The Market this Month | Rates, Rotation & Global Opportunities

• Rising energy prices and persistent inflation are putting pressure on interest rates and smaller companies.
• Materials could benefit from seasonal strength if interest rates begin to moderate.
• Cannabis consolidation and new CSE listings highlight activity in Canada’s junior markets.

Higher energy prices and persistent inflation are reshaping Canadian markets, with larger companies outperforming smaller stocks as borrowing costs remain elevated.

In October’s edition of The Market This Month, Canadian Securities Exchange Director of Listings Development Anna Brynelsen joins StoneCastle Investment Management President Bruce Campbell to examine interest rates, sector performance and the potential for a broader market rotation.

Campbell explains that stronger energy prices have supported Canadian producers while increasing costs for consumers and businesses. Higher interest rates have also favoured large-cap companies with stronger balance sheets, leaving smaller businesses under greater pressure.

This content has been prepared as part of a partnership with the Canadian Securities Exchange and is intended for informational purposes only.

However, Campbell sees potential opportunities ahead. Materials are entering a historically stronger seasonal period, and moderating interest rates could encourage investors to return to precious metals, base metals and smaller-cap equities.

The episode also explores renewed cannabis consolidation following Curaleaf’s revised hostile takeover proposal for Aurora Cannabis, alongside the potential implications of US cannabis rescheduling.

Meanwhile, the CSE highlights new listings, significant financing activity and Gladiator Metals’ Australian dual listing, which could provide another route for Canadian companies to access international investors.

Looking ahead, Campbell identifies oil prices and inflation as two of the most important factors shaping market direction.

Watch the full episode above for the latest analysis of Canadian markets, sector rotation and emerging opportunities.

Transcript

This transcript has been lightly edited for clarity and readability. Repeated filler words, false starts and brief acknowledgements have been removed where they do not affect the meaning.

Opening narration: The Canadian Securities Exchange presents your go-to source for trends in junior and small-cap markets. Each month, join host Anna Brynelsen and financial expert Bruce Campbell in partnership with Stockhouse.

Anna: Hello, everyone, and welcome to the October edition of The Market This Month. I’m Anna Brynelsen, Director of Listings Development with the Canadian Securities Exchange.

This month, we’re looking at strong energy prices, rising rates, narrow market leadership, and whether we could see a broader rotation as we head into the fall.

Energy prices have remained strong, but that strength is also creating some challenges for the broader economy, with inflation proving to be hotter than central banks and investors would like. As a result, we’re seeing the entire interest rate curve move higher.

At the same time, energy continues to be one of the strongest-performing sectors in Canada year to date, and we’re seeing an increase in M&A activity across the sector.

Materials are also entering a seasonally stronger period, although the higher-rate environment raises the question of whether we need to see some moderation in rates before materials can really begin to outperform.

Market leadership has also been quite narrow over the last couple of months. Large-cap stocks continue to dominate, with energy, technology and healthcare among the strongest-performing sectors.

We’re also seeing renewed interest in cannabis following Curaleaf’s increased hostile bid for Aurora Cannabis.

Curaleaf has raised its offer to US$1 in cash plus 0.4013 Curaleaf shares for each Aurora share, representing approximately US$5 per Aurora share based on Curaleaf’s share price at the time of the revised offer.

The proposed transaction is another example of the consolidation taking place in the cannabis sector.

On the CSE, we welcomed several new companies this September, including Brutus Mining, Blade Resources, Tiger Financial Services, Tungsten Eagle Development and Pelican AI.

And there was an important development on the international front as well.

Gladiator Metals became the first Canadian company to dual-list on the National Stock Exchange of Australia, or NSX, the CSE’s exchange in Australia.

Gladiator began trading on the NSX on September 23 under the symbol GM1, using CHESS Depositary Interests.

The listing was completed through the NSX’s new low-documentation dual-listing process, which is designed to provide an efficient and cost-effective pathway for Canadian-listed companies to access the Australian market.

Where there’s no concurrent capital raise, the process generally does not require a prospectus, allowing the NSX to rely substantially on the issuer’s existing public company disclosure record.

