >> Adjusted funds from operations. So it's kind of a smoothed measure that's comparable across all REITs.
So it takes out the noise that sometimes gets reported from quarter to quarter. And so on that measure, we were looking for the fastest growth in two years.
So that's reflective of the interest rate headwind that has obviously increased interest expense.
That impact has started to taper off.
And so now the strong underlying property performance is now able to flow through to the bottom line and to this 4.5% AFFO growth that we were looking for in Q4.
And for the most part, we're seeing more beats than misses.
I think, on average, we're seeing results about 1% ahead of forecast.
So that's good. Particular strength is being demonstrated in the apartment sector.
Particularly any apartment with Alberta exposure is seeing very, very strong demand, big, big rental uplifts.
And Boardwalk was one that reported recently and put out guidance that was very, very strong.
>> Now, when we think about that rental space that Boardwalk is in, obviously, we've had very robust immigration in this country.
So it always seems like-- it's interesting when you talk about real estate.
You talk about the challenge of a higher borrowing environment, but then we also have other factors in play including a growing population that makes some of these sectors, I think, a little more interesting than others.
>> Absolutely. Over the last two years, Canada's population is up 5%.
And that's an astounding number, I think, that probably surprised every level of government.
And I think we can read the papers and conclude that the country wasn't really prepared for that level of population growth.
And so the first thing people need is a place to sleep.
They also need to feed themselves, go shopping for the basic essentials. And so in apartment leasing and in essential-oriented retail property like grocery-anchored shopping centers, we've seen very, very strong demand, occupancies at peak levels, and rental spreads that are to the positive more than we've seen in a long, long time.
So it's really a strong tailwind for the sector. And this is offsetting the impact of interest rates.
I just want to get back to that because we talk about the funds flow.
Hopefully that sort of reverts, or stabilizes, and eventually reverses. The interest cost burden is significant.
But when we put it into context, our coverage universe saw interest expense equal to 28% of EBITDA two years ago.
That's increased to 31%. So interest expense has eaten up 3% of EBITDA over the last two years.
The good news is our forecasts, which capture the consensus TD Economics view for interest rates over the next couple of years, we don't see that 31% going any higher.
So going forward, the strong operating environment should be able to flow through to the bottom line and allow the REIT sector to report accelerating bottom line AFFO per unit growth this year and next year.
>> Interesting perspective on there. Of course, for full disclosure on the companies covered by TD Cowen, see the link to the TD Securities website at the end of this program. I've got to ask you one more thing. So this is the setup, and you're saying we think we've peaked out in terms of the effect that interest rates are having.
Of course, the market is pricing in interest rate cuts from both the Bank of Canada and the Fed this year.
Once those begin, what are we thinking about in terms of the REIT sector?
>> So it could be a setup for a positive finish to the year.
And I say that because one of the biggest challenges has been the absolute level of interest rates, but also the volatility.
And this has resulted in many companies deferring capital decisions. So we talk about the leasing market for apartments.
That's a no-brainer, if you will.
But on the industrial side, even the office-- some companies are still thinking about expansions or relocations.
But they don't really know what their cost of capital is.
And so they're hesitant. And so as interest rate volatility settles out, and even more so we start to see these cuts, I think you'll have a return of confidence in businesses deploying that capital. And that should result in acceleration of expansionary moves by companies.
>> That was Sam Damiani, Dir. for equity research at TD Cowen.
Now, for an update on the markets. We are having a look at TD's Advanced Dashboard, a PlatForm designed for active traders available through TD Direct Investing.
Let's jump into the heat map function here, gives you a view of the market movers.
We are looking at the TSX 60 by Price and volume. A lot of green on that screen to round out the trading week.
Indeed, we've got West Texas intermediate, American benchmark crude, a lot of the global benchmark crudes up today.
There are rumours that OPEC will go into a meeting next week and come out in further support this production cuts. Seems to be giving a boost to the price of a lot of energy names.
Cameco is in that group. It's on oil and gas but uranium and it's up to the tune of about 4%.
We have had a full slate of bank earnings this week from the biggest financial institutions in this country. Got green on the screen and the financial space and basic materials too. A lot of mining stocks rallying. Let's check at the price of gold.
Broad oil to the upside, also gold up about 40 bucks an ounce, almost a full 2%, to $2093. Definitely benefiting the big sectors in Toronto.
The S&P 100 back above 5100 on the S&P 500, digging down into the S&P 100, the chipmakers in the last couple of days, particularly AMD, a lot of excitement around them. It's up another 4% today.
Even Intel is feeling the uplifts here.
There is not as strong growth across the market creating a more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
We have been talking about rates, we got the Bank of Canada next week. The big question is one of the cuts coming from the Fed and the BOC?
Rate sensitive sectors like utilities and had a rough ride amid the recent central bank hiking cycle. Both interest-rate cuts expected by many this year, could that turn things around for the sector?
Marie Ferguson, analyst with Argus Research, joined be earlier to discuss.
>> They have historically been seen as a defensive stock, meaning they will have more stable earnings and consistent returns during a weaker economy and market downturn. Typically, defensive stocks relate to well known companies that provide goods, services, what consumers need regardless of what consumer spending is. And so utilities fit the bill.
Another reason utilities often trade as a defensive stock is that they are regulated.
So most public utilities are highly regulated in an effort to remain stable and typically have year-over-year growth around 3% to 5%.
Regulators, they don't just set what our electric and natural gas rates are.
They actually work with the utilities to set rates that will help the utility meet their revenue requirements for the year.
