CIBC predicts lower rates will shift investments from term deposits to dividend-paying stocks like REITs and Utilities
According to Canadian Imperial Bank of Commerce (CIBC), changes in the Canadian investment landscape are underway.
As per a report by Financial Post, rising interest rates in recent years have driven many investors toward term deposits and other short-term fixed income products. CIBC estimates that over $200bn has been directed to these products, which might otherwise have been invested in high-yielding equities.
“With falling rates, it makes intuitive sense that some of this will reverse – but also reasonable to ask ‘when’ will this occur?” said CIBC analysts led by Ian de Verteuil in a research note.
The team analysed Canadian bank term deposits over the past 35 years, identifying four significant periods of outflows. These outflows typically happened 350-400 days after the peak in Canada’s 3-month bill and 2-year bond rates.
Interestingly, both rates peaked in October 2023 and have been declining since.
CIBC predicts that high-dividend-paying Canadian stocks will be the “natural” destination for these funds. These stocks offer tax advantages over interest income, and dividends can grow over time. The relative yield of these stocks compared to 2-year government rates is becoming increasingly attractive.
Sectors like REITs, Utilities, Telecoms, and Financials are expected to perform well due to their business and earnings stability.
CIBC also forecasts that the Bank of Canada’s overnight target rate will decrease to 3.75 percent by the end of this year and 2.5 percent by the end of 2025.
If these projections materialize, CIBC expects that lower rates will drive investors back to dividend-paying stocks, especially since many of these equities have underperformed in recent years.
“If interest rates fall as we expect, what was a material headwind should turn by 180 degrees and provide support for REITs, Utilities, Telecoms and Financials,” the analysts added. These sectors are predicted to outperform in the coming quarters.
However, money flow alone is not enough—business performance will play a crucial role. Telecoms face increased competition and changing regulations, while some Real Estate Investment Trusts (REITs) are still grappling with the effects of the COVID-19 pandemic and hybrid work models.
Utilities must navigate shifts in power generation. On the other hand, Financials are projected to benefit the most. Bank earnings have demonstrated the strength of domestic personal and commercial banking, and life insurers are adjusting well to the changing interest rate environment.
The Bank of Canada’s recent benchmark interest rate cut for the third time in a row was widely expected. The 25-basis-point cut, while anticipated, left some observers feeling the central bank should have been more aggressive.
“It’s said that victory goes to the bold, but the Bank of Canada went with the more cautious approach of, yet another quarter point rate cut,” said Avery Shenfeld, CIBC Capital Markets' chief economist. He added that rates remain higher than needed to improve the economy and labour markets.
Notably, the last time the central bank made three consecutive rate cuts, aside from the pandemic, was during the global financial crisis in 2009.
