The Bank of Canada has cut rates again, coming down to 4.25% this week. And now, the Federal Reserve looks like it might do the same. If the Fed cuts interest rates in September, Canadian investors could experience several ripple effects.
A rate cut could lead to a weaker dollar in the United States, potentially strengthening the Canadian dollar. This would impact Canadian exporters by making their goods more expensive in U.S. markets. On the flip side, lower U.S. interest rates could make Canadian investments more attractive by comparison. Possibly boosting Canadian stocks and bonds as global investors seek better returns. Additionally, lower borrowing costs in the U.S. could spur economic growth, which would be good news for Canadian companies that do business with the U.S.
So, where should Canadians invest? Let’s look at the big picture.
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What to watch
If the Federal Reserve were to cut interest rates, Canadian stocks that are sensitive to interest rates could see a boost. In particular, sectors like real estate, utilities, and financials might rise. Real estate and utilities are typically seen as “safe havens” that benefit from lower borrowing costs. This makes it cheaper for companies to finance their projects and for consumers to take on mortgages. For financials, particularly banks, a rate cut could lead to increased borrowing and lending activity. This could drive up their profitability, especially if the Canadian central bank follows suit.
Furthermore, consumer discretionary stocks might also see a lift. Lower interest rates tend to encourage spending, as borrowing costs decrease and consumers feel more confident about making big purchases, like cars or homes. This could benefit retail and automotive stocks in Canada. Furthermore, growth-oriented technology companies could thrive as lower rates make it easier for them to access capital for expansion, boosting their future earnings potential.
One to watch
Granite Real Estate Investment Trust (TSX:GRT.UN) is, therefore, an attractive investment option, particularly in the context of a potential Federal Reserve rate cut. Real estate investment trusts (REIT) like Granite typically benefit from lower interest rates. These reduce borrowing costs and can lead to higher profit margins. This is crucial for Granite, as it holds a significant portfolio of logistics and industrial properties across North America and Europe — sectors that are well-positioned to thrive in a low-interest-rate environment.
The reduced cost of capital allows Granite to continue expanding its portfolio or refinancing existing debt at more favourable rates. This enhances its overall financial stability. Moreover, Granite has shown strong financial performance, which supports its potential as a solid investment. In the second quarter of 2024, Granite’s net operating income (NOI) increased by 7.6% year over year, demonstrating the resilience and growth of its income-generating properties.
The REIT also reported a 21.9% increase in quarterly earnings, reflecting its ability to effectively manage and capitalize on its property portfolio. With a consistent occupancy rate of 94.5%, Granite has a stable base of rental income. And this is further bolstered by strategic rent increases and favourable leasing spreads.
Finally, Granite’s attractive dividend yield makes it a compelling choice for income-seeking investors, especially in a declining-rate environment where traditional fixed-income returns may diminish. With a forward annual dividend yield of 4.34% and a payout ratio that indicates room for sustainable growth, Granite offers a reliable income stream. The REIT’s commitment to maintaining and increasing its dividend payouts, supported by strong earnings and cash flow, makes it a strong contender for investors looking to balance growth and income, particularly as the macroeconomic environment shifts in favour of lower interest rates.
