Canada well positioned to benefit from rising rates

Canadian investors are well positioned to benefit from expected rising interest rates, says Joe Sirdevan, CEO of Galibier Capital Management.

Sirdevan said Canada’s high exposure to financial services companies, which tend to do well in rising interest rate environments, could auger well for the Canadian economy.

“With the Canadian markets having more exposure to commodity, cyclical and financial stocks than on average, Canadian investors are potentially better positioned during a period of high inflation,” he said.

Sirdevan suggested the stickiness of inflation has everything to do with the unprecedented length and level of fiscal stimulus since the onslaught of Covid.

“We’ve been stimulating the economy at an extremely high level for two years,” he said. “That’s just never happened before at anywhere near this level. And in economics, when something happens you’ve got to say, ‘And then what?’ And that’s what we’re looking at now. This is the ‘and then what.’

He believes the actions of central banks have massively distorted the pricing of assets and caused potentially long-term consequences. The purchasing power of people living on a fixed income has eroded and consumption in discretionary sectors has diminished, posing a real threat to economic growth.

“If rates start to trend higher, the cost of servicing debt will impact taxation and also consumption, as more money will be needed to service the government, mortgage and personal levels of debt,” he said.

Canada’s economy remains somewhat insulated by its exposure to companies that thrive in high-rate environments.

“Financial companies generally do well in the rising interest rate environment as net interest margins widen out in banks, while, commensurately, insurance companies enjoy higher investment income,” he said. “So, on balance, Canadian investors are potentially better positioned during a period of high inflation.”

In the financial sector, Sirdevan likes Manulife Financial Corporation, Intact Financial Corporation, CIBC and Bank of Nova Scotia.

In other sectors, he sees good prospects for Winnipeg-based Ag Growth International and Saskatoon-based Nutrien Ltd.

“We think that both of these companies are going to benefit from a very strong planting season in 2022 because of very high commodity prices in agricultural commodities, and also a sub-standard harvest last year,” he said. “Of the two, we would favour Ag Growth, as Nutrien’s already had a great move up in 2021.”

Following the commodity theme, he likes Calgary-based Canadian Pacific Railway’s prospects for the coming year.

“In addition to being a significant beneficiary of strong commodity markets, it also has significant synergies to realize upon due to its purchase of the [Missouri-based] Kansas City Southern Railway. CP is the only railroad with a pan-North American rail network, which will lead to significant strategic benefits over the medium term.”

Finally, he likes New Flyer, the city bus manufacturer owned by Winnipeg-based NFI Group. He believes the company’s prospects will improve dramatically once the supply chain issues that hindered its performance last year are resolved.

Sirdevan is cautiously optimistic that the supply chain will improve as the pandemic comes under control.

“If nothing new develops, then, yeah, I think they will resolve,” he said. “I wish I could say yes. But there’s still so much uncertainty, unfortunately.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.