Stock picks as monetary policy eases

The Bank of Canada’s easing cycle will support several market sectors, says CIBC Asset Management’s head of equity research. 

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With inflation decreasing to 2.7% in mid-2024 — down from a peak of 8.1% in 2022 — the central bank has begun to ease monetary policy, cutting interest rates from 5% to 4.5% across June and July. 

CIBC’s Crystal Maloney expects additional cuts, potentially to 4% by the end of the year, which would help the economy by “making borrowing cheaper, boosting consumer and business spending, and supporting the housing market,” she said in a recent interview.

The easing cycle should alleviate concerns about interest-rate pressure on homeowners, banks and consumers generally, she said.

Still, she highlighted the large number of mortgage renewals expected over the next two years.

“Only around half of all homeowners with mortgages have seen their monthly payments rise since the Bank of Canada started raising rates in 2022,” Maloney said. “The other half will see their mortgages reset over the next two years, and many are in for a shock.”

The situation would be exacerbated by a rise in unemployment, she noted.

But Maloney said households have been relatively resilient, and she was optimistic that residential mortgages likely won’t be a credit issue for the banks. 

“The easing cycle started by the Bank of Canada will mitigate the worst impact on mortgage renewals,” she said.  

On economic growth, Maloney and her team expect a slight increase in Canada’s GDP, to 1.8% over the next year. 

Within equities, cyclical sectors such as technology, along with interest-sensitive sectors, tend to outperform during easing cycles, she said.  

“From a valuation perspective, we believe that yield-oriented sectors such as financials, real estate and communication services are best positioned to benefit from easing interest-rate pressures,” she said.

Within financials, “we like the Canadian banks,” she said. “Overall, we believe that the stocks are pricing in overly pessimistic recession-like conditions, and valuations are very attractive.”

She said Scotiabank benefits the most from lower interest rates, which help it reduce its funding costs.

“And we believe that [Scotiabank’s] current market valuation does not reflect the benefits from lower rates coming through this year and next,” she said. 

In real estate, she favours Granite REIT, which is “near an inflection point in its U.S. occupancy” and has an attractive valuation.

In communication services, Quebecor Inc. was singled out as a top choice, and is expected to gain market share from competitiors following its acquisition of Freedom Mobile.

Maloney said energy and materials could have some catching up to do over the easing cycle. 

“Historically, energy and materials have, on average, lagged in the 12 months following the first Bank of Canada cut when there’s no recession,” she said. “But they’ve performed more or less in line over the full easing cycle.” 

She was positive overall on Canadian equities, given the market’s cyclical industries and attractive valuations, and she forecast an annualized return of 6.7% over the next decade.

“The balance of risk appears tilted to the upside,” she said, referring to the Canadian economy. As such, she highlighted the potential for strong dividend growth in key sectors: “banks, which have accumulated record capital, and energy companies, which generate attractive free cash flow at current commodity prices.” 

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