Canadian Retail Resilience: A Buying Opportunity in Equities Amid BoC Caution

The Canadian retail sector's performance in early 2025 has become a battleground for interpreting the Bank of Canada's (BoC) next policy move. While April's retail sales showed modest growth, May's contraction hinted at underlying vulnerabilities. Yet beneath the volatility lies a compelling story of consumer resilience that could redefine investment opportunities in Canadian equities. For investors, the interplay of trade dynamics, monetary policy, and sector-specific trends presents a nuanced landscape ripe for strategic bets.

The Retail Data Dilemma: Strength in the Core

Recent data reveals a stark divide in Canada's retail ecosystem. April's 0.5% rise in retail sales (excluding autos) contrasted with a 2.3% decline in wholesale sales, driven by U.S. tariff anxieties and weak motor vehicle demand. However, the story deepens when isolating core retail sales (excluding autos and gasoline). These rose steadily, with food and beverage stores up 1.2% month-on-month in June and clothing retailers gaining 1.0%—a sign of pent-up demand in non-discretionary spending. This resilience, noted by Scotiabank economists, suggests households are prioritizing essentials despite broader economic headwinds.

The May contraction, meanwhile, was largely due to a 2.1% drop in auto sales, linked to cyberattacks disrupting supply chains. Yet this sector-specific pain has not yet spilled over into core spending—a critical factor for the BoC. As Scotiabank's forecasts emphasize, 1.4% GDP growth in 2025 hinges on sustained consumer spending in sectors like housing and services, where confidence remains intact.

BoC's Tightrope: Rate Hikes on Hold, But Risks Loom

The BoC has paused its rate-hiking cycle since March 2025, maintaining the policy rate at 2.75%. This decision reflects a delicate balancing act. Inflation, though easing to 1.7% in April, risks creeping higher if trade tensions force businesses to pass on costs. Meanwhile, Canada's unemployment rate has climbed to 6.9%, signaling labor market softness.

The central bank's April Monetary Policy Report underscored its data-dependent stance, with trade uncertainty and U.S. tariff dynamics remaining top risks. A prolonged trade war could force the BoC to cut rates further, but for now, the neutral stance persists. Investors should note: the BoC's dovish bias—coupled with flat to slightly lower rates through 2026—creates a favorable environment for Canadian equities, particularly those insulated from trade shocks.

China's Role: Trade Tensions and Sector Opportunities

China's retaliatory tariffs on Canadian agricultural exports—such as rapeseed oil and pork—have hit sectors like farmland and agro-reliant real estate, but they've also spurred diversification. For instance, Saskatchewan's farmland values rose 13.1% in 2024, driven by investor demand for arable land, even as trade barriers persist.

In contrast, Chinese investment in Canadian commercial real estate (CRE) has cooled, but opportunities remain in industrial and multi-family housing, which benefit from population growth and e-commerce expansion. Investors should favor Canadian REITs like Weston Foods' logistics hubs (WRT.U) or H&R Real Estate Investment Trust (HR.UN), which focus on industrial and urban core properties.

Where to Bet: Equities to Watch

1. Core Retail Stocks:
2. Loblaw Companies (Lobl.U) and Sobeys (FNR.TO) dominate food and pharmacy retail, sectors showing consistent demand.
3. Canadian Tire (CTC.A.TO) benefits from its diversified portfolio, including auto parts and e-commerce.

5. Real Estate: Industrial and Multi-Family:

6. Industrial REITs like RioCan Real Estate (REI.UN) and Killam Properties (KMP.TO) are well-positioned as e-commerce growth drives demand.

8. Financials: Banks and Insurance:

9. Canadian banks (TD (TD.TO), Royal Bank (RY.TO)) remain resilient, benefiting from stable rates and diversified revenue streams.
10. Insurance firms like Manulife (MFC.TO) or Great-West Lifeco (GWO.TO) could thrive as low-for-long rates boost annuity demand.

Risks and Triggers to Watch

• Trade Policy: A U.S.-Canada tariff truce or escalation could redefine growth expectations. Monitor auto sales and U.S. tariff announcements.
• Inflation: A rise above 2.5% could force the BoC to reconsider its neutral stance.
• Housing: Weakness in Ontario's housing market—down 25% year-over-year—could spill into consumer sentiment.

Final Take: Buy the Dip, Target Core Resilience

The BoC's pause on rate hikes and the sectoral strength in core retail and real estate suggest Canadian equities are undervalued. Investors should use dips—like post-May data weakness—to accumulate positions in consumer staples, industrial real estate, and financials.

For now, the BoC's caution and Scotiabank's 2026 rate-cut forecasts (projecting a 50bps reduction) create a sweet spot for long-term holders. However, stay nimble: if trade tensions ease or inflation spikes, rotation into defensive sectors or cash may be warranted.

In this volatile climate, Canada's retail resilience isn't just a data point—it's a roadmap for investors to profit from policy patience and sector-specific momentum.

Investment advice disclaimer: Always conduct your own research and consult a financial advisor before making investment decisions.