Welcome to Soundbites — weekly insights on market trends and investment strategies, brought you by Investment Executive and powered by Canada Life.

In today’s episode, we speak with Joe Sirdevan, CEO of Toronto-based Galibier Capital Management. We look ahead to 2022 with special attention to Canadian names and sectors that look promising. We talked about interest rates, and we started by asking him to give us an overview of this current round of inflation — and why it was initially predicted to be transitory.

Joe Sirdevan (J.S.): In our opinion, the response to the Covid pandemic by central banks and governments was the correct one initially. However, the duration and the magnitude of the stimulus has openly led from inflation being transitory to now sustained. I mean, we’ve been stimulating the economy at an extremely high level for two years. That’s just never happened before at anywhere near this level. So, looking forward, even if inflation goes from the current level to zero, prices have already moved up. Prices are always sticky downward, so we don’t expect a significant decline in prices in the near term. And if rates start to trend higher, the cost of servicing debt will impact taxation and also consumption. So, there’s a lot of moving parts. That’s why the central banks have to be very careful and very measured in their ratcheting of the economy. 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.’

What high inflation means for Canadian equity investors.

J.S.: Canada’s economy and its stock market has a more-than-average exposure to commodity and cyclical stocks. So, if inflation is coming from increases in commodity prices such as oil, base metals, forest products, then inventors’ suppositions in mining companies, energy companies, and forest products companies will benefit. However, investors that have exposure to companies which are hurt by inflation because they can’t pass through the raw material cost increases, those companies are going to be hurt. And if inflation leads to monetary tightening by central banks, then interest rates will increase, which means that companies that are hurt by higher rates, such as real estate companies or high price-to-earning ratio, multiple stocks, like tech stocks or growth stocks, they’re going to underperform. Now, Canada’s stock market also has a high exposure to financial services companies, such as banks and insurance companies. Financial companies generally do well in the rising interest rate environment. So, on balance, Canadian investors are potentially better positioned during a period of high inflation.

Canadian companies that look particularly attractive right now.

J.S.: I’ll give you, however, a few of our absolute favourites. We really like [Winnipeg-based] Ag Growth (Ag Growth International) and [Saskatoon-based] Nutrien (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 kind of a sub-standard harvest last year. Of the two, we would favour Ag Growth, as Nutrien’s already had a great move up in 2021. Keeping on this commodity theme, we really like [Calgary-based] Canadian Pacific Railway’s prospects this 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 [Kansas City, MO-based] Kansas City Southern Railway (The Kansas City Southern Railway Company). CP is the only railroad with a pan-North American rail network which will lead to significant strategic benefits over the medium term. We also like the financial services companies going forward, if rates start to trend higher. We like [Toronto-based] Manulife (Manulife Financial Corporation), [Toronto-based] Intact (Intact Financial Corporation), [Toronto-based] CIBC (Canadian Imperial Bank of Commerce), and [Toronto-based] Bank of Nova Scotia, in that order. And one more favourite for you: New Flyer [owned by Winnipeg-based NFI Group]. This is a company that is poised to rebound significantly in 2022. New Flyer is the dominant city and coach bus manufacturer in North America, and it was badly hurt by a lack of supply in the global supply chain difficulties. As this supply chain issue resolves over 2022, we expect the company’s fill against its order-book and generate very strong earnings growth.

And, finally, what’s the bottom line when it comes to investing in Canadian equities?

J.S.: The bottom line is that Canada’s relatively high exposure to inflation-hedged stocks in the commodity and financial space should allow it to have good relative performance versus other equity markets in 2022.

Well, those are today’s Soundbites, brought you by Investment Executive, and powered by Canada Life. Our thanks again to Joe Sirdevan, CEO of Galibier Capital Management.

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