Beyond AI, housing and industrials are set to surge

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Natalie Taylor, portfolio manager, CIBC Asset Management 

* * * 

So, we at CIBC Asset Management are bullish on equities and risk assets in 2026. 

We believe that the volatility we’ve been seeing to start the year related to geopolitical risk and AI fears is masking a shift in the underlying economy. And there’s a few reasons for this. 

We think that economic data so far has been robust and activity has picked up. There’s been positive surprises in data released around non-defense capital goods and machinery orders. We’re seeing a broad-based uptick in manufacturing recovering, and we’ve had a good ISM report for the first time in some time. 

I think that the policy environment continues to be supportive. So, we’re starting to see the lagged effects of policy rate cuts starting to stimulate growth here. And then, fiscal stimulus continues to underpin economic activity as well, both in Canada and the U.S. 

We’re also seeing a continuation of powerful secular themes — or theme I should say — related to artificial intelligence, which was a big driver of the market in 2025. And that’s continuing in 2026, as capex by the hyperscalers continues to increase and drive construction and build out of data centres, and increased use of AI technology. 

And we’re starting to see evidence of broadening equity market leadership. AI and technology narrowly led markets last year. This year, we’re seeing some strength in industrials and consumer discretionary as well. So, I think that that is a good setup for equities into 2026. 

I think we should touch on some tension that we’ve seen in the market as well, related to the technology sector, first and foremost. 

So, the narrow leadership of AI winners in 2025 resulted in meaningful declines in companies viewed to be AI losers. And this was primarily software companies that were expected to be disintermediated by AI in the fullness of time. This narrative drove a very stark divergence in performance, with software selling off 20% to 50%, and that’s continued into this year. 

And we’ve seen the AI disintermediation label broaden out to start 2026. So, it’s extended to a number of other businesses, like engineering and construction, real estate brokers, insurance brokers, asset managers, all types of business service companies, and we’ve witnessed significant erosion in value from that threat of AI. 

We think that there’s significant opportunities once the dust settles because we’ve seen indiscriminate selling so far. But the sorting is still ongoing, and we’re very early in the process. As such, we’re looking for opportunities unrelated to the AI thematic, despite its seemingly very broad reach. 

* * * 

So where are the other opportunities that we’re looking at? So, I think in certain sub-sectors that have lagged the market, there could be the potential for recovery or stabilization. 

I think housing is a good example of that. So, housing was very strong throughout the period of Covid, and then has come under significant pressure post-Covid, as we saw a pull forward of demand in the Covid period, and also much higher rates than what we were used to during the Covid period as well. 

I think if we step back and think about the secular opportunity, we have underbuilt housing since the financial crisis, and this is true in the U.S. and in Canada. And affordability is starting to be an issue. Now that we’re in a period of lower interest rates — we’ve seen some cuts by the Bank of Canada and the Fed — we’re expecting affordability to improve somewhat, and interest in housing to return. And we think that if this were to occur, there’s a number of sectors that would have a positive impact from this, including building materials, construction, some retailers. I think even transportation and rail would see a benefit from the materials required for construction of housing, as well as the financial sector, including banks and lenders to consumers for mortgages. 

I think another area of potential opportunity is in the industrial sector. So, I spoke before about a nascent recovery that could be occurring there. We see that early indicators on the freight and transportation side are starting to inflect, and this is usually the early cycle indicator within the industrial sector. We’ve been in a freight recession for over three years now, as capacity had been built up during Covid, and we’re seeing signs that some of that capacity is coming out of the market, and some demand is returning. So, there could be an opportunity for recovery in the freight and transportation sector this year. 

The chemicals industry is also a leading indicator of industrial growth. It’s the first input into consumer durables, and this sector has been challenged for some time as well, and we’re starting to see rationalization of supply and some indication that demand and activity is improving. 

So that’s more on the cyclical side. 

Then I would say on the more secular side of the industrial sector, we’re seeing generational growth in spending on defense. And there are a number of companies within Canada and the U.S. that would benefit from that as well, including aviation companies, space companies and engineering and construction. 

So, despite risks from AI disintermediation, I think there are pockets of the economy that are not completely immune to it, but less impacted, and have completely different growth drivers underpinning their long-term outlook. 

* * * 

The commodity sectors have been very topical to start 2026. 

The heightened focus on geopolitical risk at the start of the year propelled gold and other precious metals, such as silver, sharply higher, keeping that momentum from 2025 very much intact. The U.S. debasement narrative is still alive and well, although there’s cracks beginning to appear that are resulting in pretty extreme volatility. 

So, for example, the unexpected nomination of Kevin Warsh as the next Fed chair sent gold into a tailspin, as Warsh is perceived to be more hawkish than some other candidates.  

And there’s been other episodes of volatility since that time at the end of January. 

Within our portfolios, we have owned select gold companies over the last year, primarily for diversification, downside protection and general risk management. And while we continue to own a number of high-quality companies that operate in safe jurisdictions, we’re not inclined to chase, as the returns of gold companies are becoming more and more correlated with the market. We don’t expect gold to provide the same downside protection or negative beta as it otherwise would have in other market backdrops. 

Copper has also done exceptionally well as of late, but we view copper as more fundamentally driven rather than speculative. Demand for copper has risen, related to the increasing need for power and electrification. However, supply has been impacted by a number of mine issues, which have resulted in temporary production declines. We believe that a number of these mines are positioned to restart in 2026, and the supply deficit will be less acute as a result. 

Lastly, with regards to oil and gas, the commodity has been relatively flat, despite the number of geopolitical events that unfolded this year. The Canadian energy sector initially pulled back with the news around Venezuela, as the market worried about competing heavy barrels coming out of this oil producing giant. However, since January 7, the energy sector is the best performing sector in Canada at the time of recording, which is mid-February. 

So, this marks the third quarter in a row that the energy sector has significantly outperformed the commodity itself, as investors flee AI losers and other sectors in favour of physical assets. So, we don’t view this multiple expansion as sustainable, as energy stocks have always been significantly correlated with the underlying commodity over time, and we expect that to continue in due course. 

Within energy, we’re very selective about our exposure. So, we favour integrated companies which are less exposed to heavy crude differentials, such as Suncor, and have underlying operational improvement occurring at the company itself. We also have exposure to gas infrastructure companies, including TC Energy and Keyera. We view them to be less vulnerable to heavy oil price swings, and have a significant growth driver in power generation growth. 

* * * 

Of course, we are focused on risk management and downside protection, recognizing that in a dynamic environment such as this one, anything could happen. 

So, some of the risks that we’re focused on include escalation in geopolitical tensions, commodity market shocks, policy errors, persistently high inflation, and a pullback or deceleration in AI capex, and a broadening of the AI losers bucket.

* * *

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.