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Utilities expected to fall 4 per cent
July 19, 2013
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CALiFORNIA: Utilities are hurt by higher rates, and would be expected to fall 4 per cent in such a scenario. Stocks have fallen amid expectations of higher rates include those that have a high percentage of debt when compared with their market value. The concern is that those that frequently sell debt will incur higher costs as rates rise.

 “You want companies with strong finances, first of all, so they won’t have to incur higher interest charges as they borrow,” said John Carey, portfolio manager at Pioneer Investment Management in Boston, which oversees about $200 billion in assets globally.

Not including financials and utilities, both sectors that count on borrowing heavily for their operations, the average S&P 500 figure on long-term debt as a percentage of market value was 15.9 per cent as of the end of the first quarter.

More than 20 non-financial or utilities companies have a ratio of more than 65 per cent, including Iron Mountain Inc, Alcoa and Peabody Energy. These stocks, on average, have lost 3.4 per cent since the May 21 close, just before Bernanke first discussed reducing bond-buying. The S&P in that time is slightly higher, by comparison.

Dividend payers have also trailed the S&P, if only modestly. Those who invest for income often look at the S&P 500’s dividend yield - a measure of the dividend returns divided by the index price - against the 10-year note as a yardstick. 

The S&P dividend aristocrats index, which includes only S&P 1500 components that have increased their dividend every year for at least 20 years, rose nearly 19 per cent from its close last year to May 21, compared with a 17 per cent gain on the S&P 1500. 

Since then, however, it has slightly underperformed. The S&P 1500 is now up 1.1 per cent from that previous record closing high, while the “aristocrats” have gained less than 0.1 per cent.

“We’ve already seen some of the negative reaction with what the market was euphemistically referring to as ‘bond proxies,’” said David Joy, chief market strategist at Ameriprise Financial in Boston, where he helps oversee $708 billion in assets.

Since May 21, the S&P utilities sector is down 2.3 per cent. Telecoms are 3.1 per cent lower from that date. Funds specific to utilities have seen three consecutive weeks of outflows, according to Lipper, and the four-week moving average of outflows is currently $240 million, representing the heaviest flight from those funds since September 2007. 

A Morgan Stanley note showed technology and materials stocks are the best performers in a steepening yield environment, even when adjusting for the sectors’ beta, or their volatility compared to the broader market.

Agencies

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