It’s an important milestone for both exchanges and creates another potential pathway for Canadian companies looking to broaden their investor base in Australia.

We’re also seeing some significant financing activity among CSE-listed companies.

Westward Gold announced an upsizing of its non-brokered private placement to $12 million, reflecting strong investor demand and continued interest in its Nevada-focused gold exploration strategy.

BetterLife Pharma closed a US$100 million public offering of common shares and pre-funded warrants, providing significant capital to support the company’s continued development.

Avanti Gold completed a $51.75 million bought-deal private placement, giving the company substantial funding to advance its gold exploration and development activities.

And Copper One Resources closed a $7.9 million non-brokered special warrant offering, providing additional capital to advance its copper-focused exploration activities.

So, as we head into October, we’re watching the impact of higher energy prices, interest rates, whether market leadership begins to broaden, and how companies and investors are looking beyond traditional markets for new opportunities.

Bruce, let’s dive in.

Anna: All right, Bruce. Thank you so much for joining us here in Vancouver yet again. We’re talking in October, and we’re going to reflect on what happened in September and talk about what we’re going to expect in November. It’s always great to see you here in person.

Bruce: Yeah, it’s great to be here. And man, there’s a lot going on in markets.

Anna: There is. I feel like every time we record, we go, “Wow, there’s more going on than we expected,” which can be good and can be bad.

Let’s dive right into it. Let’s talk about energy prices. Now, you’ve talked about energy prices for a few of our episodes. It’s been a bit of a leader in Canada. Tell us what’s going on.

Bruce: Well, it’s been a theme really since March, when everything broke out with Iran.

We continue to see this back and forth. We saw a fairly significant pullback when we saw what was supposed to be a resolution or understanding in June.

But since then, energy prices have been ticking up, which is great for the energy sector.

Not so much for consumers, because we have seen inflation really start to escalate as a result of that, which has then meant that we saw interest rate increases.

So it’s kind of that one thing leads to the next domino effect.

Anna: We’ve been working our way through rising interest rates or rising inflation for some time now. And both governments on both sides of the border have been actively trying to deal with it, right?

It seems like they made a bit of headway, but are we losing that headway?

Bruce: Yeah, certainly it seems like that has been the case in the short term.

But the thing that always has to be in the back of your mind is, if you go back to the 1970s when we saw super-strong inflation numbers, it went in waves.

So we saw the big wave up, and then it came down, and then we saw a second wave.

And that’s what a lot of people, probably including the central bankers, are worried about here.

That being said, really this time, it seems like a lot of this energy acceleration has been what’s led inflation higher.

If we could get energy to moderate, we actually have the base effect where the numbers falling off from a year ago are going to be larger.

So we should actually start to see inflation coming down into the new year.

But the caveat there has to be that energy has to maintain where it is or actually start to fall.

Anna: Okay. So hopefully this is, if history has proven correct, a good sign. And hopefully no new wars commence between now and the new year, and energy prices can make their way down.

Strong energy prices are also affecting the market. So how is that affecting the market?

Bruce: Energy input is a big factor for a lot of industries, and that’s had the market concerned.

As interest rates have gone up, businesses have to cover their interest ratio, right? So if they borrowed money, they have to cover that.

And so what we’ve actually seen is a real narrowing just in the last several months here, where the biggest companies have the best balance sheets, and so their stocks have continued to perform, whereas the smaller companies haven’t so much.

And then the second caveat to that is that as inflation has gone up, it’s put a bit of a damper on commodity prices outside of energy, especially in the base metals.

Base metals and precious metals tend to have an inverse correlation to interest rates, and right now they’ve actually held in pretty steady, but we’ve basically seen them going sideways.

Anna: We’re seeing a bit of pressure coming to them.

Bruce: Yeah. There’s probably pressure in two places, right?

One is that they’re not getting as much to sell their product, but as well, their costs would have risen as energy prices have gone up, especially diesel.

That’s used in a lot of industrial applications and mining, so that would be a fairly significant input.

Anna: Okay, we’ll keep watching that.

