2026 Preferred Securities Outlook:

Overweight utilities – stability meets growth in a rate-cutting cycle

31 December 2025

Joseph Bozoyan, Portfolio Manager

Heading into 2026, preferred securities remain an attractive asset class supported by strong fundamentals and favourable macro trends. In particular, utilities preferreds stand out as a core allocation, benefiting from structural growth drivers, such as artificial intelligence (AI)-driven energy demand, easing monetary policy, and their defensive characteristics amid potential market uncertainties.

Summary:

The Fed is expected to be dovish in 2026, which could lead preferreds to appreciate.
In 2026, utilities are expected to be a significant focus, supported by lower interest rates, AI trend and defensive hedge nature.
Within fixed income, preferreds are a great place to be in 2026, with strong credit fundamentals, wider credit spreads than in other areas of the market, and attractive yields of 6.64%¹.

Market uncertainty gives way to robust performance

Despite three US Federal Reserve (Fed) rate cuts in 2024, the 10-year US Treasury yield rose significantly at the beginning of 2025 amid inflationary fears. This led to the underperformance of preferreds in January. In April, after US President Donald Trump announced his “Liberation Day” tariffs, most financial assets began to perform poorly, including preferred securities. Preferreds quickly recovered, however, and performed well through October.

US economic outlook

The solid economic growth in US provides support to the overall preferred securities market, because a strong economy generally benefits credit spreads.

Several factors lead us to believe that US economic growth will be strong in 2026. The “One Big Beautiful Bill Act” is expected to contribute to economic growth in 2026, as it allows accelerated depreciation of capital goods, incentivising companies to spend more to gain this one-time benefit. In addition, US consumers are expected to get around USD 100 billion (0.3% of GDP) in fiscal stimulus. Of the USD 100 billion, USD 65 billion will be a tax refund windfall due to the favourable treatment of gratuity and overtime income. The combined effect of more capital goods investments and tax refunds is expected to boost GDP growth by 0.3 to 0.4 percentage point. The other two factors are 1) the lagged effect of Fed rate cuts and 2) AI investment.

Chart 1: 2025 year-to-date US fixed income performance (as of 30 November 2025)²

2025-ytd-us-fixed-income-performance

Utility preferreds benefit from market trend and the US macro backdrop

We have been overweighting utilities preferreds for years, given the sector’s excellent fundamentals, low valuations relative to the market benchmark, investment-grade-rated balance sheets, and attractive yields. In 2026, utilities should remain our core play, supported by rapid AI development, as the reindustrialisation should no longer serve solely as downside protection.

The rapid growth of AI is driving a surge in data centre usage and electricity consumption because training and running large AI models require massive computational power, typically provided by high-performance graphics processing units (GPUs) and specialised chips housed in data centres. As AI workloads scale, data centres consume significantly more electricity than traditional IT operations, and the market has been gradually raising the US power consumption forecast, with the latest estimate of 68% growth over the next 15 years.

Increasing power demand could result in two outcomes:

1. Driving renewable investment and earnings prospects

Accelerating investment in US renewables and storage solutions for now, given renewables like solar and wind can be deployed faster at a lower marginal cost, and provide clean energy. Gas and nuclear are expected to further supplement in the next decade. The trend could result in significant investments in the sector. We believe this could potentially translate to consistent earnings and cash flow growth of between 6%-8% for at least the next five years.

2. The need for investment financing and preferred issuance

US utilities tapped the preferred market to power the AI boom. In 2024, the sector raised USD 18.8 billion from new issuance, a nine-fold jump from 2023, and surpassed the US banking sector. The trend continued in 2025, and we expect issuance to increase in 2026.

Chart 2: US power demand is expected to increase up to 3.5% annually through 2040

US power demand by sector

us-power-demand-growth-through-2040

Source: McKinsey, 29 April 2025. For illustrative purposes only. CAGR stands for compound annual growth rate.

We expect this trend to continue, and, in particular, energy midstream companies are major beneficiaries, presenting more investment opportunities for investors seeking income via quality investment tools.

As electricity demand is strong, new generation is required to meet that demand. Natural gas-fired generation can meet this demand, so more natural gas is needed as well. This is positive for energy midstream companies, as a large share of their earnings comes from transporting natural gas through their pipelines. More volumes in their pipes result in higher earnings and cash flow for these companies.

