- Macro scenario for 2018. Global purchasing managers’ index [PMI] momentum moderating, EPS growth slowing to high single digits, and yields rising. Recession probabilities remain low; inflation upside could spark volatility.
- U.S. 10-year Treasury yields. Upside risk to fair value above 3%, core consumer price index (CPI) up >2% (1.8% now).
- U.S. dollar: more modest losses in 2018 (U.S. Dollar Index [DXY] -10% in 2017). DXY range of 90-95 (now 92) as U.S.-EU yield spreads narrow. C$ trades around US$0.80 in 1H/18.
- WTI crude oil averaging >US$58/bbl in 2018; Gold benefits from fading PMIs in 2H/18.
- Recommended asset mix. Equities > Bonds preference intact, but with declining conviction. Rising yields + fading PMIs = less-attractive equity risk/reward outlook.
We come off restriction following Emera’s ~$700m common equity offering (excluding the over-allotment option). While the company noted at its recent investor dinner that it required external financing to fund its $7.7b 2017-2020 capital plan, the equity issue was larger and quicker than we expected. Our estimates decline as Emera accelerates the de- levering of its balance sheet. Looking forward, we expect the company will require additional financing to bring its debt-to-capitalization down to its targeted 55% level and we forecast a $500m hybrid issue in 2018 and $500m common equity in 2019. We remain Sector Perform rated, and our target decreases $1 to $50, commensurate with our lower estimates.