Let’s talk about materials. Materials seasonality is now in a period of strength. What do we need to see for this sector to outperform?

Bruce: Well, we just talked about interest rates and what’s happening there.

If we were to see interest rates moderate, because they were on this big, steep curve up in July, August and September, we’ve now seen the Fed in the US hike rates once, but the expectation now is that there’s only one hike left this year, with two meetings remaining.

But if we were to see that interest rate move start to moderate, at that point in time, you’d probably start to see the flow of funds back into those commodities, precious metals and base metals.

At the same time, you have that seasonality push that’s behind it.

So again, we always talk about that being the climate, and then the weather is what’s happening on the day.

The climate is that we’re heading into that seasonally strong period. The weather will be whether or not interest rates moderate, and if they do, then you could probably see the next move up.

Anna: When will we see the potential next interest rate move?

Bruce: Well, there’s one meeting scheduled for the middle of October and then one for December.

The expectation is always based on what the probability is in the market. Futures traders can price that in, and it’s also based on the two-year yield.

Right now, the expectation is that there’s going to be one more hike before year-end.

The thought is, though, that they’re not going to do it during the October meeting because it’s too close to the election.

So they would wait until December, but between now and December, there could be a lot that happens with inflation.

Anna: Maybe you could just touch on traditionally what are some of the market trends that we see happen? Because the market’s greatly affected by this, isn’t it?

Obviously, the government is making decisions that are specifically based on that. Is there a standard thing that we see happen in the markets around this time?

Bruce: A hundred per cent.

We actually see the third year and the fourth year of a presidential cycle being the strongest. The third is actually the strongest.

And the reason for that is typically somebody gets elected and they put all their tough medicine up front.

Then the last two years, they’re doing everything they can to get re-elected.

And the bottom of that cycle actually happens right as October gets flipped over.

So far, we’re a few days into October now, and the markets have had a fairly strong October so far.

So it looks like the climate is showing up exactly with the weather right now.

Anna: And we’re not really sure what the sentiment is as far as those midterm elections. I feel like there are some opposing views of what the sentiment is.

Bruce: Yeah, certainly it’s very mixed and probably comes down to the wire.

It also probably has a lot to do with what happens politically in the world and also in the US between now and then.

Anna: Absolutely. Lots to pay attention to.

Let’s talk about large-cap stocks. What’s leading the way? I know that the large-cap stocks have had a good run. So what’s leading the way?

Bruce: Well, it really has to do, again, with interest rates.

As interest rates have come up, the large caps have the best balance sheets.

Typically, they’re around 20 times interest coverage on their debt, whereas small-cap companies are usually between one and two times interest coverage.

So that starts to have an impact on their earnings, or can have an impact on their earnings.

And so the market’s looking at that.

What would we need to have happen? We would need to see those interest rates moderate, which they have started to here.

And then at that point in time, investors probably go back to looking at the small caps because of their earning potential.

Anna: Right. So they get potential upside once they’re comfortable in the large-cap space. It’s potential movement of capital into the smaller-cap space, right?

Bruce: Yeah. Well, it moved out, and now it could potentially move back in.

Anna: Okay, great. I like that.

Let’s talk about cannabis. We haven’t talked about cannabis in a long time.

I feel like when we started this show maybe five years ago, we talked about cannabis a lot.

Bruce: Every show, yeah.

Anna: It was, in fact, one of the reasons why we started this show, because you had a cannabis fund, right?

You had lots of thoughts on our issuers that were in that space, and we talked about it a lot.

We haven’t talked about it very much recently, and there’s a fairly large potential consolidation happening in the space.

So tell us, what’s happening between Curaleaf and Aurora?

Bruce: Yeah, well, let’s just talk for a second about the sector itself.

If you roll the clock back, we were talking about all these cannabis issuers, and a lot of them were newer businesses.

Now they’re much more established businesses.

Anna: They’re real businesses!

Bruce: They’re real businesses, but now you’re actually starting to see consolidation happen.

So this isn’t the first one, but this is where it gets really interesting because you have Curaleaf, which is the big US MSO, the biggest, and they’re coming in to buy Aurora, which is a Canadian issuer that also has some international assets.

