The financial sector’s landscape has seen a shift towards the end of 2024. The TSX Composite Index and the S&P 500 Index fell in the fourth quarter as the U.S. Fed slowed its interest rate cuts. Donald Trump’s winning the U.S. presidential elections brought mixed reactions and sent the stock market down. While lending stocks declined, insurance stocks surged.
The shift in the Canadian financial sector
Manulife Financial (TSX:MFC) and Power Corporation of Canada (TSX:POW) surged 12% and 10%, respectively, between November and December first week. Meanwhile, lending stocks such as Timbercreek Financial (TSX:TF) and goeasy (TSX:GSY) fell by 13-15%. This switch shows the rising credit risk.
In light of recent developments, which financial stock to buy and sell? Let’s take a step back and analyze the financial situation. Canadian lenders took a hit as the government announced a 40% cut in immigration targets to ease the housing crisis. At the same time, Donald Trump is likely to cut corporate taxes and make immigration rules stricter, thereby promoting U.S. jobs and increasing corporate investments.
There is a possibility of consumer spending reviving as corporate taxes fall. The Bank of Canada’s interest rate cuts from 5% in April 2024 to 3.25% in December 2025 could bring significant relief in interest expenses. A slowdown in rate cuts could encourage individuals and companies to restructure or repay their debt and lower credit risk. Affordable lending could even revive lending activity and help lenders recover from lower loan turnovers. This is a positive scenario.
A bearish scenario could be the debt burden becoming unbearable, spiking delinquency rates. If this happens, lenders’ stock prices could fall drastically. The Bank of Canada’s Financial Stability Report—2024 shows that the financial stress levels of borrowers without a mortgage have elevated to the pre-pandemic levels. Even though households have adjusted to higher debt servicing costs, the report stated a word of caution of a rise in credit risk.
Top Canadian financial stocks in 2025
The uncertainty and rising stress levels have created an opportunity to take advantage of market volatility. You can adopt a contrarian approach and buy one stock of a lender and one of an insurer to benefit in either scenario.
Lending stock to buy in 2025
If the economy revives and borrowing activity resumes, stocks of Timbercreek Financial and goeasy could surge gradually. Between the two, goeasy is a better buy even though it offers a lower dividend of 2.7% compared to Timbercreek’s 9.68% yield. goeasy has a riskier borrower base of subprime borrowers with unsecured loans. It saw a 28% increase in its loan portfolio to $4.39 billion. The net charge-off rate (the percentage of loans not repaid on time) also increased to 9.2% in the third quarter but within its target range of 8-10%.
However, Timbercreek Financial has seen a slowdown in loan turnover and an increase in repayment. It lends money to income-generating real estate investment trusts (REITs). A slowdown in the housing and real estate market discouraged lending activities. While Timbercreek Financial is a good stock, the risk is relatively high.
Insurance stock to buy in 2025
Manulife stock is trading at its all-time high. The last time the stock crossed the $40 mark was in 2007, just before the Great Financial Crisis. If you own this stock it is better to sell stock and book profits, as it is trading at very high valuations. This price is not sustainable.
Instead, you could consider buying Power Corporation of Canada, which holds Great-West Lifeco and IGM Financial. Its well-diversified portfolio of wealth and insurance assets in Canada, the United States, and Europe reduces its downside risk. Even POW is trading near its all-time high, as the company has been restructuring its assets to generate shareholder value. While there is limited upside potential for the stock, you can get a 5.2% dividend yield.
