Investment advisors often have to warn their clients against the propensity for home-country bias. This is especially true in Canada; our stock market represents a tiny fraction of global market capitalization. If you overweighted Canadian equity during the past decade, you likely underperformed your friends and neighbours who had greater exposure to the massive and more diversified U.S. market.
Past performance should never be taken as an indicator of future returns, however, and so far in 2022, it’s been Canadian equity’s time to shine. In the first quarter of the year, the S&P/TSX 60 gained 5% in US dollars (3% Canadian), compared to a 5% decline for the S&P 500. And Russil Lea, portfolio manager responsible for Nicola Wealth’s Nicola Canadian Equity Income Fund, is confident the pattern will hold for at least the balance of the year.
Why? In a word, inflation. The stimulus-assisted recovery of consumer demand, before global supply chains could reconstitute themselves after the disruptions of COVID-19, has sent inflation soaring over the past six months. The year-over-year jump in the consumer price index in the U.S. hit 8.5% in March, the highest such increase in four decades.
The situation was exacerbated by Russia’s invasion of Ukraine. “Ukraine and Russia combine for around one-quarter of the global exports of a lot of things, like energy but also food. There’s going to be no planting season in Ukraine, and is anybody going to want to buy Russian goods?” Lea explains. “Everybody eats and everybody uses energy. So this is going to hit the pocketbooks of consumers everywhere.”
Fortunately for Canadians, our economy and especially our stock market features a lot of those commodities in short supply: oil, gas, copper, grain, fertilizer, uranium, and gold.
They are positioning the rest of the portfolio for higher inflation too, for example buying consumer staples companies such as Loblaws that can pass on their higher input costs to consumers.
All the while the Canadian equity fund has retained its preference for dividend payers and kept an eye open for the risks that come with inflation and higher interest rates. “If there’s one thing you would want to worry about in Canada, it’s housing,” Lea says. The housing sector has come to form a huge part of the Canadian economy, from mortgages to construction to retail. Should there be a dramatic slowdown, “I’d worry about the knock-on effects.”
Still, compared to other investable markets, “you have to like Canada’s positioning,” Lea says.
In a follow-up post, we’ll delve deeper into the fund’s approach to energy and why we think energy stocks still have room to run.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. This investment is intended for tax residents of Canada who are accredited investors. Residency restrictions apply. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required securities commissions.