Featuring
Catharine Sterritt
From
Text transcript
Welcome to Advisor to Go, brought to you by CIBC Global 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, Canadian equities, CIBC Global Asset Management
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Canada is entering a significant capex-driven investment cycle, and it’s important not to underestimate the scale of that opportunity. What has become much clearer in recent months is that infrastructure is moving from a policy priority to actual projects.
Through June, July and August, we’ve seen more than $300 billion in federal government announcements for major infrastructure-related projects across energy, transportation, defence, and digital infrastructure. These include expanded LNG on the British Columbia coast; the Robert Banks port expansion, both for container handling and oil shipments; the submarine purchase, which will also drive a lot of related infrastructure for building docking ports and maintenance facilities; the new West Coast pipeline twinning the TMX, which will enable growth in oil sands production; and there has also been the proposed meta-backed data centre announcement in Alberta, which will include a 1,000 gigawatt natural gas generation facility. And most recently, the large satellite communications project for Canada’s north.
Projects of this size have a big multiplier effect. Look at the positive impact on the U.S. economy from the AI capex cycle. Similarly, infrastructure capex in Canada will have a multiplier effect throughout the Canadian economy, driving GDP growth, jobs, and business investment by related suppliers over multiple years.
What is especially important for investors is that the opportunity is not limited to one sector. It potentially benefits pipelines, rail, utilities, engineering and construction, aerospace and resource producers. Companies such as Pembina, CN Rail, Capital Power, Teck, CAE which will provide submarine training, AtkinsRéalis and WSP Global on the engineering side, Aecon in construction, and the major oil sands producers like CNQ, Cenovus and Suncor, and also satellite manufacturer, MDA.
In our view, this is significant because the market is only beginning to reflect this theme in earnings expectations and index weights, as the projects move through permitting and final approvals into initial spend in engineering and construction, likely by late 2027. And then the spend will start building into 2028 through 2030.
So yes, we see infrastructure as a multi-year structural opportunity, not just a short-term headline.
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We are happy to see that the S&P/TSX has moved into the final stages of review for the inclusion of foreign issuers into the TSE indexes, both the composite, TSX 60 and the other subindices. Targeting to be effective September 18, the proposed rule change would allow certain foreign issuers with strong Canadian connection — whether through assets, investor history, or trading activity on the TSX — to become eligible for index inclusion.
This is meaningful to Canadian investors because it will help the TSX index meet its purpose of reflecting the depth, liquidity and sector diversity of the Canadian market, and may also create index-driven demand for qualifying companies, which can be important for both passive ETFs and active manager positioning.
One company that may end up re-entering the TSX index in September is Ovintiv, formerly Encana, which has significant Canadian natural gas assets and meaningful trade volumes on the TSX.
Another company that will be directly impacted is TECK, which is in the process of being acquired by Anglo. The pro-forma Anglo-TECK entity could end up retaining TECK’s TSX 60 membership after the transaction closes, and at an increased combined weighting, potentially as much as 40% greater.
For investors, the proposed new rule will allow for a broader and more representative investable universe, and in cases of M&A for shares, will allow Canadian investors to continue to participate in the combined entity’s future upside.
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The most compelling opportunities in Canadian equities are in areas where there is a combination of strong cash flow, reasonable valuations, and visible catalysts, such as energy, particularly the large-cap oil sands producers.
In July, Suncor, Cenovus and CNQ were among the strongest performers, helped by firmer oil prices, strong free cash flow, healthy balance sheets and growing optimism around infrastructure-led production growth. And we have recently seen Suncor report strong Q2 results, and announced a further step up in buybacks. We expect that similarly strong cash flows will enable CNQ and Cenovus to expand production if the new Westcoast Pipeline moves ahead.
Another area of opportunity is in the infrastructure beneficiaries. That includes names tied to pipelines, rail, utilities, engineering, construction and defence. The key point is that if this infrastructure cycle continues to develop, these businesses could see multi-year earnings support.
Investors should also watch for companies where concerns around AI may be overstated, such as companies that have been under pressure earlier this year on concerns of being disintermediated by AI — companies like Thomson Reuters and WSP Global with strong franchises, deep data-driven expertise providing services in mission critical areas for their customers.
As we go forward through the coming quarters, operating performance will prove out — and will be able to show — that AI is actually helping improve their service offerings, margins, and customer relationships, rather than disrupting them.
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The biggest risks to the Canadian equity outlook are macro.
First, rates really matter. In both Canada and the U.S., rates were left unchanged in July, but inflation remains an important question.
In the U.S., expectations have risen for a possible September rate increase, and that keeps pressure on valuations, especially in more rate-sensitive, high-multiple parts of the market, such as technology and financials.
Clearly part of that inflation story is directly tied to geopolitical risk, particularly around the Iran conflict and the continuing oil supply disruptions through the Strait of Hormuz, and the question of how long it takes to repair damaged oil infrastructure and return to pre-conflict levels of production. That creates volatility in oil prices, but it also impacts broader market sentiment.
Third, trade negotiations, including USMCA with the U.S., are still unfolding. And while Canada is taking steps to meaningfully diversify away from the U.S., this will be a very long process and, in the meantime, our economy is still very vulnerable to where those trade deals land.
Given the macro risks, it’s important to focus on companies that are positioned to rerate higher regardless of the macro picture. The market is continuing to reward companies that are delivering cash flow, and have clear catalysts. So, the strongest opportunities remain in cash flow-driven sectors, like energy, infrastructure and nuclear, while staying more selective in areas where valuations or macro risks look stretched, such as the banks and insurance.
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