Supply And Demand: Why Fixed-Rate Reset Preferred Shares (And The Canadian Preferred Share Index) Are Still Vulnerable
Paul and I have been focusing more on the preferred share dilemma in our respective blog's and discussions of late and just in time, a report from Bloomberg to corroborate our concerns that banks will have to continue to raise Teir 1 capital to maintain their ability to absorb losses:
"Canadian Banks Fall Behind US, Europe Lenders In Strength Gauge"
In a nutshell, this means that Canadian banks will once again likely have to turn to the fixed-rate reset preferred share market to issue new preferred shares (because it is the cheapest way for them to do build the required capital) and add supply to a market that is only just now finding a way to absorb last years supply.
Total return on the Canadian (SP /TSX) Preferred Share Index (including dividends) is close to - 15% over the last year. The index is made up of close to 65% fixed-rate reset preferred shares. That kind of volatility has not been seen since the 2008-2009 financial crisis.
This has not been a the "comfortable", low volatility, approximate 5% dividend return vehicle that it once was. If supply is coming, then the little bounce since the January lows may be just about over and the downward trend may be about to reassert itself.
You just might want to have a look at your preferred share allocations.
Today is webinar Tuesday and we will be discussing this and many other topics surrounding the global economy, financial markets with our clients. As we do each week, following the webinar, we will post the recorded version on our website, so feel free to tune in at http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist