The TSX Composite Index surged 18% in 2024 as interest rate cuts began. However, Trump tariffs created an uproar and overturned the stock market rally into a correction. Why so? Canada is an export-led and immigration-led economy. The TSX Composite Index earns around 30% of revenue from the United States, according to Edward Jones’s research. That explains the 4.3% correction in the TSX Composite Index between December and January after the election of Donald Trump as U.S. president. However, there is still value in the TSX as the remaining 70% has sectors that will benefit from falling interest rates and improvement in consumption.
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Finding value stocks in the TSX
Interest rate-sensitive sectors like real estate and banks could see a recovery as the Bank of Canada slashes interest rates. Moreover, the telecom sector could recover as companies adjust to the new normal of network sharing.
Real estate stocks
The Canadian real estate market is recovering, with property prices stabilizing after a decade-long rally and two years of correction. Retail real estate investment trusts (REITs) dealing in necessity stores are the first to recover because of the resilient nature of their business. There is value in the following REITs:
- SmartCentres REIT, which earns 23% of its revenue from Walmart
- Choice Properties REIT, which earns 57% of its rent from Loblaw
- CT REIT, which earns more than 90% of its rent from the parent company Canadian Tire
The above three REITs offer 5-7% annual distribution yield and are trading at or below the net asset value (NAV) per unit. The NAV is the valuation of their property portfolio after deducting debt. As property prices revive, so will their NAV and drive unit prices over the long term.
The reduction in interest rates will leave more free cash flow in the hands of REITs for distribution. Since the construction cost is high and Canada has reduced immigration targets, the REITs could slow their new developments to keep rents strong. (An oversupply could pull down rent.)
Meanwhile, you can lock in a higher distribution yield. These REITs are a low-volatility substitute for term deposits whose interest is falling.
Telecom stocks
Telecom stocks are trading near their multi-year low as the regulator has opened Telus’s (TSX: T) and BCE’s (TSX: BCE) fibre networks to competitors for a fee. Both have reduced their capital spending and are focusing on increasing revenue and reducing costs.
Telus is using the network sharing mandate to offer its bundled services to new regions through competitor networks. This has increased its revenue and made it competitive. The telco is also reducing its costs and looking to lower debt by selling non-core assets. The falling interest rates will help Telus reduce its interest expense. All these efforts could improve its future free cash flows and bring the dividend payout ratio in line with its target range of 60-75% from 81% in 2024.
BCE is adjusting to the new normal by selling low-margin businesses like radio channels and electronics stores and acquiring high-margin businesses like digital media, cybersecurity, cloud, and business solutions. These services will have more demand in the 5G world as everything is connected to the internet, and a secure cloud network helps perform artificial intelligence at the edge.
Final thoughts
You could consider booking profits in utility and energy stocks to buy the above-value stocks and hedge your portfolio against Trump tariff uncertainty.
