The unfortunate reality for many Canadian investors looking at high-quality names on the TSX is that U.S. policy matters a great deal in terms of how these companies are valued. The Canadian economy has historically been very closely tethered to the U.S. economy. Over the long term, that’s been a big boon for key large-cap names that benefit from cross-border trade.
But with the expansion of tariffs this Spring and recent moves to expand tariff policy even more, concerns that Canadian companies could get hit much harder than other global peers led to a sharp sell-off in April.
I’m going to dive into why this trend has not only reversed, but some investors may rightly view the Canadian market as the investing option of choice over the next year.
Here’s what I’m watching.
Prudent monetary policy, stable inflation
The reality for central banks right now is mixed, depending on location. For the U.S. Federal Reserve, a weakening labour market coinciding with much sticker inflation than what we’re seeing in Canada has led to a conundrum, which means lower interest rates may not be a lock-in.
Whereas the Bank of Canada has been able to lower its benchmark overnight rate to just 2.5% from 5% as of April 2024, investors are banking on the idea that inflation can not only remain low, but could do so for an extended period of time.
Due to a mix of prudent monetary policy and a much less indebted populace overall, there’s actually room for the Bank of Canada to continue cutting. For asset prices and consumers, that’s a good thing.
Resources matter
Another key factor I continue to come back to when I look at the Canadian market in particular is how resource-rich this economy is. Unlike other countries that are forced to import most of what they use, Canadian energy, lumber, minerals, and agricultural goods are plentiful.
This is a country that can therefore withstand various insular trade policies globally better than others. In theory, if Canada needed to shut its borders to the rest of the world and every country chose to do so, this is one of the top places most would want to live.
As commodity prices have surged, so too has the market capitalization of many of the top companies in mining and agriculture (plenty of head offices based in Canada for such North American giants).
Thus, those looking to take a bit more of a defensive stance on this market right now, while looking at the TSX and index-traded ETFs tied to the Canadian stock market, may be surprised at how well this market can perform in times like these. I think this outperformance has the potential to continue, and I will continue to hold exposure to Canadian stocks in my portfolio for this reason.
