Canada's top stock index shines as investors seek inflation hedge

iA

14/03/2022 16:53

By Alexander Schummer and Fergal Smith
    TORONTO, March 14 (Reuters) - As Russia's invasion of
Ukraine disrupts the global economy and drives up oil, gold and
industrial metal prices, investors are embracing Canada's
commodity-linked stock market to protect their portfolios from
the impact of supply shortages and soaring inflation.
    Financial markets globally have been rattled in recent
months by rising inflation as economies recover from the
coronavirus pandemic, with matters made worse by the spike in
commodity prices after sanctions against Russia, the world's top
wheat exporter and second-biggest oil exporter.
    Canada offers a hedge of sorts. It produces many of the
energy, metal and agricultural products in short supply, while
its main stock index, the S&P/TSX Composite  .GSPTSE , has a 27%
weighting in energy and materials, indicating that the earnings
of a large chunk of the market are directly tied to rising
commodity prices.
    Inflation-linked bonds are a more conventional hedge for
investors fearing price spikes, but some prefer to maintain
exposure to equity markets.
    "The TSX is a preferential allocation within global
equities, given the relatively cheap valuation still and the
more muted macro economic impact of the war on the Canadian
economy," said Kurt Reiman, senior investment strategist for
North America at BlackRock.
    The Toronto market is one of the few major indexes globally
that is in positive territory since the start of the year,
having advanced 0.5%, compared to a decline of 11.3% for the S&P
500  .SPX  index, the U.S. equities benchmark.
    At 14.6, the 12-month forward price-earnings multiple for
the TSX is slightly below its average for the last 10 years,
data from Refinitiv Datastream shows, and well below the S&P
500's multiple of about 18.5.
    The Toronto market's large concentration of resource shares
"provides a good hedge for global investors against the
possibility of a prolonged commodity supply-shock," said Angelo
Kourkafas, investment strategist at Edward Jones in St. Louis,
Missouri.
    Foreign investors have taken notice, plowing a net C$46
billion ($36 billion) into Canadian equities last year, the most
since 2016, according to data from Statistics Canada.
    Among the companies that investors favor are copper miner
Hudbay Minerals Inc  HBM.TO , which trades at a forward
price-to-book ratio of 1.24 versus the industry average of 1.61,
Refinitiv data shows.
    Its valuation should play catch-up as the company has "laid
the groundwork" for growth, said Michael Sprung, president at
Sprung Investment Management.
    Paul Gardner, a portfolio manager at Avenue Investment
Management, says the gold sector is "generally cheap" relative
to the price of bullion. He sees Agnico Eagle Mines Ltd  AEM.TO 
as a long-term buy and expects Canadian Natural Resources
 CNQ.TO , the country's biggest oil producer, to benefit from
the rally in oil prices.
    
    EYE ON DIVIDENDS
    But it's not just resource shares that help differentiate
the Toronto market. It's also the market's heavy weighting, at
31%, in financials.
    "An inflationary environment generally coincides with rising
interest rates, which benefit banks and insurers," said Elvis
Picardo, portfolio manager at Luft Financial, iA Private Wealth.
    Earlier this month, the Bank of Canada raised its key
interest rate for the first time in three years and made clear
that further hikes are on the way. The Federal Reserve is
expected to announce a lift-off in U.S. rates on Wednesday.
    Adding to the attraction of financial and energy shares in
the current environment are high dividend payouts compared to
some other sectors such as technology.
    "When there are concerns about global growth, the dividend
starts to become more important," BlackRock's Reiman said. "You
tend to see Canadian stocks delivering because of that sector
exposure."
    
($1 = 1.2743 Canadian dollars)

 (Reporting by Alexander Schummer and Fergal Smith
Editing by Denny Thomas and Paul Simao)
 ((fergal.smith@thomsonreuters.com; +1 647 480 7446;))