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The path to “more normal” monetary policy has affected Canadian equities, with sectors responding differently to the tightening cycle, CIBC Asset Management’s head of equity research says.

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“We are now on the path to more normal monetary policy levels,” said CIBC’s Crystal Maloney, and past cycles provide clues about the impact on equities.

In the four months leading up to the start of bank’s tightening cycle in March, Maloney said the S&P/TSX Composite index remained relatively flat, up 0.4%, or 1.3% including dividends.

Energy led, up 15%, followed by materials (14%) and communication services (10%). Information technology, health care and industrials lagged, dropping 38%, 23% and 8%, respectively.

The history of rate tightening cycles shows that cyclical sectors such as commodities and industrials generally outperform defensive sectors like utilities and telecoms, she said.

However, industrials and technology underperformed this time, she said, while defensive sectors held up better as they were less impacted by inflation levels, labour shortages and supply-chain challenges.

In the two months following the BoC’s March 2 rate hike, Canadian stocks dropped 1.7%, Maloney said. As of Friday, the S&P/TSX Composite was down 2.79% in May and 4.9% this year.

“In this case, the negative shift was heightened with the invasion of Ukraine by Russia in February,” she said.

Consistent with previous cycles, Maloney said investors rotated into energy and materials, which were up an additional 9% and 5%, respectively, in the two months since the first interest rate increase. Commodities reached an all-time high and technology continued to sell off, down another 21%, she said. Financials also dropped 7.6%, while defensive sectors, such as staples and utilities, continued to outperform. 

“There are a number of areas where we continue to see opportunities in the Canadian market,” Maloney said.

With higher interest rates supporting commodities, she likes energy producers such as Cenovus Energy and ARC Resources Ltd.

She also maintains a favourable view on financials — the banks, in particular.

“Historically Canadian financials have been positively correlated to interest rates and have been among the best performing sectors in the previous seven rising rate cycles,” said Maloney.

Despite slowing earnings momentum, she said fundamentals remain strong. In this space, Maloney favours the Bank of Montreal due to strong commercial loan growth and lower relative mortgage exposure.

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