If Governor Stephen Poloz does the expected and raises Canadian interest rates on Wednesday, it may be time to load up on potash, copper and gold stocks.
A review of equity performances following Bank of Canada tightening cycles over the past dozen years shows that materials stocks including Lundin Mining Corp. and Potash Corp. of Saskatchewan Inc. significantly outperform all other sectors of the Canadian market.
Over five periods of higher interest rates, including 2010, 2007 and an extended eight-month cycle in 2005 and 2006, the S&P/TSX materials index has returned an average of 9.7 percent in the three months following a rate hike, according to data compiled by Bloomberg. By contrast, financials have gained 1.8 percent, energy has returned 0.6 percent and the benchmark index has added 2.4 percent.
The historical gains in the face of higher borrowing costs suggest that Canada’s resource-laden broader index may be poised for a second-half rally, after lagging every other developed market gauge in the second quarter and declining 1.5 percent on the year.
Canadian investors should avoid most domestic equities in the current rates environment except for resource stocks, said Martin Roberge, North American portfolio strategist at Canaccord Genuity Group Inc.
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