Investors in real estate investment trusts, utilities and banks should see the normalization of bond yields and interest rate spreads as a good environment for equities, analysts say.
While the yields on Canadian government bonds have been rising from extremely low levels, investment-grade corporate bond yields have been declining - narrowing the spread or difference - as perceived risks in financial markets diminish.
At the same time, global interbank lending rates have returned to close-to-normal levels, while the volatility of equities has declined.
Also helping out is a recent decision by the U.S. Federal Reserve Board to purchase toxic assets (commercial mortgage-backed securities), Shant Poladian and Jonathan Kelcher, analysts with Canaccord Capital Corp., said in a recent report to clients. "[That] could be the key catalyst to finally kick-start the securitization market for commercial real estate mortgage debt within a matter of months as opposed to years."
HOW WILL THE MARKET REACT?
The recent sale of a "non-distressed trophy" office building in Vancouver suggests top-quality property values are holding up well, they said. This bodes well for companies such as "buy"-rated Brookfield Properties Corp. and H&R Real Estate Investment Trust. "We believe that the recent REIT rally is well supported and there is still good upside from current levels."
Canaccord has "buy" ratings on Canadian REIT, Northern Property REIT and Cominar REIT and a "speculative buy" on Innvest REIT.
"As investors gain more comfort that the financial market is secure and the economy has bottomed, corporate bond and stock yields should decline further and income-oriented equities should advance," said Canaccord's utility, pipeline and power analysts. The groups have lagged the broad market recovery and tend to do well in a recession. Among their "buy"-rated companies are Canadian Utilities Ltd., Emera Inc., Enbridge Inc., Fortis Inc. and TransCanada Corp.
Canaccord analysts estimate interest-sensitive utilities and pipelines could realize a 15- to 33-per-cent increase in their prices in addition to their healthy yields if corporate and government bond yields return to normal levels.
Finally, as the Canadian banks roll out their second-quarter results this week, investors should expect to see net interest margins improve in the second half of 2009 as funding costs decline and the difference between short-term and longer-term rates widen, according to UBS Securities.
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