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Short-term gain or long-term play?

28 April 2022 by National Bank Investments
Text NBI Insights – May 2022

Spring is in bloom – the bone-chilling winter months are behind us and warmer weather is on the horizon. Yet, even with a renewed sense of optimism in the air, the world still grapples with lingering uncertainties.

Canada is in a good position

Though the Russia-Ukraine war has created a plethora of uncertainty, the first three months of 2022 weren’t as dire from a Canadian standpoint.

Thankfully, Canadian equities are less exposed to Russia and were standout performers, largely due to the commodity-based nature of the broad-based S&P/TSX Index. In comparison, some of the world’s major equity and bond indices ended the first quarter with lower returns (see chart).

A graph - Canadian equities were standout performers

Do oil prices have more room to run?

The short answer is – only time will tell. On the surface, it may seem like a persistent rise in energy prices is not sustainable. In fact, the futures curve for the commodity suggests prices might be lower a year from now.

Nonetheless, a deeper dive into oil prices in comparison to disposable income suggests that oil prices may have more room to run. As can be seen in the chart, perhaps the current level of oil prices isn’t as constraining to the consumer as one might think (see chart).

A graph - Oil prices: a matter of perspective

A shifting landscape?

The Canadian economy will undoubtedly be a major beneficiary of the geopolitical risk premium in energy prices. But is Canada also poised to benefit from a longer-term shift in the commodities landscape?

Sanctions on Russia are creating imbalances in the commodity space, forcing countries to foster new trade relationships with one another to address shortages in raw materials. If a resource rich country like Canada is deemed to be a safer and more reliable supplier of these raw materials, it may very well be in prime position to fill the global supply gap for years to come.

Whatever happens, tread with caution

Predicting the overall direction of energy prices is a dangerous game and any investor should be wary about investing solely on the basis of commodity price movements. That said, striking the proper balance across multiple asset classes, strategies and sectors of activity is always the best way to maintain a well-diversified portfolio!

Reaping the benefits of a possible commodity supercycle

Adding the NBI Liquid Alternatives ETF (NALT) to a traditional portfolio of stocks and bonds is one way to take advantage of rising commodity prices.

How NALT can capitalize on commodity price trends:

  • By taking on long or short positions on 22 futures across 5 investment categories: Energy, Agriculture, Metals, Fixed Income and Currencies.
  • By using quantitative and statistical models to generate value and identify trends (i.e. a trend where commodity prices trend upwards for an extended period of time is a favorable environment for NALT).
  • By shifting its position with weekly rebalancing and no turnover constraints, NALT can quickly adjust if the trend reverses.

Legal notes

The information and opinions herein are provided for information purposes only and are subject to change. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

NBI ETFs are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Management fees, brokerage fees and expenses all may be associated with investments in exchange-traded funds (“ETFs”). Please read the prospectus or ETF Facts document(s) before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. NBI ETFs do not seek to return any predetermined amount at maturity.

These index providers are included in this document: BofA Merrill Lynch, Standard & Poor’s, CME Group Inc., Nasdaq, Inc. and MSCI. These companies are licensing their indices “as is”, make no warranties regarding same, do not guarantee the suitability, quality, accuracy, timeliness and/or completeness of their indices or any data included in, related to or derived therefrom, assume no liability in connection with their use and do not sponsor, endorse or recommend National Bank of Canada and its wholly owned subsidiaries any of their products and services. The above index providers do not guarantee the accuracy of any index or blended benchmark model created by National Investment Bank using any of these indices. No responsibility or liability shall attach to any member of the Index Providers or their respective directors, officers, employees, partners or licensors for any errors or losses arising from the use of this publication or any information or data contained herein. In no event shall the above Index Providers be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, legal or other expenses, or losses (including, without limitation, lost revenues or profits and opportunity costs) arising out of or in connection with the use of the content, even if advised of the possibility of such damages.

S&P Indices are trademarks of S&P Dow Jones Indices LLC, a division of S&P Global. MSCI indices are trademarks of MSCI Inc. BofA indices are trademarks of Merrill Lynch, Pierce Fenner & Smith incorporated (“BofAML”). Nasdaq-100® is a registered trademark of The Nasdaq Stock Market, Inc. The WTI Index is a trademark of the CME Group Inc.

© 2022 National Bank Investments Inc. All rights reserved. Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank Investments Inc.

® NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under license by National Bank Investments Inc.

National Bank Investments is a member of Canada’s Responsible Investment Association and a signatory of the United Nations-supported Principles for Responsible Investment.

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