Secondly, we have a constructive view on utility preferreds amid the easing monetary policy trend. The US Fed cut interest rates by 25 basis points (bps) at its mid-September meeting, marking the first rate cut in 2025. Fed Chairman Jerome Powell’s term ends in May 2026, with his replacement expected to be more dovish, potentially leading to two more rate cuts in 2026, bringing the Fed funds rate to 3%.

A lower Fed funds rate provides a tailwind for fixed income, particularly preferred securities. That said, despite the 2025 rate cuts, long rates remained range-bound and didn’t fall by all that much. We expect the same in 2026, with short rates continuing to move lower. However, long rates will be range-bound. This is because of inflationary concerns that still permeate the economy, which could mean that 2026 will be a year of carry that favours asset classes like preferreds, offering attractive yields of 6.64%.

In particular, utilities preferreds are viewed as a bond proxy and typically underperform in rising rates. The sector historically posts strong returns in a falling-rate environment.

Falling interest rates are beneficial to utilities that must issue debt to fund their capital expenditure. Also, falling interest rates help utility common stocks, as they are considered a bond proxy and, like other fixed-income sectors, do well when rates fall. This helps our utility convertible preferreds, which are equity-linked securities.

From a risk management perspective, utilities' positioning is also crucial as a defensive play, given that their businesses are highly regulated. They can provide downside protection in times of elevated volatility.

This was evident in 2023, when concerns arose about US regional banks. Many of the regional bank preferred securities performed very poorly in 2023. However, utility preferreds significantly outperformed, again showing their defensive characteristics.

A risk we will watch in 2026 is higher-than-expected inflation. Geopolitical risk is also something we will be mindful of in 2026.

Although we have a positive economic outlook for 2026, unforeseen events could still negatively affect the economy. That’s why we believe it is important to have a large weighting in the defensive utility sector, which can mitigate the effects of a weaker economy by maintaining more stable credit spreads. Importantly, utility preferreds have been the best performing element of the strategy over the last three years, despite their defensive characteristics.

Apart from utilities, financial institutions, which represent more than half of the preferred universe, showcase strong industry fundamentals³ that we view positively. Bank fundamentals remain strong with solid loan growth and low delinquencies. The earnings of most banks beat expectations in the third quarter of 2025, driving stock prices higher. A steep yield curve, which we’re likely to see in 2026 as the Fed funds rate comes down, is positive for banks, as they can earn a higher spread between what they pay for deposits and what they earn on loans. Insurance companies, which are regulated businesses, also have strong fundamentals, with property and casualty (P&C) insurers enjoying elevated premiums that drive earnings higher. Life insurance companies are reaping the benefits of higher interest rates in their investment portfolios, which supports credit.

The positive fundamentals outlined above should result in tighter credit spreads in the preferred securities market. Chart 3 shows that credit spreads have widened over the last three months. We believe that credit spreads can tighten back to where they were just a few months ago, given our view of a strong economic environment, plus positive industry fundamentals.

Chart 3: Potential tightening of preferred credit spreads (basis points)

Source: Bloomberg, as of 30 November 2025. The above chart shows the credit spread of ICE Bofa US All Capital Securities Index. For illustrative purposes only.

Conclusion:

The Fed is expected to be dovish in 2026, which could lead preferreds to appreciate – although the 10-year US Treasury yield might not come down as much. We believe we should at least achieve a coupon return plus the potential for a little more if spreads further tighten. Higher price appreciation could occur if the entire US Treasury curve declines in parallel with the Fed funds rate. Through an overweight utility play, we can not only benefit from lower interest rates, but also from the AI trend and a defensive hedge.

We believe that, within fixed income, preferreds are a great place to be in 2026, with strong credit fundamentals, wider credit spreads than in other areas of the market, and attractive yields of 6.64%.

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¹ Bloomberg, as of 30 November 2025. Yield refers to the yield to Maturity (YTM) of ICE Bofa US All Capital Securities Index. YTM is the discount rate that equates the present value of a bond's cash flows with its market price (including accrued interest. Yield to maturity is not an accurate reflection the actual return that an investor will receive in all cases.

² Source: Bloomberg PORT, data as of 30 November 2025. Performance is in USD and total return. Preferred securities are represented by ICE BofA US All Cap Securities index. Retail preferreds are represented by ICE BofA Core Plus Fixed Rate Preferred Securities Index. Institutional preferreds are represented by ICE BofA US Capital Securities Index. US corporate bonds are represented by ICE BofA US Corporate Index, US high yield bonds are represented by ICE BofA US High Yield Index. Past performance is not indicative of future performance. It is not possible to invest directly in an index. For illustrative purposes only.

