Is Canada a useful hedge against the AI trade?
“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. And those two aspects are really important to distinguish and understand,” says Dylan Bredo CFA, MBA, Partner at Bilyk Financial Private Client of Aligned Capital Partners in Edmonton. “Whether Canada is a good place to get protection depends on whether we’re seeing a change in investor expectations or a fundamental change in AI investment.”
Where Canada is, and isn’t, exposed to AI
Fundamental to Bredo’s view is the distinction between AI as an investment theme that has buoyed the share prices of the world’s largest technology companies and the AI infrastructure buildout as an economic force. He notes that he doesn’t necessarily see the AI trade coming to an end, but highlights some of the potential risks to AI-related stocks that certain Canadian names might hedge against.
Canadian companies, he says, could benefit from a shift in investor appetites from growth oriented tech stocks towards more value sectors. That drive could be motivated by the tougher earnings comparables now being set for tech companies, which might motivate investors to look for sectors and companies with more stable earnings.
If the shift in AI goes beyond stock prices and starts to touch on the massive AI infrastructure buildout, then Bredo says a lot more of the Canadian stock market could be exposed. The ongoing push towards data center construction relies on a huge amount of energy, minerals, and industrial equipment, sectors with a large amount of representation on Canadian markets. Bredo notes that some Canadian-listed companies in sectors like electronics manufacturing performed well as investors focused on the AI buildout, only to pull back significantly as investors grew more concerned.
Garey Aitken, head of Canadian equities at Franklin Templeton‘s ClearBridge Investments, believes that despite some shifts in the pace of the AI infrastructure buildout resulting from recent Midterm elections, the economics of ongoing demand for AI services will result in further data center construction. Like Bredo, he notes that there are certain AI pure-play winners and losers in the Canadian market. He agrees that Canadian exposures might hedge against some of the “froth” at the top end of the US market, but that many Canadian companies are tied to AI. Moreover, a significant correction in US equities, whether as a result of the AI trade coming apart or not, would have contagion effects in the Canadian market.
