Canada’s smaller stocks are holding up better than their larger peers as U.S. President Donald Trump’s trade war shows few signs of slowing.
Following a brief cross-border trade skirmish last week, Canada’s small-cap index climbed 0.7%, driven by gains in cannabis and mining stocks, while its large-cap counterpart, the S&P/TSX Composite, declined 0.4%. The fracas simmered down a bit after the US agreed to postpone the levies for 30 days.
The outperformance continued on Monday, when the S&P/TSX Small Cap Index rose 1.2% after Trump said he would order a 25% tariff on steel and aluminum imports, a big part of which are sourced in Canada. He made good on his promise after the markets closed and Prime Minister Justin Trudeau said Canada’s response “will be firm and clear”.
To Colin Cieszynski, chief market strategist and portfolio manager at SIA Wealth Management in Toronto, the small-cap index is outperforming due to a larger weight in mining and metals stocks, which have benefited as the Loonie declined and gold prices gained.
“The uncertainty has pushed up the price of gold and commodities in general. When the Canadian dollar falls, all else being equal in commodities, you’d expect resource stocks to go up,” Cieszynski said.
Gold mining companies, in particular, have helped juice the returns of the Canadian small-cap index, which has a nearly 33% weighting in materials and much of that in gold stocks. Solaris Resources Inc., Orla Mining Ltd. and Skeena Resources Ltd. all posted double-digit gains last week.
Investors are flocking to the small-cap gold sector with domestic production, said Travis Irwin, a portfolio manager focused on small- and mid-cap stocks with Picton Mahoney Asset Management. “For Canadian domestic gold miners their costs are in Canadian dollars and they are paid in US dollars,” he said.
SIA Wealth’s Cieszynski also said that the corners of Canada’s stock market that tilt more heavily toward commodities and toward domestic-focused stocks are also putting up wins, or as he put it, “the really deep Canadian companies,” like telecommunications firm BCE Inc., which has a video streaming service.
To be sure, Canadian markets have, in aggregate, suffered a brutal stretch. Stocks on the main benchmark shed a cumulative $91 billion (US$63.5 billion) in market value. Over the course of last week, Royal Bank of Canada, Brookfield Corp., Canadian Pacific Kansas City led those losses and dragged the country’s benchmark equity index lower.
Still, the performance of the commodities-linked stocks is apparent in Toronto in general and the small-caps in particular.
“The list of reasons gold has been rising is plenty — from Chinese buying to fear over all the political headlines,” Purpose Investments' Chief Market Strategist Craig Basinger wrote in a Monday note, adding that gold and commodity exposure can be a hedge for investors against rising inflation.
“This is one of the reasons the TSX tends to outperform broader equity markets in higher inflationary environments.”
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