It’s been hostile to this point in time.

They put out an initial offer, and since then they’ve upped that.

So it’ll be really interesting to see if they actually can get shareholder approval to take this over and make it into an even bigger company with a bigger footprint, not just in the US, but globally.

Anna: So, just to clarify, Aurora. The initial offer went out and it was dismissed. They’ve now come in with a bigger offer.

I’m curious what the investor sentiment would be and why even that initial offer would have been dismissed.

You’d think that this massive MSO out of the United States would be a win for Aurora shareholders. Do you have any ideas why that happened?

Bruce: Well, it certainly would have been a win at the price that it was.

But Aurora management basically said, “Vote against this because they’re not giving us fair value for what we think we’re worth.”

And of course, the market wasn’t giving it fair value either, and that’s why Curaleaf was being opportunistic.

Since then, Curaleaf’s upped their bid. That was just a day ago.

So we haven’t really had a chance to see the full thoughts from Aurora’s management on whether or not this is a fair deal.

But sometimes these things settle out even higher than where they go after the first or second bid.

Anna: This would make Curaleaf a massive, massive cannabis-focused company, right?

Bruce: It’s already the biggest, but now they get assets in Canada, and Aurora has some business internationally as well.

Anna: I do love that both these companies at one point were listed on the CSE, so that’s great for us that we continue to foster that ability for growth.

Now they’re massive companies, and it’ll be interesting to watch that play out.

Do you think this will spur some reinvigoration in the cannabis sector?

Bruce: Well, what’s going to spur it is potential legislation, and this has been on again, off again for the last five years, that would reschedule the plant and move it from Schedule I down to Schedule III.

If we saw that happen, when we see that happen, it will mean significant things from a cash flow perspective for these businesses.

Because right now, with this 280E, which is a tax code, they can’t write off their business expenses, and so they pay a tax rate that’s way higher than a normal business.

If you get that through, now all of a sudden they become way more profitable.

At the same time, you’ve seen institutional investors starting to be able to come into the sector, and that would be a real push in.

Anna: I’ve had this conversation with a few people, and there are certainly opposing sides.

Some believe that at some point this has to happen, like you said.

But there are also views out there that say, based on the political sentiment in the US right now and what’s going on geopolitically, that this might not happen for some time.

What are your thoughts?

Bruce: Yeah, it’s so hard to handicap right now.

When we started the show five years ago, or even longer, we thought this was going to happen several times, and it just keeps getting pushed back and delayed.

There always seem to be reasons for it.

We know that generally the politicians in the US tend to be significantly older and grew up around that war on drugs era.

Since then, there’s been a lot more data on cannabis use. We’ve seen a lot more cannabis being legalized in other countries and other jurisdictions.

At some point in time, the younger population’s going to push that through.

But the old guard’s kind of hanging on for as long as they can because they’ve been indoctrinated on that.

It’s always going to be that political back and forth, and there always seem to be different opinions on what they have to give up or what they have to provide to get that through.

Anna: Absolutely. We’ll continue to watch that.

I do love that we’re talking about cannabis again. We’ll see if that sector has a little revival.

What should we be thinking about going into next month, Bruce?

Bruce: Yeah, really the two things that we’re focused on are oil and inflation.

What we see happen with those will probably have a big bearing and impact on a lot of other sectors, not just the energy sector, but the overall market.

And then we also talked about the precious and base metals. Those could also have a fairly significant move here.

Anna: Okay. Well, thank you so much for making your way to Vancouver.

I’m giving you a fresh host next month. You will be joined by none other than James Black, our VP of Marketing and Communications.

He is a great friend on the podcast train, so I’m sure you’ll have a great month.

But it’ll be interesting to see how this all plays out as we continue to watch this fight against inflation.

It seems like everything is a little bit of the sun right now in the ecosystem. Everything seems to be floating around it, so we’ll continue to watch that.

Thank you again for joining me.

Bruce: Yeah, it’s been great. Thanks.

Anna: We’ll chat later.