The data centre boom has hit Canada to a greater extent than many readers might expect and that’s the topic of the first piece in this edition of Market Factors. Part two discusses the likelihood of a new paradigm for stock valuations, and the diversion - one of my favourites so far - starts a list of the greatest alternative rock one-hit wonders.
A view shows detail of racks for data servers, GPUs and CPUs inside the Nebius AI UK data centreToby Melville/Reuters
Energy
More domestic data centre activity than you might think
It is a complete coincidence that I have a nephew-in-law employed to sell sterilization services to data centres in Canada. The main takeaway from our conversations is that there are a lot of existing data centres already in operation domestically – some in surprisingly urban areas - and there are many more either under construction or announced.
Scotiabank analyst Maher Yaghi outlined three big drivers behind the rapid ramp-up in data centre construction in a Monday research report. AI is the obvious impetus but cloud migration - companies switching from managing their own computer network to cloud computing with Amazon Web Services or Microsoft’s Azure platform - is also contributing to data centre growth. The digitization of the economy, and e-commerce specifically, is the third source of demand.
The scale of data centres is measured in power usage. Domestic data centres currently need 1.6 gigawatts, the rough equivalent to a city of one and a half million people. Centres under construction will use 0.4 more gigawatts, and 4.2 gigawatts worth of new data centres have been announced for the future.
Ontario and Quebec have been the most popular sites for data centres so far, in large part because of hydro electric power. One example is a 4.5-acre facility under construction in north Toronto run by U.S. specialist developer Yondr.
Mr. Yaghi expects that construction will move to Saskatchewan and Alberta as eastern power supplies become constrained. BCE recently announced a new 300-megawatt data centre to be built in Saskatchewan in partnership with the provincial government.
The analyst noted Alberta’s new strategy to attract $100-billion in private investment aimed at making the province a premier destination for AI infrastructure. Abundant natural gas for power generation is a major selling point. In late 2025, the Alberta Electric System Operator committed to sell 1.2 gigawatts of power to two planned data centres as part of the initiative. Brookfield and the Canada Pension Plan are part of the ownership group.
More data centres in Alberta means more profit for TransAlta Corp. (TA-T), according to Scotiabank. Higher power demand would push selling costs to the C$80 to C$120 per megawatt range and add C$200-million to C$650-million to annual cash flow.
Capital Power Corp. (CPX-T) would be another winner. The company has already secured a data centre buyer for 250 megawatts of energy capacity in Alberta. Capital Power is developing a 1.0 to 1.5 gigawatt data centre adjacent to its Genesee natural gas power facility.
Pembina Pipeline Corp. (PPL-T) is another potential beneficiary. The company has entered into a partnership with a subsidiary of the OPTrust pension plan to build a 1,864 gigawatt power station to be co-located with a major data centre.
Market trends
Valuations higher for longer
Citi chief U.S. equity strategist Scott Chronert’s weekly report on markets highlights the higher-than-normal volume of unknowns for analysts and investors in markets today. He noted that hedge funds are slapping risk on and taking it off repeatedly based on news reports while the effects of AI in coming years are potentially huge, potentially marginal, and completely hypothetical.
Financial theory says that uncertainty should be matched by a higher discount rate because of the added risk. This would take the form of discounted valuations on equities except the reverse is true - stocks are more expensive than the historic average by almost every conventional measure.
One of two things must be true. Either traditional models of investing are now anachronistic or a really bad bear market is ahead. There is a middle ground that points to massive government deficits in most G10 nations and equally outsized, relative to the past, central bank balance sheets as propping up stocks at current levels. That is, however, just a different way of saying traditional finance theory still holds - only with money supply added as a variable.
I lean positive on this question. I think average valuations will remain higher for longer, even if not as high as they are now. The economy is different than 50 years ago when the models of finance were developed. Labour and land-intensive assembly lines have been replaced by software and servers and optical cables. We can’t value modern companies like those in the 1930s when new orders were hand written in big ledgers.
I don’t believe volatility is all behind us and, as always, past performance is no guarantee of future returns. But why should we expect markets to remain the same when the world is changing so quickly.
A double-neck guitar played by Jimmy Page of Led Zeppelin displayed at an exhibit in New York.Seth Wenig/The Associated Press
Diversions
Worthwhile Canadian radio initiative
Canadian music journalist Alan Cross has embarked on a podcast-y journey that has my attention. Setting a record for hyphens in a title, Mr. Cross has started highlighting The 50 biggest all-time, alt-rock one-hit wonders on his Ongoing History of New Music radio show.
Songs on the first show included M/A/R/R/S’s Pump Up the Volume, Mexican Radio by Wall of Voodoo, School of Fish with Three Strange Days, Birds Fly (Whisper to a Scream) by Icicle Works and the song made famous by Twin Peaks, Falling by Julee Cruise.
The big song on the list for me, though, is Go! by Tones on Tail. I loved this song. Still do. It was on the soundtrack of a less successful John Hughes movie, Career Opportunities, and it was never, never, ever available at the record store. Basically you had to rent the movie at Blockbuster to hear the song and hold up a crappy microphone to the TV if you wanted your own copy. The only song that was nearly as hard to get was Hey, Hey, What Can I Do by Led Zeppelin, one of the few Zeppelin songs I can still stand.
Go! was also on the sneakily terrific soundtrack for Grosse Pointe Blank. The Violent Femmes, The Clash, Siouxsie and the Banshees, Echo & the Bunnymen, the Cure and A-ha were also in that movie. The music always seems great in John Cusack movies - High Fidelity is also a standout - but maybe I just feel that way because we were born a week apart and have the same musical tastes as a result.
The essentials
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Globe Investor highlights
Larry MacDonald reports on the monthly moves by short sellers on the TSX
Norman Rothery makes the case for momentum portfolios
Tim Shufelt on how stocks, not real estate, has been the great wealth generator of late
David Berman says forget about gold being a safe investment. Dr. George Athanassakos agrees
Meera Raman looks at what’s in store for Canada as financial firms bet on prediction markets
Tom Bradley on the thin lines in markets - and how smart investors navigate it
Quick hits
Morgan Stanley published a big long report about how robotics companies have stopped everything while they plan on how to integrate AI into new products, which is what I envisage happening in a prequel to The Matrix. The report also notes that “[roughly] 90 per cent of the critical components supply chain [in the robotics industry] is in some way controlled by China” - which I found interesting.
Every time I see a “No, really, software company corporate debt is ok!” report from a big investment company I get more nervous. Goldman Sachs had two related stories in their weekly email.
The Canadian credit market, specifically the shape of the yield curve, is getting a lot more attention than usual. The curve is flattening because two-years keep tracking global rates higher. The domestic economy has been pumping out weak data lately, however, so it doesn’t make much sense, nor do derivatives prices indicating expectations for 50 basis points of rate hikes this year.
Read this week’s earnings and economic calendar here