STICK TO TRADITION

Valuations may be high, but stocks are still worthy

You’ve been hearing it for months, maybe years: Interest rates are heading higher. But you need not look any further than the Bank of Canada to see that may not be the case. Recent data show the country’s headline inflation may be ticking up gradually, but it’s still near the lower end of the central bank’s to 3% target range. “In Canada, low inflation and disappointing job creation have prompted many to ask whether the Bank of Canada will need to ease in Paul-André Pinsonnault, senior economist at National Bank Financial, said in a recent report. Even if year U.S. Treasuries end the year around and Canadian year government bonds are somewhere near as many economists expect, the move higher is expected to be gradual, unlike the shock sparked by U.S. Federal Reserve chairman Ben Bernanke’s tapering talk in May As a result, investors will have little reason to quickly shun interest-rate sensitive equities that offer significantly higher relative yields — such as TransCanada Corp. and BCE Inc. — and have the potential for capital appreciation in an improving economic environment.

Of course, the recovery may stall or muddle through as it has for much of the past few years, which should keep central banks on hold even longer than the bulls expect. The recent turmoil in emerging markets shows howquickly another macro flare-up can happen.

Michael Gavin, Barclays’ head of asset allocation research for the Americas, pointed out that market participants appear to have concluded that interest rates will remain low for the next couple of years, but the subsequent normalization should be more rapid than previously expected. This perception, coupled with low and falling inflationary pressures, may keep interest rates low for longer.

Investors are familiar with the demographic argument for dividend-paying stocks — an aging population is thirsty for the income publicly-listed companies provide — which is also why companies in sectors other than the traditional payout leaders, such as telecom, utilities and pipelines, are hiking their dividends. Valuations among high dividend payers may look lofty, but their yields are clearly too attractive to pass up for many investors just yet — and maybe for a long time to come. —