Make that two Poloz rate cuts to go!

Bank of Canada rate cuts may well have been the most popular item at global convenience store operator Alimentation Couche-Tard (INK Edge outlook: sunny; ATD.B) Wednesday, if not with their customers certainly with shareholders. The stock was the best performing name (+4.2%) in the INK Canadian Insider (CIN) Index as insider stocks rallied on the back of a quarter point drop in the central bank's overnight rate. However, the Poloz cut did not lift all boats. While both the INK CIN Index (+0.14%) and the S&P/TSX Composite Index (+0.43%) rallied on the rate news, both the S&P/TSX Completion (-0.37%) and Small Cap (-0.44%) indices dropped. Perhaps most surprising was a drop in the Dividend Aristocrats Index which suffered a -0.47% loss.

Two rate cuts to go! Alimentation Couche-Tard up 26% since the first Poloz cut Jan 21

While we are as happy as anyone to see the INK CIN Index rising, we are unimpressed with the Bank of Canada's move given that core inflation has been floating above the 2% target for the past 10 months. The move seems particularly careless given that even the central bank governor admits that he is rolling the dice with financial stability "vulnerabilities". Finally, we are even less impressed that that the move came less than 100 days before an election date.

That all said, from an investing perspective, it is our job to deal with the situation as presented, not the one we would prefer.

With Stephen Poloz now more or less assuming the role of Industry Minister for the federal government, Canadian investors and entrepreneurs are going to have to start paying even closer attention to which parts of the economy are on the central bank's preferred list. Clear winners are companies that have assets or do business in the United States. Following behind Couche-Tard in terms of performance Wednesday in the INK CIN Index was paper products company Cascades (INK Edge outlook: sunny; CAS) which services the American market. It jumped 2.7%.

Canadian banks will also have the opportunity to do better if the demand for loan products increases as expected. However, given the volatility in monetary policy at the central bank, the outlook for interest sensitive stocks is unclear. We note that while the BMO S&P/TSX Equal Weight Banks Index ETF (ZEB) jumped 1.1% when Poloz cut rates on January 21, Wednesday the ETF advanced a more modest 0.8%. Moreover, smaller lenders put in a mixed performance on the day. While INK CIN member easyhome (INK Edge outlook: mostly sunny; EH) jumped 1%, lender Equitable Group (INK Edge outlook: mostly sunny; EQB) fell 0.1%. Outside of the INK CIN Index, the rate cut did not help reverse the slide of embattled Home Capital Group (INK Edge outlook: cloudy; HCG) shares which ended off 1.1% On the other hand, smaller lender MCAN Mortgage (INK Edge outlook: mostly sunny; MKP) advanced 0.7%.

The central bank's tinkering is likely to have a small negative impact on human capital intensive sectors such as Healthcare and Technology as more expensive housing and cost of living makes it harder for those industries to attract and keep the best talent. However, for leading companies with sound management, the bank's meddling is unlikely to derail them. In that regard, we note that INK CIN member Constellation Software (INK Edge outlook: mixed; CSU) advanced 0.9% while non-member Valeant Pharma (INK Edge outlook: mostly sunny; VRX) was up 1.2%.

While exporters are generally expected to win under a weaker currency, unfortunately a devalued loonie will not be an automatic fix across the board. For those firms such as Bombardier (INK Edge outlook: mixed; BBD.B) which have complex supply chains and are design dependent, a weaker and volatile currency may be little more than a distraction. Bombardier class B shares fell 4% on Wednesday.

In general, a dovish central bank tends to support asset prices. In terms of the stock market, well-run companies in the Bank of Canada's preferred areas should offer some diversification to those who want to hedge the likely erosion of their global purchasing power in the months ahead. Perhaps more importantly, for investors going forward they will need to correctly identify the acting Minister of Industry's anointed businesses as well as the unintended consequences evolving in our central bank planned economy.

So far this year, Canadian insiders have been on the right side of the Bank of Canada trade as the INK CIN Index has outperformed the S&P/TSX Composite Index by about 4%.

An earlier version of this article appeared before the market open for subscribers on INKResearch.com.

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