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Inflation expectations and a commodities boom help push TSX to 20,000

By on June 1, 2021 0

Spring wheat is harvested from a farm near Beausejour, Manitoba, Canada, August 20, 2020. REUTERS / Shannon VanRaes

Being a resource rich index has not been a boon to the TSX in recent years, but inflation expectations and a commodity boom helped propel Canada’s main benchmark past 20,000 for the very first time in intraday trading on Tuesday.

Materials and energy account for 25 percent of the TSX, compared to 5 percent for the U.S. S&P 500. The higher weighting has helped the TSX outperform its US counterpart since the start of the year.

TSX outperforms the S&P 500 (Yahoo Finance Canada)

TSX outperforms the S&P 500 (Yahoo Finance Canada)

Martin Pelletier, portfolio manager at Wellington-Altus Private Counsel, says he enjoys the materials industry, agriculture, oil and gas. He expects the TSX to continue to benefit from the higher weighting in these sectors.

“In our view, many underestimate inflationary pressures beyond the transitory nature, as commodity producers have been underinvested over the past decade. Meanwhile, demand is increasing as economies reopen, ”Pelletier said. Yahoo Finance Canada.

“What makes the current situation different is that the fiscal floodgates are opening and central banks are not too keen to tighten any time soon, which we believe could trigger the start of another supercycle. raw material.”

Pelletier also believes the cleantech trade is ahead of itself and expects the money to come back in the cyclical, commodity and value segments of the market.

He says his company owns Nutrien (NTR.TO) for the agricultural exhibition and Cenovus (CVE.TO), Canadian Natural Resources (CNQ.TO) and Suncor (SU.TO) for energy.

ETFs will play the commodities boom

A number of economists expected central bank stimulus measures in the aftermath of the financial crisis to lead to soaring inflation. That didn’t happen, but the effects of the pandemic mean this time could be different.

“There is a reason to be cautious this time around, especially as the catalysts of inflation appeared to be closely linked to the supply chain disruptions surrounding the coronavirus pandemic,” said Daniel Straus, responsible for research and ETF strategy at the National Bank. Yahoo Finance Canada.

“A price increase due to disruptions in the global supply chain and downturns in factories may be transitory, or it may still be viewed as ‘inflation’ of some sort – we’ll only know in hindsight.

Straus says it may seem prudent to seek out a basket of commodities in the form of an ETF, but investors should be careful because most of them hold futures contracts.

“These are relatively straightforward when it comes to derivatives, but a commodity-based ETF must periodically roll forward contracts (eg, every month) to avoid taking physical delivery of the underlying commodities.” , Straus said.

“This means that the effects of the shape and structure of the futures curve will impact their performance relative to ‘spot prices’, especially over long holding periods.”

Precious metal ETFs are an exception because they hold physical bars of silver, gold, platinum, palladium, or a combination of these. Straus likes the Purpose Gold Bullion Fund (KILO.TO) for gold price exposure, iShares S & P / TSX Capped Materials Index ETF (XMA.TO) for miners / producers of materials, iShares S & P / TSX Global Gold Index ETF (XGD.TO) or BMO Global Gold Equal Weight Index ETF (ZGD.TO) for Global Gold Producers and iShares S & P / TSX Global Base Metals Index ETF (XBM.TO) or BMO Equal Weight Global Base Metals Hedged to CAD Index ETF (ZMT.TO) for global base metals.

Choice of Canadian mining stocks

Benj Gallander, president of Contra The Heard Investment Letter, says he’s somewhat agnostic about an ongoing race for commodities. But he has been expecting inflation for some time.

“Of course, from the way governments spend money and with interest rates where they are, inflation seems to be popping up as I predicted and I doubt it’s just one mistake, ”Gallander said. Yahoo Finance Canada.

Gallander says he loves the Black Diamond group (BDI.TO), which among other things has exposure to the oilfield.

“They rent and sell modular spaces and workforce accommodation solutions. Doing a little in the field of oil and gas, but more and more outside the realm of resources such as schools, fires, construction, real estate, etc. “Gallander says he sees a lot of benefits for the stock.” Currently at $ 4.17 and my goal is $ 10.24. “

Gallander also loves two Canadian miners. “I like SSR mining (SSRM.TO) based in Vancouver and with many mines, ”he said. “Orvana (ORV.TO) is another one that I own that I think has more potential if commodities continue their race. Mines in Spain, Bolivia and expansion in Argentina. “

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on twitter @jessysbains.

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