While the backdrop for investors has been challenging over the past two years, global macroeconomic conditions are continuing to improve in 2024 as inflation moderates and expectations of monetary loosening intensify.

With stocks a likely beneficiary of ongoing positive economic momentum, investors have understandably been seeking to increase equity allocations. However, this focus has recently been concentrated on a select group of stocks as evidenced by the performance of the AI-linked Magnificent Seven, which contributed almost two-thirds of the S&P 500 return in 2023.

Even though AI continues to attract widespread attention, the improving broader sentiment is likely to reignite investor interest in opportunities beyond the handful of US tech behemoths. The spotlight could be set to shine on the US’ overlooked northern neighbour.

With a wealth of high-quality companies, the diverse Canadian stock market offers a compelling alternative to the US, as demonstrated by the S&P/TSX composite (TSX) trading at its largest discount to the S&P 500 in recent times. Below, we outline a number of appealing sectors within the underappreciated Canadian market.

Rising industrial power

Industrials is our largest sector allocation, making up 24.7% of the portfolio, which is well beyond the benchmark’s 14.5% weighting. The sector has benefited from continued infrastructure spending in the US, as part of both the continuation of nearshoring and the push for electrification and decarbonisation.

This has been propelled by the Bipartisan Infrastructure Law, which enabled $1.2tn (£958bn) of US federal funds to be spent on transportation, energy and climate infrastructure projects.

One company benefiting from this is engineering group Stantec, which recently secured a £4bn contract to design a new facility for Tata’s global battery business in the UK.

Boyd Group Services, one of the largest operators of non-franchised collision repair centres in North America, and a major consolidator in the fragmented industry, has also been a beneficiary of the post-pandemic uptick in road usage and trucking, which is likely to continue along with a further strengthening of the US economy.

Uranium going nuclear

Transitioning from fossil fuels to clean energy remains high on the agenda for many countries, which is driving a surge in interest for nuclear energy. The COP28 meeting last year marked a pledge by 22 countries – including the US, UK, and Canada – to triple nuclear capacity by 2050.

With existing sources of uranium, the critical component for nuclear energy, relying on imports from Russia, Kazakhstan and Uzbekistan, demand is turning to markets with lower geopolitical risk. Therefore, we expect mining and enrichment to follow the reshoring and friend-shoring trends experienced in other industries.

In response to these shifts, one of the world’s largest publicly traded uranium miners, Cameco, was added to the CGI portfolio late last year. The company owns several mines in Canada’s Athabasca Basin, a region renowned for containing the world’s largest deposits of high-grade uranium. Cameco’s net earnings doubled in 2023, partly driven by the soaring uranium price.

Meanwhile, NexGen Energy, a recent addition to our portfolio, features one of the largest and highest-graded undeveloped advanced uranium projects in the world, accentuated by its location in the Athabasca Basin. As global demand for nuclear energy continues to rise, and stable uranium supplies remain limited, we anticipate these trends will continue to drive strong performance for the industry’s leaders for the remainder of 2024 and beyond.

Turnaround for tech

While the AI theme witnessed overwhelming demand, many other technology stocks have struggled in recent times, as investors penalised companies trading on elevated multiples as interest rates increased. However, we expect a reversal of fortunes for many companies as economic conditions improve and rates decline.

A prime example is the international e-commerce company Shopify. Benefiting from the e-commerce boom during the pandemic, Shopify subsequently faced challenges as the tailwinds subsided. The company has been one of CGI’s most successful investments to date and we believe it still has the potential to become Canada’s home-grown Amazon.

Shopify’s proprietary e-commerce platform for online stores and retail point-of-sale systems has more than 4.5m business users across approximately 175 countries, with revenues forecast to grow by over 20% in 2024 on a year-over-year basis. After falling around 85% from its peak, Shopify’s share price has since stabilised.

We are positive on the outlook for the company, driven by efforts to streamline its expansion plans and right-size operations, coupled with double-digit price increases across a range of products and strategic management initiatives.

Greg Eckel is the manager of Canadian General Investments (CGI ) and based in Toronto. If you would like to learn more about Canada, register for our online event with Middlefield Canadian Income (MCT ) next Thursday, 9 May at 3pm.

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