CIO of SLGI Asset Management Inc. outlines why a global rotation in equities could benefit Canada despite economic headwinds
The massive returns investors saw from their US equity allocations last year may have masked just how well their Canadian equities did at the same time. The TSX 60 ended 2024 up over 20 per cent and while it underperformed the S&P 500 for the whole year, looking at the past six months the Canadian index has actually outperformed the American benchmark. All that amidst a narrative of a Canadian economy lagging the US and the risk of potentially catastrophic US tariffs on Canadian goods.
Chhad Aul explains the run up in Canadian equities in the context of a global rotation away from a few concentrated mega-cap tech stocks towards a broader array of equity themes. The Chief Investment Officer and Head of Multi-Asset Solutions at SLGI Asset Management Inc. explained that the Canadian market boasts heavy representation in the sectors that many investors are electing to rotate to now. He noted, as well, that these names tend to have more global exposure and are therefore insulated from some of Canada’s national economic headwinds. He outlined how, in the context of economic uncertainty, advisors can make what appears to be a strengthening case for Canadian equities.
“We’re positive on Canadian equities primarily around that theme of broadening participation in equity markets. We think a lot of what worked well last year will continue to work well this year,” Aul says. “We expect yields will continue on their downward trajectory and dividend paying equities will probably continue to look more attractive. Stable dividend payers are some of the noteworthy characteristics of the wider Canadian equity market.”
Aul’s view is largely that the themes that drove the TSX 60 in 2024 should continue in 2025. That begins with a rotation away from mega-cap tech names. While those names — including Canada’s limited selection of domestically-listed tech stocks — have continued to grow the Canadian equity standby sectors of financials and energy have picked up global tailwinds. Despite some backing up in yield as markets price in the possibility of inflationary policies under President Trump, Aul sees growing appetite for the dividends that many Canadian equities are known for.
Aul’s base case for the global economy is that things will strengthen and resume growing. He notes, though, that the Canadian market offers various hedges against some of the downside risks, chiefly a downturn in growth. He notes that the stability of dividend payers and some Canadian consumer staples names can help protect against that downside. Energy names, too, may help offset any inflationary pressure. Add to that, many of the more defensive names on the Canadian market are more attractively valued which Aul says could make them attractive to global capital.
Beyond those more obvious sectors, Aul sees a few subsets of the Canadian market contributing positively this year. Gold as a commodity and gold producers — many of whom are listed in Canada — could help investors offset volatility. He posits that the wider materials space, too, may be poised to continue its growth this year.
The economic uncertainty now plaguing Canada seems largely to revolve around the prospect of massive tariffs imposed by the Trump administration. While that is not yet known as a certainty, Aul notes that the primary market impact of that prospect has been felt in the Canadian dollar, rather than in Canadian stocks. Moreover, certain export-oriented sectors like energy may see an uptick in profit margin as a result of a lower CAD.
If tariffs do manifest, Aul says that more domestically-oriented Canadian companies might suffer. Nevertheless, he notes that many Canadian-listed companies have global lines of business and should continue to hold up despite those theoretical headwinds.
Canadian advisors and investors have been told for years to diversify away from Canada and steadily decrease the home bias in their portfolios. Now, as they consider a potentially attractive opportunity set in Canada, Aul notes that they should continue to apply a global lens. Advisors should position any possible renewed allocation to Canada in the context of where global capital is going and the global lines of business these companies have. Client needs, too, should come first and Aul suggests that the dividend opportunities advisors can find within the Canadian market may help serve specific clients well. On the whole, he believes a global orientation and a view to diversification should actually motivate advisors to look more favourably on Canadian equities now.
“As you get into these larger and larger cap names, you can see that their economic exposures to their earnings can be broadly different than the country of listing,” Aul says. “So that's very important and a reason why we are proponents of active management, where, again, these sorts of stock by stock, sector by sector, industry by industry considerations are actively being assessed, as opposed to relying on the benchmark weightings at the various index providers.”
