The TSX real estate sector has risen 8 per cent over the past three months. (Photo by Arrush Chopra/NurPhoto via Getty Images) (NurPhoto via Getty Images)
The Toronto Stock Exchange’s real estate and utilities sectors have been recovering with the onset of interest rate easing, outperforming the S&P 500 as well as the TSX Composite Index recently.
“Interest rate sensitive sectors of the stock market have been hit hard since the tightening cycle began in early 2022,” BMO Capital Markets economist Robert Kavcik wrote in a Tuesday note. “Since January of that year (when the Bank of Canada began raising interest rates in March), TSX real estate has fallen roughly 20 per cent and utilities have fallen more than 10 per cent.”
During that same period, the TSX rose by about 10%. The Bank of Canada cut interest rates by 25 basis points twice during that time, taking the overnight rate to 4.5%.
“As mature sectors comprised of historically highly leveraged and indebted companies, utilities and real estate, like bonds, tend to move inversely with interest rates,” Colin Ciesinski, portfolio manager and chief market strategist at SIA Wealth Management, wrote in a note to Yahoo Finance Canada.
The telecom industry is also struggling with rising interest rates due to its mounting debt burden, Kavcic wrote in an email. “Stocks are priced based on dividend yields that become less attractive as interest rates rise.”
In the real estate industry, “due to differing demand patterns, some areas (offices) performed significantly worse than others (multifamily),” he wrote.
But over the past three months, the fortunes of interest-rate sensitive sectors have shown some bright spots, coinciding with the Bank of Canada’s first two rate cuts. Kavcic notes that Canadian REITs, which make up a large part of the real estate sector, have risen 8%, while the utilities sector as a whole has risen 10%. The TSX Composite Index has risen 3.8% in that period, while the S&P 500 has risen 7%.
In the coming months, “these sectors could benefit from the possibility of further interest rate cuts,” Cieszynski said, adding that there could be a shift in capital “from the current concentration in high-growth, high-tech companies to broader participation or even defensive parts of the market.”
John MacFarlane is a senior reporter for Yahoo Finance Canada. Follow him on Twitter. FollowDownload the Yahoo Finance app, available for Apple and Android.