Canada’s new investment rules are being inspired by dishwashers, refrigerators
Canada’s new labels for green investments are being inspired in part by energy ratings on refrigerators and dishwashers. That’s according to Barbara Zvan, the Canadian pension fund boss looking to ease uncertainty for investors and shrink the estimated $115 billion per year shortfall in spending needed to hit Ottawa’s net zero by 2050 goal.
Most consumers don’t question the accuracy of the government-backed Energy Star product labels that spell out efficiency stats for furnaces, pool pumps, ceiling fans, and other household appliances, Zvan says. She hopes the federal government’s yet-to-be-released labels for various types of climate-focused investments will offer similar peace of mind as Canada attempts to bankroll a shift to lower-carbon energy.
Known as a climate change maverick in the $2 trillion world of Canadian pension funds, Zvan became president and CEO of the nearly $12 billion University Pension Plan (UPP) in 2020. Taking charge following a nearly 25-year stint at the much larger Ontario Teachers’ Pension Plan, she has promised a net-zero portfolio at UPP by 2040, 10 years ahead of the net-zero deadline set in the Paris Climate Agreement.
As leader of the Sustainable Finance Action Council’s (SFAC) Taxonomy Technical Expert Group, Zvan is shaping the much-anticipated green framework being developed by finance industry experts at the request of the federal government. The plan is to deliver science-based definitions of climate-compatible investments for capital markets participants wary of “greenwashing,” a term for the false or misleading environmental credentials that plague climate investment globally.
An interim report from the SFAC backed by Canada’s 25 largest financial institutions recommends two investment buckets: “green” for low-to-no carbon purposes, like financing renewable energy or battery technology, and “transition” for investments to decarbonize emissions-intensive sectors. For example, a carbon capture and storage installation at an existing oilsands facility with a short to moderate lifespan.
The European Union taxonomy for sustainable activities came into force in July 2020. Zvan says more than 30 taxonomies are in different stages of development globally.
Yahoo Finance Canada spoke with Zvan last week about what investors can expect when the new rules are released in Canada. Comments have been edited and condensed:
Yahoo Finance Canada: What do you hope to accomplish with the new green and transition finance taxonomy for Canada? Is it mainly about reassuring institutional money managers?
Barbara Zvan: There’s a really important number: $150 billion. That’s the gap the federal government has estimated that Canada needs each and every year to meet its net-zero goals.
Take the big pension plans. That’s $2 trillion in assets. If they can muscle themselves to get up to five per cent [in green investments], that’s barely a year’s worth of the capital that’s needed. Then look at Canada’s deficit. We spend $40 billion more than we collect. So the government can’t fund $150 billion per year.
We have to go to foreign pools of capital. What do those pools of capital need? They need clarity. Is it green? Is it transition? They’re not going to figure this out for Canada. They’re going to move on and invest in other opportunities. We need to make it easy to get included in that conversation.
YFC: Will we see a wave of capital mobilize from the sidelines into these investments once the ‘green’ and ‘transition’ labels are applied?
BZ: In 2018, green bonds were about three per cent of bonds issued globally. Today, it’s 15 per cent. So, huge growth. There’s huge demand for this product because a lot of companies, like RBC (Royal Bank of Canada) and others are making sustainable finance commitments. It has spurred a whole market. You’ve seen it go into equities. Now, in Europe you have ratings for different types of sustainability funds.
YF: What types of securities and investments will the “green” and “transition” labels be applied to?
BZ: There are lots of different use cases. Most people think of “use of proceeds” bonds. Those could be called green bonds. We’re hoping that we can also get a transition bond label created as well. That’s why we’ve worked with a lot of international peers to make sure that our definition of transition would be seen as acceptable.
If you’re an equity investor, and you want to look at how transition-aligned a company is, you can look at capex and say, if I use the taxonomy, is the capex going to things that would be considered “green” or “transition.” Eventually, you could get ETFs (exchange traded funds) to say if they are “green” or “transition.”
And if we’re trying to build this green economy, why don’t we have government procurement pointed that way? So, there are lots of different uses by different groups.
YF: You say there are about 30 taxonomies in various stages of development around the world. What challenges and opportunities are unique to Canada?
Most of those taxonomies, when you go around the world, are focused on “green” investments. Our roadmap report laid out a path to get a “transition” label that’s really about defining activities in high-emitting sectors. Think energy and heavy industry, and how they can decarbonize while we need them.
We need oil and gas for a while, but that’s 25 per cent of Canada’s current emissions. They need financing for carbon capture and storage, and methane reductions, and investors need to know which actions actually qualify. We’re actually targeting the hardest parts of our economy to decarbonize. It’s not just green, like in Europe.
YF: When will the new framework be released, and take effect? Do you have a date circled on your calendar?
