After making eight consecutive interest rate hikes through 2022 and the start of this year, the Bank of Canada finally put a pause on rate hikes. The policy interest rate has held steady at 4.50% from January 25 to the last announcement yesterday.
Since peaking in June 2022 at 8.1%, inflation has come down to 5.2% in March. However, it’s still a way off from our central bank’s target of about 2%. This is why the Bank of Canada is holding the policy interest steady for now.
The Bank of Canada will continue to monitor the economy and “remains prepared to raise the policy rate further if needed to return inflation to the 2% target.” Investors can mark the calendar to note the next announcement for the overnight interest rate target is June 7.
In light of interest rates holding steady, where should you invest next?
From a contrarian standpoint, investors can explore investments that have come down significantly because of higher interest rates.
NorthWest Healthcare Properties REIT
NorthWest Healthcare Properties REIT (TSX:NWH.UN) was whipsawed by a jump in interest expense. In 2022, its interest expense rose 60% year over year. Also, its funds from operations (FFO) reported in the last quarter was down 24% year over year. From a per-unit basis, it was even worse — down 32% at $0.15. So, its payout ratio was extended. As a result of higher interest costs and a cut in its FFO, the stock has fallen a whopping 40% in the last 12 months.
The global healthcare real estate investment trust’s (REIT’s) debt management is more complex than pure Canadian REITs, because it has investment properties and, therefore, debt in the Americas, Europe, and Australasia. So, overnight interest rate changes in related countries could affect its ultimate interest payments.
As it stands now, the stock yields 9.7% at $8.22 per unit at writing. From the looks of the stock slide, the market is likely pricing in a cash-distribution cut. However, its real estate portfolio appears to be quality. In the fourth quarter, it reported its net asset value (NAV) declined only 4.6% year over year to $13.80 per unit. It means the REIT trades at a 40% discount from its NAV.
Brave souls with a contrarian mindset might consider taking an appropriately sized position in the stock amid the downturn this year.
iShares 20+ Year Treasury Bond ETF
iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) tracks the Barclays U.S. 20+ Year Treasury Bond Index. So, it provides exposure to long-term U.S. Treasury bonds. Its technical chart looks more positive than NWH.UN’s.
Like Northwest Healthcare Properties REIT, the TLT exchange-traded fund (ETF) should also see price gains when interest rates decline. However, it could be a while before we do see interest rate declines, which may not occur until a recession hits. Meanwhile, the ETF offers a yield of about 2.6%.
It may be a tad early to invest in TLT, but investors can consider adding over time for the ultimate period of interest rate cuts that will inevitably arrive in the future. Since there are periods of interest rate hikes, there will also be periods of interest rate declines in an economic cycle. Patience is needed.
Investor takeaway
Patience is required in long-term investing. Right now, investors can explore contrarian positions in NWH.UN or TLT in anticipation of an eventual decline in interest rates. It may be safer to wait for an actual initial decline in interest rates, though.
