This year may see some structural changes. The decline in interest rates will play a crucial role in reviving some sectors despite trade tensions. The Bank of Canada has slashed interest rates from 5% in May 2024 to 3% in January 2025. More rate cuts are likely if Trump tariffs become a reality. These rate cuts will take time to trickle down into the economy. Such a vast difference in rates creates an opportunity for debt restructuring and taking new loans. Many companies are waiting for interest rate cuts to end to restructure their debt and get the advantage of the lowest rate possible.
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Two hottest sectors for Canadian investors
Real estate sector
The ease in borrowing costs will help revive the interest rate-sensitive real estate market. At present, the real estate market has revived in certain areas after a steep correction in the last two years. The Canadian government also made various policy changes to make housing affordable. Some of them included the launch of the First Home Savings Account to help homebuyers save for downpayment and also get tax benefits. Then, there was an Underused Housing Tax to discourage house flipping. While these factors could stabilize real estate prices, lower immigration targets could affect rental income, especially for residential. Hence, the real estate revival is tepid.
Canadian real estate investment trusts (REITs) have stopped reporting losses from the fair market valuation of properties. The unit price of REIT depends on the value of their property portfolio. It is too early for real estate prices to increase, which means now is a good time to buy REITs as they have already bottomed out.
You could consider investing in iShares S&P/TSX Capped REIT Index ETF (TSX: XRE) and get a diversified exposure to retail (43.9%), multi-family residential (27%), and industrial (16%) REITs. Retail and industrial REITs generate high rental income. Hence, the exchange-traded fund (ETF) has a dividend yield of 5.1%.
XRE ETF’s last five-year performance is negative 5% as the real estate sector saw a correction. A recovery in the sector could drive the ETF’s unit price. Now is a good time to buy the dip and lock in a higher yield. The distributions will likely improve as retail REITs increase distributions through store intensification.
Technology sector
Apart from real estate, 2025 could be an interesting year for the technology sector as companies continue to adopt artificial intelligence (AI) applications. The pending investments in information technology by companies in the last three years could see recovery as interest rate declines give them room to open up tech budgets. Moreover, the growing adoption of 5G could facilitate AI at the edge, creating a need for systems updates and acceleration of digitization and secure connectivity. All these trends hint that the technology sector could continue to grow.
However, economic uncertainty from a possible trade war could lead to a downtrend in the short term. It is an opportunistic time to invest in iShares S&P/TSX Capped Information Technology Index ETF (TSX: XIT). It has 50% holdings in Shopify and Constellation Software and 28% in CGI and Celestica. All four stocks will benefit from the secular trend of AI and 5G.
Investing $100 every fortnight in this ETF can help you take advantage of dollar-cost averaging.
Investor takeaway
The time to invest is when a sector is likely to witness a correction, and the time to reap the rewards is when it is rallying.
