Barlow’s Research Roundup: Top REIT picks, sector review from a Scotiabank analyst

Canadian REITs have outperformed the TSX by 280 bps after the FCR acquisition announcement, with the sector now trading at a 10% discount to NAV and near longer-term FFO multiples. Scotiabank raised Canadian Utilities' target price to $50 from $48 and ATCO's to $70 from $67 on a stronger longer-term utility growth outlook. BMO said Canada’s March trade balance returned to surplus, aided by higher energy and precious-metals exports tied to the Iran war, while non-energy/non-metals exports remained essentially flat.

Analysis

The real signal here is not that REITs and utilities are “defensive,” but that capital is rotating toward duration-sensitive cash flows with embedded re-rating optionality. In REITs, the most important second-order effect is that M&A becomes self-reinforcing: once sector multiple dispersion narrows, underperformers with clean balance sheets become cheaper acquisition targets, which can compress spreads further and force shorts to cover. That dynamic is especially relevant in residential and smaller-cap names where private-market values still sit above public marks, creating a financing-arbitrage bid that can persist for quarters.

Within utilities, the market appears to be underpricing the value of longer growth visibility versus near-term rate sensitivity. If regulated earnings visibility extends and allowed ROEs hold, the next leg is not just multiple expansion but a lower cost of equity for the entire Canadian utility complex, which can support larger capital programs without equity dilution. The relative gap versus the highest-quality peers is still wide enough that modest target multiple revisions can drive meaningful upside, but the trade is now more about bond-proxy crowding risk than fundamental deterioration.

The trade deficit improvement looks directionally bullish for resource exporters, but the composition matters more than the headline. Energy and precious metals are masking weakness in cyclical manufactured exports, which means Canada’s “improvement” is partly an exogenous commodity shock rather than evidence of broad-based demand resilience. If geopolitical supply disruptions ease or commodity prices mean-revert, the macro tailwind can fade quickly while tariff damage to autos, lumber, and base metals remains sticky.

The more contrarian read is that the market may be too comfortable with AI-linked mega-cap earnings quality and too complacent about utility/REIT crowding. As rate-cut expectations get pushed out or growth confidence stabilizes, these defensives could underperform on a 1-3 month horizon even if fundamentals remain intact. In other words: the setup is constructive, but the best risk/reward now sits in relative-value expressions rather than outright beta longs.

Key Decisions for Investors

• Long CU.TO / short FTS over 3-6 months: CU has cleaner re-rating torque from target multiple expansion, while FTS looks more fully owned; target a 5-8% relative spread with stop if rate expectations reprice sharply higher.
• Add to EXE and pair against a weaker residential REIT basket for 2-4 months: the M&A premium is not fully reflected in smaller names, and EXE still has re-rating lag versus peers; use a basket hedge to isolate deal-optionality.
• Overweight EMA and ACO.Y.TO on 6-12 month horizon: this is a lower-volatility way to express the utility growth-duration trade; upside is best if long-term capex visibility improves and dividend yield compresses.
• Avoid chasing broad Canadian exporters on the trade-balance headline; instead, use any strength to fade cyclical industrials exposed to autos/lumber/metals if commodity support looks temporary over the next 1-2 months.
• Consider a tactical long H.TO on a 1-3 month basis only as a rate-sensitive defensive hedge; risk/reward is less attractive than CU/EMA because it lacks the same earnings or valuation catalyst.