Canadian Equity Strategies

October 2025

 

In the third quarter, Canadian equity markets rallied sharply while navigating a myriad of geopolitical, economic and technological cross-currents. This built on the strong returns generated in the first half of the year. Pembroke’s Canadian equity strategies also performed well over the period, adding to the gains enjoyed in the first half of the year.

Despite the continued uncertainty caused by ever-shifting American trade policies for businesses and governments alike, investors gained confidence that the most extreme tariff proposals would not be implemented. Consequently, risk premiums narrowed from the “Liberation Day” drawdowns earlier in the year.

At the same time, however, the Canadian economy is facing slowing growth, rising unemployment and consumers tightening their purse strings. In response, the Bank of Canada has continued to lower interest rates with the aim of creating more favourable financial conditions and counteracting these headwinds.

Additionally, the rapid evolution of artificial intelligence is bringing innovation and disruption to the entire economy. Speculation about the winners and losers from such sweeping changes is having a significant impact on equity valuations.

CANADIAN GROWTH STRATEGY

Pembroke’s growth-oriented portfolios performed strongly in the third quarter. The Canadian growth strategy benefited from solid results in investments across the consumer discretionary, materials and financial sectors. These good results were partially offset by declines in technology and energy investments. Overall, the portfolio has recovered well following a challenging sell-off in the first quarter, as the tariff fears that affected several of our larger holdings were either exaggerated or unfounded.

Furthermore, the strategy remains well exposed to secular tailwinds involving space and defence spending, the increased urgency to initiate national infrastructure projects in Canada, and the growing demand for clean energy as well as energy for artificial intelligence applications.

Role in a Diversified Portfolio

This strategy provides targeted exposure to dynamic Canadian small- and mid-cap growth businesses. It seeks to capture the value created in the early stages of a company’s development, providing long-term growth potential and portfolio diversification alongside core large-cap Canadian equities.

DIVIDEND GROWTH STRATEGY

Pembroke’s dividend strategy delivered solid returns in the third quarter. The portfolio enjoyed a broadly based rally, with particularly robust returns in the financial, industrial, energy and materials sectors.

Although the strategy has experienced some volatility in its year-to-date results, the companies in the portfolio are conservatively financed, have well-funded dividends, are attractively valued, and have skilled and aligned management teams. We believe the strategy is well placed to deliver total returns through a combination of dividend yield, per-share cash flow growth and multiple expansion.

Role in a Diversified Portfolio

This strategy provides targeted exposure to dividend-paying Canadian small- and mid-cap growth businesses. It aims to strike a balance between capital appreciation and income stability in order to improve return consistency. The focus on smaller companies also provides diversification to complement core large-cap Canadian equities in a portfolio.

CANADIAN ALL CAP STRATEGY

Pembroke’s all-cap strategy enjoyed strong gains during this period, benefiting from significant growth across a wide range of sectors, with the exception of technology.

Despite an uncertain and evolving operating environment, the portfolio is generally performing well, with numerous holdings showing encouraging fundamental performance. The focus of the portfolio on entrepreneurial growth and its targeted structure differentiate it from broader Canadian indices.

Role in a Diversified Portfolio

This strategy provides targeted exposure to Canadian growth businesses across the full market capitalization spectrum. The aim is to capture opportunities throughout the business lifecycle to provide long-term growth potential. The strategy can be used as a core holding of Canadian equities in a portfolio.

POSITIVE CONTRIBUTION TO THE STRATEGIES

Shares in Groupe Dynamite (GRGD) saw significant growth in the third quarter. The company, a fashion company that operates retail stores and digital experiences under the Garage and Dynamite brands, reported financial results and provided forward-looking guidance that far exceeded consensus expectations. This caused the share price to soar.

Groupe Dynamite’s brands clearly resonate with Canadian and American consumers alike, driving store traffic, same-store sales and profits higher. We believe that these brands will continue to gain momentum, and that same-store sales growth will be augmented by opportunistic store openings. This should result in an attractive corporate growth profile.

NEGATIVE CONTRIBUTION TO THE STRATEGIES

Terravest Industries (TVK) performed poorly in the third quarter, after a strong first half of the year. Terravest is a market-leading manufacturer of fuel containment and processing equipment for the HVAC, compressed gas and energy sectors.

The company experienced macroeconomic headwinds in the form of weak freight markets, which negatively impacted demand for its storage tank transportation solutions. Furthermore, tariffs on imported steel into the U.S. caused distortions in costs and buyer behaviour, further holding back results.

Although these macro and trade frictions have hindered shorter-term financial results, the Terravest team has an impeccable track record of capital allocation. We expect them to make acquisitions at a time when weaker competitors are vulnerable to consolidation.

 

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