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).
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 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.