Capitalizing on TSX Momentum Amid BoC Rate Cut Expectations: Strategic Sector Positioning in Rate-Sensitive Equities and Commodities

The Bank of Canada’s (BoC) anticipated shift toward rate cuts in 2025 has ignited renewed optimism on the Toronto Stock Exchange (TSX), particularly for sectors sensitive to lower borrowing costs. With the Canadian economy contracting by 1.6% annualized in Q2 2025 due to U.S. tariffs and a weakening labor market [3], the BoC is widely expected to reduce its key interest rate to 2.75% in September and 2.50% by year-end [2]. This dovish pivot creates a compelling backdrop for investors to strategically position in rate-sensitive equities and commodities, where the interplay of monetary easing and sector-specific dynamics could drive outsized returns.

Economic Context: A Fragile Recovery and Policy Easing

The BoC’s Monetary Policy Report underscores that inflation is nearing the 2% target, but the central bank remains cautious about balancing growth and price stability [1]. The recent GDP contraction—driven by export sector headwinds and job losses in manufacturing and transportation—has accelerated market expectations for a September rate cut, with implied probabilities now exceeding 70% [2]. Analysts like David Rosenberg and Veronica Clark have emphasized that further easing in 2025 is likely to stimulate demand in sectors reliant on credit, such as construction and retail [3].

Strategic Sectors: Materials, Gold, and Interest-Sensitive Equities

1. Materials and Mining
The materials sector, particularly gold and base metals, has already outperformed in 2025, with gold prices surging on trade uncertainty and inflation concerns [3]. Lower interest rates reduce the opportunity cost of holding non-yielding assets like gold, while industrial metals benefit from infrastructure spending and global supply chain adjustments. The TSX Materials Index has gained over 50% year-to-date, reflecting robust demand for mining equities [3].

2. Gold Miners and ETFs
Gold miner ETFs have emerged as a cornerstone of rate-cut strategies. Instruments like the Global X Gold Producers Index ETF (GLDX) and the iShares S&P/TSX Global Gold Index ETF (XGD) offer diversified exposure to Canadian and global gold producers. These funds have capitalized on BoC-driven optimism, with ZGD and HGGG (Harvest Global Gold Giants Index ETF) seeing inflows as investors hedge against currency volatility and inflation [2].

3. Utilities and REITs
Utilities and real estate investment trusts (REITs) are classic beneficiaries of rate cuts, as lower borrowing costs reduce debt servicing for income-generating assets. The BoC’s projected easing has already spurred a rally in these sectors, with utilities like Brookfield Renewable Partners (BEP.UN) and REITs such as Allied Properties REIT (AP.UN) trading at premiums to net asset value [2].

Tactical Positioning: ETFs and Equities to Watch

• Gold Miners: GLDX, ZGD, XGD, HGGG, ZJG (BMO Junior Gold Index ETF) [2].
• Materials: Ivanhoe Mines (IVAN), Teck Resources (TECK.B), and base metal-focused ETFs like the S&P/TSX Global Materials Index ETF (XMC).
• Utilities/REITs: Brookfield Renewable Partners (BEP.UN), Allied Properties REIT (AP.UN), and the iShares S&P/TSX Capped Utilities Index ETF (XUR).

Conclusion: Navigating the Rate-Cut Cycle

As the BoC’s rate-cutting cycle gains momentum, investors must prioritize sectors where lower interest rates directly amplify cash flows and asset valuations. The materials and gold sectors, alongside utilities and REITs, present a compelling case for capitalizing on monetary easing. However, sector rotation should remain dynamic, with close attention to inflation trends and global trade dynamics. For Canadian investors, the TSX offers a unique blend of macroeconomic responsiveness and sectoral diversity, making it an ideal arena to harness the BoC’s accommodative stance.

Source:
[1] Monetary Policy Report [https://www.bankofcanada.ca/publications/mpr/]
[2] Canada Mortgage Interest Rate Forecast: 2025-2029 [https://wowa.ca/interest-rate-forecast]
[3] How Friday's surprisingly weak GDP report has shifted ... [https://www.theglobeandmail.com/investing/markets/inside-the-market/article-markets-price-in-higher-odds-of-september-boc-rate-cut-in-wake-of/]