While these large players are not the only companies Global X deems ‘best in Canada,’ there is quite a lot of overlap. Generally, McHaney says, the traits they see as most attractive tend to be the large-caps with significant liquidity. These are companies with long track records of success and operate at a large enough scale to be included in the TSX 60.
From an investment standpoint, the relative lack of competition in many Canadian sectors means that investors don’t run the risk of ‘picking the loser.’ While McHaney still insists on the importance of diversification even in these sectors with narrow leadership, he argues that investors can expect that an upward trend in a sector will be felt by all of its Canadian leaders to roughly equivalent degrees.
Canadian large-caps also come with an almost defining elevated dividend yield. Because these companies tend to be large, successful, and well-capitalized, they often return profit to shareholders in the form of dividends. They also tend to offer greater stability of returns over market cycles. McHaney notes that this is especially the case for Canada’s grocery giants and staple retailers like Dollarama. Those names can even experience an uptick during an economic slowdown.
While perhaps outside of the concern for investors, there is a notable consideration with these companies for the wider Canadian economy: that their dominance will stifle competition and innovation. McHaney says that they key to balancing success and stagnation lies with regulators, who he praises as allowing many of these companies to thrive while encouraging new players — notably in the realm of telecommunications. He pushes back on the thesis somewhat, too, noting that for certain innovations — like generative AI — scale is just as important as competition.
Concentration does bring some investment risk, though, and McHaney notes that as sectors get more narrow the more stock-specific risk occurs in a portfolio. It’s an area where he notes investors in Canadian leaders need to stay wary and alert. Concentration can also bring regulatory risk into force, as governments decide to enact antitrust regulation to prevent full-blown monopolies. McHaney, though, is confident that this represents a tail risk for Canadian companies as there is no apparent political will in this government to begin a trust-busting cycle. However, it’s another area to watch for in the likely event that Canada has an election in 2025.
