Diversified Industries 2023

A 2023 cross sector outlook across the Diversified Industries coverage universe. 

Chris Murray, CFA

Another Year Past the Pandemic:
With 2022 being a restart year for many of the companies in our diversified universe, there were several challenges, with impacts from supply chains, labour availability, inflation, and rising interest rates among several macro factors at play. For 2022, the S&P/TSX Composite Index was down 8.7%, with the Industrials sub-index flat at a 0.1% gain, while the Real Estate sub-index was down 24.3%.

Significant Opportunities Despite Headwinds:
We see several opportunities in 2023 across our coverage, with many names in deep value territory, while others are ready to continue to extend their leadership in their respective sub-sectors. Our universe covers a wide breadth of the Canadian landscape, and while companies will all feel the impact of broader economic trends, including what is shaping up to be a shallow recession in 2023 and the impact of interest rate expectations on share prices, we believe company-and sub-sector-specific factors and positioning will be important for investors.

Supply Chain, Interest Rates, and Consumer Spending are Important Themes:
Supply chain disruption, rising interest rates, and general concerns around consumer spending remain headwinds entering 2023 and reflected in prevailing valuations, though we expect the impact of each to ease beginning in H2/23. We believe the last handful of major supply disruptions is likely to be resolved by mid-2023, still leaving strong pent-up demand tempered by higher interest rates impacting consumer end-demand. Several of our Outperform-rated names are active consolidators in their respective sectors, and we view them as increasingly well positioned to accelerate their M&A-led growth profiles in 2023 given the impact of tighter debt markets on private equity, succession-related issues, and heightened uncertainty for independent operators. While we expect rates to move moderately higher in H1/23, we see the potential for cuts in H2/23 and into 2024 as supply-side pressures ease, which we expect to support consumer demand trends over the near to medium term.

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