Barlow’s Research Roundup: Biggest issues for regulated utilities investors

Canadian regulated utilities underperformed in April 2026, returning 0.5% versus 3.8% for the S&P/TSX Composite, as the 10-year Government of Canada bond yield rose about 10 bps to 3.54%. RBC highlighted mixed company-specific drivers, including Hydro One up 1.6%, largely flat performance from Emera, Fortis and Algonquin, and Canadian Utilities down 0.8%, while regulatory and ROE issues remained in focus. The piece also notes supportive commentary for U.S. equities and a positive thematic outlook for World Cup-linked technology and media spending, but the core market read is rate-driven and broadly neutral.

Analysis

The key mechanical driver here is not “utilities are defensive” but that the sector is acting like a duration proxy while the market is re-pricing real yields higher. With bond yields grinding up, the biggest vulnerability is not the regulated cash flow itself, it’s the multiple compression on names that have leaned on payout stability and incremental rate-base growth to justify premium valuations. That means the pain can persist even if operating fundamentals remain intact, because the market is trading discount-rate math first and earnings second.

Within the group, the cleaner relative loser is the name with the most visible policy and execution overhangs, since rising rates reduce the value of delayed cash flows and make any regulatory setback more punitive. The ice-storm cost disallowance matters less for the absolute dollar amount than for the precedent: once regulators show willingness to push back on recovery, investors start underwriting a lower probability of full pass-through on future extraordinary costs, which widens the spread between “high-quality” and “litigious” utility names. That should also support a rotation toward the least controversial balance sheets and away from stories needing multiple catalysts in the next 1-2 quarters.

The contrarian angle is that this may be closer to a valuation reset than the start of a structural underperformance regime. If yields stabilize, utilities can snap back quickly because income buyers are still underallocated relative to cash; the sector’s forward returns usually improve once the rate shock stops, even if earnings revisions are muted. The more interesting trade is not outright sector bearishness, but relative shorts against the names with the most refinancing or regulatory sensitivity and longs in the best capital-allocation discipline.

Outside utilities, the U.S. equity strength looks more like a positioning/flow story than a clean macro acceleration, which raises near-term pullback risk after new highs. Berkshire’s relative underperformance is a useful tell: if “quality at any price” is no longer working, the market is rotating toward cyclical beta and AI/tech-linked cash generation, but that can reverse fast if breadth narrows or rates back up again. The World Cup tech theme is longer-dated, but the immediate beneficiaries are more likely to be ad inventory, streaming, payment rails, and travel rather than the event itself.

Key Decisions for Investors

• Short H.TO vs long FTS or EMA for 4-8 weeks: H has the clearest regulatory headline risk and rate sensitivity; use a 1:1 notional pair and look for 3-5% relative downside if bond yields keep firming.
• Avoid adding to AQN until U.S. redomiciling/tax structure clarity is confirmed: this is a binary catalyst that can re-rate the stock 10-15% either way, but the path is too headline-driven for size now.
• Sell upside calls or run a collar on CU.TO into the annual ROE reset window: this is a low-conviction, event-driven name where upside is capped unless the reset surprises positively; prefer monetizing theta over directional long exposure.
• Use any 2-3 day yield-driven bounce in utilities to trim gross exposure: the sector’s beta to rates is currently dominating fundamentals, so entry on weakness is better than chasing 1-2 week mean reversion.
• Maintain a small long GS / short BRK.B relative-value expression for 1-3 months: GS is better positioned for trading activity and market-volatility monetization, while BRK’s lag suggests the market is punishing defensive allocation; expect 5-8% relative spread if risk appetite stays high.