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The Canadian financial system, in distinction to the U.S., seems considerably extra weak. The heavy financial tightening, unparalleled in latest historical past, suggests a looming onerous touchdown state of affairs that the fairness markets have but to think about. The distinctive nature of the COVID-19 pandemic and subsequent authorities interventions additional complicates the financial panorama, probably delaying the results of coverage adjustments.
Aitken maintains, “Whereas better-than-expected GDP development has triggered the smooth touchdown refrain to develop louder within the U.S., the Canadian financial system is in a meaningfully weaker place. We stay of the view {that a} onerous touchdown is a probable state of affairs, given the magnitude of financial tightening over the previous yr and a half, a stance but to be discounted by Canadian fairness markets.”
Defensive sectors: A brand new constructive outlook
Defensive sectors akin to communication companies, utilities, and actual property, beforehand hit by charge tightening, now current a extra engaging funding alternative. These sectors, together with midstream power, have seen decreased valuations amidst a still-fragile financial system. This shift provides a extra constructive outlook for these areas of the market.
The utilities sector’s regular development, particularly in supporting the renewable power transition, suggests worthwhile alternatives forward. Nevertheless, the broader selloff in defensive areas could also be overdone, presenting potential re-rating alternatives.
Conversely, the outlook for cyclical sectors akin to supplies, power, and financials is extra bearish. The power sector, regardless of its robust efficiency lately, is weak to a possible international demand slowdown, particularly with looming uncertainties in main economies like China and Europe. Banks, having skilled a sell-off over the previous few quarters, are buying and selling at valuations that trace at a difficult surroundings however don’t absolutely account for a major recession. These sectors, due to this fact, are approached with warning.
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