³ Source: Bloomberg, as of 30 November 2025. Financial institutions represent 61.81% of the issuers in the US All Capital Securities index, with banking comprising 34.38% and insurance accounting for 21.05%.

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Some funds may invest in securities of small and/or medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Some funds may invest in a single country/region and/or a particular industry sector which may be concentrated and subject to greater risks than diversified investments in several countries and/or regions and across sectors.
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Certain sub-funds invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
Certain sub-funds invest in securities of small and medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Certain sub-funds concentrate their investments in a single country and/or a particular industry sector are subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Certain sub-funds may invest directly in certain China A shares via Stock Connect, which may involve in risk related to Investments via Stock Connect and Mainland China investment.
Investment involves risk. The sub-funds may expose their investors to capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds and their share classes.
Each sub-fund intends to use financial derivative instruments (“FDIs”) for investment, efficient portfolio management and/or hedging purposes. The use of FDIs exposes the Fund to additional risks, including counterparty/credit risk, liquidity risk, valuation risk, volatility risk and over-the-counter transaction risk.
Given RMB is currently not a freely convertible currency, payment of redemptions and/or dividend payment in RMB may be delayed due to the exchange controls and restrictions applicable to RMB. As offshore RMB (CNH) will be used for the valuation of RMB denominated Class(es), CNH rate may be at a premium or discount to the exchange rate for onshore RMB (CNY) and there may be significant bid and offer spreads and thus the value of the RMB denominated Class(es) will be subject to fluctuation. Any devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated Class(es) of certain sub-funds.

Manulife Advanced Fund SPC

Manulife Advanced Fund SPC is an umbrella fund comprising a number of sub-funds investing primarily in equity and bond securities, each of which has a different investment objective and risk level.
The sub-funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. A sub-fund may at its discretion pay dividend out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share of the respective share classes after the distribution date.
Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in. This may adversely affect its return and performance.
Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Bond Market and custodial risks.
RMB is not freely convertible and is subject to exchange controls and restrictions.
Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
Certain sub-funds may invest in equities of small- and mid-capitalization companies, which can expose investors to liquidity and volatility risks, and is subject to greater risk than is customarily associated with investments in larger capitalization companies.
Investment involves risk. The sub-funds may expose to a high risk of capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds.

Manulife Hong Kong Series

Manulife Hong Kong Series (“the Series”) is an open-ended unit trust comprising a number of funds primarily investing in equities, debt securities, exchange-traded funds and/or collective investment schemes, each of which has a different investment objective and risk level.
The funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. Dividends may be paid out of capital and/or out of gross income of certain funds in respect of Inc classes, while charging/paying all or part of certain funds’ fees and expenses to/out of capital of certain funds. This represents a return or a withdrawal of part of an investor's original investment amount or capital gain attributable to that amount. Distributions will result in an immediate decrease in the net asset value of the relevant units. Class AA (RMB) Inc Hedged Unit of certain funds is subject to higher distribution risks than other non-hedged unit classes.
Certain funds may involve equity market, emerging markets, Dim Sum bond market, concentration, volatility, liquidity, credit, credit ratings, below investment grade and unrated securities, credit rating downgrading, interest rates, valuation, sovereign debt, unlisted debt securities, political and regulatory, currency, foreign exchange, derivative and structured product, hedging, and distribution risks. Certain investors may also be subject to the risk relating to RMB hedged share class..
Certain funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
Certain fund is subject to the risks relating to investment in exchange traded funds, Strategic and Tactical Asset Rebalancing Strategy (“STARS”), small- and mid-capped companies, convertible bonds and the risks associated with securitised debt instruments and investments in loss-absorption features. Certain fund is a feeder fund that invests all or substantially all of its assets in another collective investment scheme (the “master fund”) and is therefore subject to the risks of investing in the master fund.
Certain fund will not have direct investments other than cash, cash equivalents and financial derivative instruments (such as futures, options and forwards).
Investment involves risk. The funds may expose its investors to capital loss. Investors should not make investment decisions based on this material alone but should read the offering document for details, including the risk factors, charges and features of the Fund and its unit classes.