Value investing in today’s Canadian and global markets

Why valuation discipline matters again

For over a decade after the global financial crisis, many developed-market central banks kept interest rates close to zero. In that environment, discounting future cash flows became less meaningful: when the discount rate is near zero, the market can place a similar value on cash flows expected far in the future and those generated today.

We believe the post-pandemic period marks a return to more historically normal market conditions. With inflation proving to be more structural, we expect interest rates may remain positive as central banks maintain a commitment to policy normalization rather than reverting to a zero-bound rate framework. As a result, the cost of capital is more relevant, as are valuation discounting mechanisms.

In this article, we discuss three sectors which may offer attractive bottom-up value opportunities today, taking into consideration improving fundamentals and a favourable macro context.

Opportunities in Canadian resource security

Canadian equity allocations are often framed around a few familiar categories – particularly banks, energy producers and gold-related companies – but a value investing approach can broaden the opportunity set.

Resource and energy security have become more prominent considerations for countries and businesses. After the pandemic exposed vulnerabilities in global supply chains, many companies and governments reassessed their reliance on concentrated sources of goods, materials and energy. Geopolitical tensions have reinforced that shift.

This has implications for resource-related equities. Demand for secure supplies of materials and energy may support select companies involved in areas such as copper, oil services and delivery, exploration and mining-related infrastructure. These are not simply cyclical considerations; they may reflect a step change in how countries think about secure access to critical inputs.

Copper is one example of a material with broad economic relevance. It is used in data centres, electrical grids and housing. Demand tied to digital infrastructure and grid expansion may provide support, while a recovery in housing or stronger growth in China could add further upside. For investors, the key is not to make a blanket allocation to a commodity theme, but to evaluate where the strongest operators are available at attractive valuations.

Infrastructure-linked businesses can broaden Canadian exposure

The resource security theme also extends beyond the producers themselves. In some cases, infrastructure-linked companies may benefit from the capital spending required to maintain, expand or optimize existing resource assets.

New mine development has become more difficult because of environmental regulation, approval timelines, capital requirements and operational complexity. As a result, existing mine operators may need to extract more ore from lower-concentration areas around existing deposits. That can require more excavation, transportation, processing and equipment servicing.

This creates potential opportunities in businesses that provide heavy equipment, servicing, power solutions or related infrastructure support to mining and resource markets. Beyond a purely domestic infrastructure story, some of these companies are connected to Canada but operate globally, including in major mining regions abroad.

Global technology within a value discipline

Although technology is often associated with growth investing, that framing can be too narrow. Developments such as artificial intelligence are not inherently growth or value themes. They are broad technological shifts that may create both expensive securities and undervalued opportunities.

The distinction lies in fundamentals and valuation. Some semiconductor and memory-related businesses have seen strong demand because their products are in shortage and are being sold into real end-market demand. That differs from past technology cycles where infrastructure was built ahead of actual usage. In today’s environment, select companies may be supported by earnings, cash flows and supply-demand dynamics rather than speculation alone.

Beyond data centres, traditional semiconductor companies that sell inputs for autos, appliances, industrial products and other parts of the real economy may benefit if manufacturing activity improves in the US or parts of Europe. When these companies trade at depressed valuations during periods of weak sentiment, they can become candidates for value-oriented investors.

Implications for investors

We believe the current environment supports a broader view of Canadian equity allocation. Banks, energy producers and gold-related companies remain important, but they do not define the full opportunity set. A disciplined valuation process can help identify companies tied to resource security, infrastructure spending and global technology demand, including businesses abroad when domestic market depth is limited.

The objective is not to chase themes, but to find undervalued businesses in industries with improving fundamentals, where the cost of capital is properly reflected and the potential contribution to portfolio resilience is clear.

Learn more about the Mackenzie Cundill Team.

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