Earlier this month, we wrote that investors looking to protect their portfolios against the Scylla and Charybdis of high inflation and war in Europe ay want to look at BlackRock Latin American (BRLA).
The trust’s exposure to commodities companies, along with the West’s need for alternative trading partners as countries seek to isolate Russia, mean there are some positive macroeconomic tailwinds working in BRLA’s favour.
But there is an argument to be made that these trends won’t only benefit Latin America. Although the US has its own problems, notably high inflation, it looks more immune to some of the difficulties counties in Europe are now facing particularly regarding energy security.
The same is also true of Canada. In fact, Canadian companies are arguably better placed than their southern peers to benefit from the current macroeconomic environment. Partly that’s due to the pressure inflation has placed on higher valuations. The Canadian stock market has performed well since the pandemic started in 2020 but has not seen the same sort of eye-watering earnings multiples that the US has.
Prospective interest rate hikes have not been as hard-hitting to equities as a results. Whereas the S&P 500 is down almost 13% in the year up to April 27th, the S&P/TSX index has fallen lass than 3%.
Another reason for that is that is likely to be the prevalence of energy, materials, and industrials companies on the market. Indeed, 16.97% of the MSCI Canada Index was comprised of energy companies at the end of March 2022 – very close to the 16.90% in the equivalent Brazilian index. These businesses have benefitted from high commodities prices and can also keep prices in line with inflation.
One trust that seeks to take advantage of opportunities in the Canadian market is Middlefield Canadian Income (MCT). The trust is overweight to energy and utilities and has substantial exposure to businesses in the oil and gas pipelines sector as well.
MCT also invests heavily in real estate investment trusts (REITs), with holdings in the commercial, industrial, healthcare, office, and residential sectors. Trust manager Dean Orrico wrote in a report published earlier this month that he expects REITs to manage inflation by raising prices, adding that some of the REITs in the MCT portfolio have inflation-linked contracts with tenants.
Canada has been slow to open up from the pandemic but, as that happens, rental rates are returning to pre-pandemic levels. Despite this, some REITs in the MCT portfolio continue to trade at a discount. These may tighten as ‘normality’ returns, providing some capital uplift to the MCT portfolio as well.
None of this is a guarantee of success. We continue to live in an extremely volatile world but, all things being equal, Canada looks like one of the more resilient options available to investors.
Past performance is not a reliable indicator of future results