Regulators also have oversight as to items on the balance sheet.
They overlook debt cap ratios, and they set return on equity on capital investments.
So utilities are known to have a little lower risk, more modest equity return.
But they're also low beta.
And they also usually provide a stable dividend income, often importantly qualified dividends, which are taxed at a lower long-term capital gain rate than other income-- rather than normal income.
This can appeal to certain investors who are willing to accept the total return of equity growth and the dividend contribution. It's interesting. Right now, the average dividend yield in the S&P 500 is about 1.6%. The average dividend yield for utilities is 4%. So if we're looking at 2% to 3% earnings growth, stable growth, a defensive stock, we're looking at 4% income growth.
So not all utilities pay equally or raise their dividends equally.
So not all utilities pay equally or raise their dividends equally.
But they're typically very stable.
And we very rarely see dividends suspended.
Duke Energy in the utility sector has been paying dividends for 99 years without missing a year.
Con Ed, our local New York utility, has had 50 consecutive years with annual rate hikes.
So typical rate hikes are 2% to 3%. But in our sector and in the stock side cover, we'll see-- this year, we expect some rate hikes close to 7% or 8%. For instance, from Nextera and from Wisconsin Energy, we expect much higher than peer dividend increases.
>> So we got a nice rationale there as to why investors look to the utility space as part of a portfolio.
What does it mean, though, when we hear that utilities are sensitive to interest rates?
Because obviously, interest rates are pretty much all we've been talking about for the past year and a half or so.
>> That is a well followed, pretty well proven historical trend that utility stocks decline in price when interest rates rise, or in periods of prolonged high interest rates.
The reasoning behind this is that when rates interest rates go up, large institutional investors will leave the equity market and sell their shares and move over to the fixed income market.
So while interest rates rise, share prices can remain sluggish. But conversely, dividend yields also rise.
So when rates are high, share prices often decline.
And for interested investors, you can follow the timing.
It could provide an opportunity to enter the sector.
The benchmark, I just want to point out that we typically use in the sector to gauge rates is not really just mortgage rates, but the 10 year treasury yield.
So that's been hovering around 4.3%.
So we're almost equaling that with our dividend yield in the sector.
>> And we do have expectations of rate cuts, right?
>> Better performance. I'm sorry?
>> was just saying, and we do have expectations this year of rate cuts from the Fed at some point. It's still early in the year. I feel like the market's a little impatient. But there's still expectations that we'll get these cuts. So what would you expect from utilities this year in the way of their earnings?
>> OK. Well, I just want to say what we're expecting-- I think almost all economists on the street are projecting that interest rates are going to ease some point in 2024. Our Argus economists are projecting that they're going to probably have three quarter point down ticks in the second half of 2024 with some continued easing in 2025. So with rates going down, I just want to point out some historical facts to prove up this theory that it could be a good time to get into the utility sector.
So since 2007, we've had roughly about five periods of interest rates, a continued declining treasury yield and rates that are going down. In 2011 when rates were going down, utilities were the best performing sector. In 2014 when treasury yields were declining, utilities were the second best sector. And in 2018, they were also the second best performing sector as rates were declining. Conversely in 2020 to 2023, rates have been up and utilities have been a bottom five performing sector.
>> So that's a nice historical context for it. Obviously, if we do see the rate cuts coming this year, as you said economists are expecting, we can start to see some share price movement. What about the actual earnings? I mean, utilities are also sort of capital-intensive industries.
And well, they have to borrow, right? Just like anybody else.
>> They do have to borrow. Interest rate pressure has been a headwind to earnings.
There are some generalizations we make about the sector.
In a more sluggish economy, stocks tend to follow and trade on news of interest rates.
As the economy improves, we see the stronger and larger companies starting to trade on news of earnings growth and dividend hikes.
Very generally, customer growth adds to the top line.
New asset development adds to the top line whereas regulatory increases energy prices, cost savings, that adds to earnings.
So what are we going to expect for earnings in 2024?
I think we need to look at two things that have happened.
So in 2022, we saw soaring energy prices.
Wholesale electricity costs were high across the country.
Natural gas prices were high. We were seeing-- my benchmark is the Henry hub spot price.
We were seeing prices above $5 for million BTU over much of the year.
We were seeing prices as high as eight during the summer.
Going forward in 2024 and 25, we're expecting to see prices closer to $3.
We're not expecting to see prices-- natural gas prices go up and approach $5 until 2025.
So we're going to see cost savings. That is going to drive earnings. And the other thing is weather.
Most of the US, most utilities had substantially milder temperatures.
The mildest temperatures on decade. And so we saw earnings drop, not just what would be usual.
In one quarter, we'd see 3%, 4%.
We were seeing 8%, 9%, 10%, even as much as 15% or 20%.
So the good news is most weather forecasts are saying we're returning to normal weather in 2024.
So I think we can expect our utilities to have substantial earnings growth in the first quarters and the third quarters.
And that's from the favorable comparisons when they suffered so much last year.
>> That was Marie Ferguson, analyst with Argus Research.
As always, make sure you do your own research before making any investment decisions.
stay tuned for next week. We are going to hear from noted hedge fund manager Cliff Asness of AQR Capital on Monday.
You are going to get his take on the markets and whether the 6040 portfolio strategy works in this environment.
That's all the time we have the show. On behalf of me and Anthony in front of the camera and everyone behind-the-scenes who brings you the show on a daily basis, thanks for watching and you will see you tomorrow.
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