Rate-cut delays are a headwind for Canadian stocks, IG strategist Petursson warns
Canada’s main equity index is poised to struggle if investors determine that central banks are going to delay rate cuts for a while, IG Wealth Management’s chief investment strategist said.
Traders have become less optimistic that policymakers will lower borrowing costs in the first half of 2024 after U.S. inflation data was hotter than expected. That’s a potential headwind for banks, utilities and possibly other names such as Shopify Inc. that are rate-sensitive heavyweights in the S&P/TSX Composite Index, IG’s Philip Petursson said.
“If interest rates are pushed off, then the upside for those stocks gets pushed off as well,” Petursson said by phone. “It seems that the TSX has come down to being about interest rates.”
The consensus of economists surveyed by Bloomberg is that the Bank of Canada will make its first cut in June. Since last July, the policy rate has been at 5 per cent, the highest level since 2001.
Tuesday’s U.S. inflation reading sent the TSX Composite to its biggest one-day loss since September 2022, down 2.3 per cent. The benchmark rebounded on Wednesday and Thursday, but still trails major U.S. stock gauges and most European ones so far this month.
Compared with the S&P 500, the TSX index has few technology companies and is heavy on financials. The country’s six largest banks are almost 20 per cent of the benchmark, while the utilities and communications services sectors — filled with high-dividend stocks — add up to about 7.5 per cent. All three of those groups are down so far in 2024.
Utilities, which have large-scale capital projects financed by debt, have struggled mightily in a higher-rate environment, falling about 9 per cent in the past 12 months.
Some consumer stocks are also feeling pressure from interest rates, as heavily indebted Canadians set aside more of their take-home pay for mortgage payments, leaving less for non-essentials. Shares of big-box retailer Canadian Tire Corp. fell Thursday after the company reported normalized earnings of $3.38 per share for the fiscal fourth quarter, far short of analysts’ forecasts.
Chief Executive Officer Greg Hicks said the uncertain path of interest rates has caused management to adjust operations because demand for discretionary items is weaker than for essential goods.
“If the intent of restrictive monetary policy was to curb consumer demand and slow the consumer economy, we would certainly say the policy strategy is working,” Hicks told analysts on a conference call. “So, we aren’t planning for any real growth in the economy.”