I wish. The report was released on the Government of Canada website in March. We’re waiting to hear back from them in terms of their next steps, and hopefully funding as well. In the meantime, the group continues to meet. We also have an official sector coordinating group, so groups like OSFI (Office of the Superintendent of Financial Institutions) and the Bank of Canada are participating.
We’re trying to expand out the details around the transition side, [and] more details around governance. OSFI is beginning its work to think about how to connect the taxonomy to capital, and we continue to work with peers globally to build a global definition. Hopefully, we can get an announcement from the government, and in terms of funding, and we can stand up the organization properly, similar to what Australia got today.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
Is AGNC Investment's Stock a Buy? – The Motley Fool
Times are tough in the mortgage space right now. Rising interest rates led to a collapse in mortgage originations, and mortgage-backed securities have been out of favor among investors for the past 15 months or so. Mortgage real estate investment trusts (mREITs) were beset by declining asset values and have had to cut dividends. These factors explain mREITs’ massive share price underperformance since the Fed started hiking rates last year.
Under these circumstances, is AGNC Investment (AGNC 0.62%) — the best known mortgage REIT — a buy?
Mortgage REITs are different than traditional REITs
Most REITs invest in physical properties like office buildings, malls, or apartment complexes, and then lease out space to tenants. It is an easy-to-understand business model. Mortgage REITs use a different model: Rather than investing in properties, they invest in real estate debt — in other words, mortgages. Instead of collecting rent payments, they collect interest payments. In many ways, they look more like banks or hedge funds than landlords.
AGNC Investment focuses on mortgage-backed securities (MBS) that are guaranteed by the U.S. government, so it has minimal credit risk. If a borrower fails to pay their mortgage, the government ensures that AGNC Investment gets paid on its investment. These securities tend to pay low interest rates because of the government guarantee — low risk equals low returns. This means that mortgage REITs generally must borrow a lot of money to turn a bunch of securities that pay interest rates in the mid-single-digit percentages into dividend yields in the teens.
Mortgage-backed securities are under pressure
Over the past year, mortgage-backed securities have underperformed Treasuries as benchmark interest rates were raised. You can see the effect in the chart below, which looks at the difference between the prevailing mortgage rate and the yield on Treasuries. The higher the line goes, the greater the underperformance (“widening MBS spreads” in trader parlance) and the higher the risk of a dividend cut.
The underperformance of mortgage-backed securities results in the book value per share of mREITs declining, which puts them at risk of needing to cut their dividends. There have been three main drivers of MBS underperformance recently:
- The Fed’s ongoing policy of fiscal tightening.
- The exit of the Fed as a regular buyer of the securities.
- The supply of mortgage-backed securities from banks that saw big regional banks get into trouble because they held MBS that were underwater.
AGNC Investment held onto its portfolio of MBS, so their declines in value will translate into higher returns going forward. On the first-quarter earnings conference call, Chief Executive Officer Peter Frederico said that the expected return on its portfolio was a percentage in the mid-teens, and asserted that the company can support its dividend. That said, AGNC cannot ignore declines in book value per share, so, at some point, it might have to cut the dividend if mortgage-backed security underperformance continues.
The dividend is no sure thing
Investors who look at AGNC Investment now are probably going to be attracted to its dividend, which yields 15.2% (based on its current share price and recent distributions). However, the continuation of payouts at that level is no sure thing. The stock trades at a premium to book value per share. However, with the MBS spread increasing, its book value per share is probably declining. With mortgage REITs, it is important to remember that book value per share is a moving target.
Mortgage-backed securities are the cheapest relative to Treasuries they have been since the mid-1980s. There is no doubt that valuations are attractive. The problem is that the fortunes of AGNC Investment are tied to Federal Reserve policy, and while most strategists believe the central bank is near the end of its rate-hiking period, that is no sure thing either. Investors considering buying AGNC for the dividend should keep all of that in mind.
5 Best Growth Stocks to Invest in Now, According to Analysts – June 2023 – TipRanks
Growth stocks are enjoying huge gains in 2023 so far due to the hype surrounding artificial intelligence and expectations of a slowdown in interest rate hikes. Further, recent economic data reflects slowing inflation and a decrease in the yield on long-term government bonds. Interestingly, this makes for a favorable scenario for growth stocks.
To help investors choose the best growth stocks from the entire universe, TipRanks offers a Stock Screener tool. Using this tool, we have shortlisted five stocks that have received a Strong Buy rating from analysts, and whose price targets reflect an upside potential of more than 20%. Also, they carry an Outperform Smart Score (i.e., 8, 9, or 10) on TipRanks. Lastly, these companies’ revenues have witnessed a strong compound annual growth rate over the past three years.
According to the screener, the following stocks have the potential to grow and are analysts’ favorites.
