M&A, AI and energy to power Canada’s market

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. 

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Catharine Sterritt, lead portfolio manager of Canadian equities for CIBC Asset Management 

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Despite the macro uncertainties in the current environment, I do regard the Canadian equity market as well positioned for further gains, given that we’re seeing expanding profit margins through a broad group of sectors because of cost-saving initiatives, including AI efficiencies. 

We think that interest rates moving down is very supportive for expanding multiples. 

We like the optimism that management teams are showing, as we can see from the M&A activity that’s picking up. 

And also, in some sectors, we have ongoing structural demand. For instance, the AI need for power is driving demand for nuclear energy, and we also see structural demand for gold. Both of those are well positioned in the TSX. 

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We’re seeing that companies are being able to expand their margins across many sectors through the application of AI. They’re using AI to reduce their costs. And these programs are not only doing things like managing emails and your call centres, but they’re also being able to take costs out of their manufacturing systems, out of their time to delivery. And we do think that these cost savings are going to be sustainable. 

One of the things that it’s important to note is that these cost savings programs aren’t solely related to AI. What we’ve seen is a change in corporate behaviour post the pandemic. The pandemic proved to companies that they could execute and implement technology far faster than they had in the past. Companies are going with great solutions, rather than the best solution so that they can improve their time to market. This means that they are moving on to the implementation phases much faster with significantly less testing. 

The other lesson from the pandemic was the importance of corporate flexibility to pivot in the face of crisis. And so, following the April 2 Liberation Day, where the U.S. global tariff regime started to change, corporations immediately started to look at their supply chains and their cost structures. And we think that the efficiencies that came out of that are going to be persistent even if, ultimately, the impact of tariffs is less than what was initially feared. What we’re seeing is that companies are making sustainable long-term changes to their processes. That’s going to result in these margin improvements being captured over a long period of time. 

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Another factor that’s positive for ongoing equity performance has been the significant pickup in M&A activity. We interpret this as being an indicator of growing management confidence in their internal operating performance. As a board, you can’t go out and do major M&A – especially transformational M&A – if you’re not certain of your own internal earnings visibility and your balance sheet strength. 

And so, the fact that companies are going out in this environment and starting to do major strategic acquisitions is indicative of a lot more confidence of what companies’ own operations are delivering, and so they’ve got the ability to go out and pursue external growth. 

And we can tell that we’re in early days of this phenomena because right now the M&A is being synergy driven. As M&A carries on, you’ll start to see the private equity competition, and you’ll also start to see follow on M&A. 

M&A begets more M&A as competitors have to follow the lead of the major players in any given industry, or else risk being left behind. 

One of the main drivers for M&A in this market is because we’re going through a period of tremendous technological change. And so companies are making this decision of whether it would be faster for them to develop competing technologies in-house, or to go out and buy them — faster meaning how long it will take them to get those products to market and to serve their customer bases. So it’s a very strong motivation for M&A. 

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The sectors that we’re focused on that are offering opportunities for margin improvement and for valuation re-rate do relate to the companies that are in the best position to take advantage of the AI trends in the marketplace.  

So, we’re looking at the Canadian banks. 

Certainly, the financial sectors have a lot of the types of jobs and processes that lend themselves to AI efficiencies. 

We’re also looking at the second-order impacts of the expansion of data centres. This is a need for energy. We’re seeing that being reflected in the amount of work that’s going into the planning for expansion in nuclear power. 

We expect the pace of AI innovation and the associated corporate competition to continue to drive the expansion in data centres and the corresponding rise in energy demand. 

So it was very notable that the U.S. government entered into a US$80-billion partnership with Westinghouse in October. This joint venture is owned by Canadian companies. It’s owned by Brookfield and Cameco – both TSX 60 companies – to accelerate the build out of the U.S. nuclear fleet.  

While we saw shares of Cameco and Brookfield Renewable move sharply higher on this news, we do think that this is going to be a catalyst for further investment in this sector. And it’s going to have a multiplier effect, for instance, on the Canadian engineering firms that have a lot of talent on the nuclear side because of Ontario’s long-standing support of nuclear energy. We have a lot of expertise in the province. 

Separately, we’re also thinking that we like the ongoing prospects for the Canadian gold equities. 

While we have seen gold recently pullback as a result of an easing of geopolitical factors — and we’re happy, of course, to see that issues in the Middle East and relations with China are improving — we think that the longer-term forces that were driving the recent gold bullion strength remain intact. In particular, foreign central bank buying, amid an ongoing global push to diversify away from U.S. Treasuries. 

The other thing to keep in mind is that the underlying equities are demonstrating very, very strong free cash flow, and a strong commitment to share buyback programs. And so we do think that this pullback is a buying opportunity. 

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One of the major risks that is facing the Canadian economy – and by extension, the Canadian equity markets – is the USMCA. The trade agreement between Canada and the U.S. is still unsettled. 

This is an area where the U.S., through their tariff programs, are trying to rewrite their relationships with their major trading partners, including Canada. 

That agreement comes up for review mid-2026, and the outcome of that review is critical to the Canadian economy because so many of our exports – especially in energy and auto – are covered under that agreement. And those industries are major employment drivers and have a big multiplier effect in the Canadian economy, so that is something that we will certainly be monitoring.

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