- With unemployment rising to 6.4 per cent in June, Canadians cutting back on spending and high borrowing costs casting a shadow over business sentiment, the Bank of Canada saw it fit to cut interest rates for a second meeting in a row
- The Consumer Price Index has been within the Bank of Canada’s target range of 1-3 per cent since January, down from 8.1 per cent in June 2022
- REITs, mining and materials, consumer discretionary and small-cap stocks broadly stand to benefit from continued dovishness from the central bank
With unemployment rising to 6.4 per cent in June, Canadians cutting back on spending and high borrowing costs casting a shadow over business sentiment, the Bank of Canada (BoC) saw it fit to cut interest rates for a second meeting in a row.
After lowering its policy rate from 5 to 4.75 per cent in June, the first cut in four years, the BoC has knocked off another quarter point to 4.5 per cent, sending a signal to financial markets that inflation is getting under control.
The Consumer Price Index has been within the BoC’s target range of 1-3 per cent since January – down from 8.1 per cent in June 2022 – with price pressures finally easing for gas and groceries after surpassing C$2 per litre and 10 per cent year-over-year growth in 2022, respectively.
With a scenario for less restrictive borrowing conditions slowly materializing, investors should be prepared to respond, rather than react, to sectors that tend to benefit during easing cycles.
4 investment catalysts for a falling-rate environment
- Real estate investment trusts (REITs): Lower rates mean lower debt burdens for REITs, which have been hammered over the past few years as the work-from-home movement, higher interest payments and higher mortgage refinancings cut into profits and caused many to sell assets to keep their heads above water. Look for stocks with depressed prices despite continued profitability to turn market fear into your advantage.
- Mining and materials: As rates decline, the incentive for businesses to build more products increases, leading to a higher demand for raw materials like uranium, gold, oil and agricultural commodities, as well as upward price pressure for high-quality explorers and producers, with primarily junior stocks having languished in the BoC’s post-pandemic hawkishness.
- Consumer discretionary: Thanks to lower debt payments, Canadians will be more flush with cash and willing to spend on non-essentials such as cars, entertainment, travel, technology, cannabis and designer clothes, opening up multiple avenues for due diligence and potential allocations.
- Small-cap stocks: Broadly speaking, small-cap stocks should benefit from a dovish BoC because they rely heavily on financings and will have an easier time finding investors to get growth initiatives off the ground. This bodes well for the portfolios of Stockhouse readers, as well as anyone keen on gaining exposure to the asset class’ ability to outperform as rates fall.
How is your portfolio positioned to capitalize on normalizing interest rates? What else should investors know to adapt to shifting macroeconomic conditions?
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(Top photo of Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers: Bank of Canada)