Nvidia is up 163% this year and worth nearly $1 trillion—here's what to know before investing – CNBC
You’d be hard-pressed to find a hotter stock than Nvidia right now.
From the start of 2023 through June 8, the stock has returned more than 163% — a meteoric rise that has the chipmaker flirting with a $1 trillion market capitalization.
Currently, only four firms can say that the total value of their outstanding shares eclipses $1 trillion: Apple, Microsoft, Google parent company Alphabet and Amazon.com.
Nvidia differs from these firms in one key way: valuation.
Valuation is a blanket term that generally refers to the ways in which the market assesses a company’s worth. This is generally measured by comparing a firm’s share price with one of its underlying financial metrics such as earnings, revenue or cash flow.
When you buy a stock, you’re buying a share of a going concern that you expect to grow into the future, and stock prices typically reflect this potential growth. In essence, investors are willing to pay more for a company than what it’s worth today.
One way to measure this phenomenon is examining the company’s stock price compared to a fundamental measure, such as earnings or sales. If a company realizes $1 in earnings per share and trades for $10 a share, it’s said to have a price-to-earnings multiple of 10.
How a particular stock’s multiple compares to its own history (has it had this high a multiple before?), to peer companies (do tech companies tend to have high multiples?) and to the stock market at large (how does this firm compare to the average S&P 500 company?) determines whether investors consider a stock over- or undervalued.
Warren Buffett looks for stocks that trade cheaply compared with their underlying value — a strategy known as value investing. Other investors are willing to pay a large premium for a company they expect to deliver explosive growth.
Now, let’s get back to Nvidia and the trillionaires.
Nvidia’s stock currently trades for 204 times the company’s earnings per share. That’s lower than Amazon’s multiple of 296, but Amazon has always been an outlier in this regard; the retail giant rakes in boatloads of cash that it could convert to earnings if it wanted to. Microsoft trades for 35 times earnings, Apple for 31 times, Alphabet for 27.
Compare stock prices to sales and the difference grows starker. Amazon trades at 2.4 times sales, pretty much in line with the average S&P 500 company. Alphabet’s price-to-sales ratio is 5.6, Apple’s is 7.5 and Microsoft’s is 11.7.
What Nvidia’s high valuation means for investors
Based on earnings and sales, Nvidia comes with a higher price tag than the four biggest stocks on the market.
That doesn’t mean you shouldn’t buy it, or that you should sell it if you already own it. Rather, any prospective investor in Nvidia should do two things, investing experts say.
1. Examine the hype
Nvidia is not a meme stock. Investors are piling in because they believe in the fundamentals of the chipmaker’s business.
Namely, they think Nvidia has a chance to be the largest beneficiary of a technological revolution: artificial intelligence.
Nvidia is the dominant player in graphics processing units — an essential component for running AI in the cloud. Tech investors have seen this as a compelling opportunity for years, and Nvidia got a boost when OpenAI released viral chatbot ChatGPT earlier this year.
“It was an iPhone moment,” says Angelo Zino, senior industry analyst at CFRA. It forced companies across a wide range of industries to rethink how and how much they’ll be investing in AI.
“That makes it really hard to look at those conventional valuation metrics when assessing the magnitude of this opportunity,” adds J.R. Gondeck, managing director with the Lerner Group at Hightower Advisors.
Basically, investors are paying big now in the belief that the company’s fundamentals will eventually justify the price tag, and even make it look cheap in hindsight.
“Given the growth opportunities we see ahead, we think the multiple is fairly reasonable,” says Zino.
2. Prepare for volatility
If you believe in the long-term potential of a hyper-growth stock like Nvidia, you have to be willing to stomach some big drops in the value of your investment to reap the benefits, say investing pros.
During broad market selloffs, companies trading at the highest multiples often get hit the hardest. When investors are betting huge on a company’s future, and that future suddenly looks bleaker, things can get scary in a hurry.
“No tree grows to the sky,” says Gondeck. “You look at Apple, which recently hit an all-time high, and there were plenty of entry points along the way.”
Of course, they’re only “entry points” — or, buying opportunities — with the benefit of hindsight. If you’ve held Apple stock for decades, you’ve likely made a pretty penny. You’ve also experienced two drawdowns of more than 80%, between 1991 and 1997 and between 2000 and 2003.
“If you’re a long-term investor in Nvidia, there’s going to be a lot of volatility along the way,” says Zino.
To keep these sort of downdrafts from derailing your portfolio returns, build a core portfolio of broadly diversified exchange-traded funds and mutual funds, financial pros say.
And keep your individual stock bets to a relatively small corner of your portfolio. If you pick right, it’s a cherry on top of your portfolio’s performance. If not, you’re still theoretically on track to meet your financial goals.
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Check out: Nvidia is worth nearly $1 trillion—here’s how much you’d have if you invested a decade ago
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