Canada’s market outperforms as AI trade cools

The Canadian stock market has shown stronger performance than its US counterpart, with the TSX 60 returning close to 16% by mid-November, compared to roughly 11% for the S&P 500. Over the past six months, this gap widened as the TSX 60 returned about 9.5%, versus the S&P 500’s 2.8%, coinciding with a slight unraveling of the AI trade in the US.

The S&P 500 is heavily weighted in technology stocks, at roughly 37%, while the TSX 60 is only 10% tech. This difference in sector composition has led to questions about whether Canada offers a hedge against AI-driven market trends. On November 5, the S&P 500 saw its worst day of the year, losing 4.2%, while the TSX 60 dropped 2%, less than half the US market’s losses. However, experts caution against viewing Canada as the ‘anti-AI’ trade, as its relationship with AI exposure is more subtle.

Dylan Bredo, Partner at Bilyk Financial Private Client of Aligned Capital Partners, highlights the distinction between AI as an investment theme and the AI infrastructure buildout as an economic force. He notes, “The important piece to understand is that Canada might be a hedge against AI stocks getting cheaper. It is not a hedge against AI spending slowing down.” This distinction is key, as these risks do not always align. If investors shift from growth-oriented tech stocks to value sectors, Canadian stocks could benefit. However, if AI infrastructure spending contracts, Canada’s exposure becomes more direct.

Canada’s energy, materials, and industrial sectors are integral to AI infrastructure, supplying power, minerals, and equipment. Some Canadian-listed companies in these sectors have seen performance fluctuations tied to AI spending sentiment, indicating partial protection but not complete insulation from AI-related risks.

Garey Aitken, head of Canadian equities at Franklin Templeton’s ClearBridge Investments, agrees that Canadian exposures might hedge against some speculative excesses in the US market. However, he notes that many Canadian companies are tied to AI, and a significant correction in US equities would likely affect Canadian markets. The question is not whether Canada is entirely safe, but the extent and duration of its protection.

Both Bredo and Aitken advise against treating Canada as a universal solution. Recent gains have been partly fueled by high valuations in banking and commodity prices linked to geopolitical events. Aitken describes Canada’s performance as “sneaky good” but warns of unsustainability. Bredo cautions, “I think that the worst thing for people to do would be to be making big swings with country allocations… Canada’s still got a role to play, the question of non-correlation and whether when something happens in the US you benefit from some Canadian exposure and vice versa, that’s as relevant as ever. But people should make sure they have their heads screwed on straight and not chase the last long-term winner in terms of country allocations.”

A stock-specific approach is recommended over index-based exposure to Canada, particularly in a shifting market environment. While Canada offers companies aligned with a rotation from growth to value, similar opportunities exist in the US. The focus should be on selecting individual companies rather than assuming broad market protection.

Canada’s AI Exposure Extends Beyond Tech Sectors

The TSX 60’s limited tech exposure does not imply complete disconnection from AI trends. While tech constitutes only 10% of the TSX 60, compared to 37% in the S&P 500, Canadian companies in energy, mining, and financials play critical roles in AI infrastructure. Energy firms supply power for data centers, mining companies produce essential minerals, and financial institutions benefit from lending tied to AI projects. These connections create a two-way risk, offering partial insulation from tech downturns but exposing Canada to broader economic shifts if AI investment declines.

The November 5 market reaction showed this duality. While the TSX 60’s losses were milder than the S&P 500’s, they still reflected underlying vulnerabilities. Canadian stocks are not immune to AI-related slowdowns, particularly if reduced spending impacts energy and materials sectors. The exposure is less direct than in the US but remains significant across multiple sectors.