Update on Canada Stocks: Buy the S&P/TSX If You Want To Be Protected From Inflation, says National Bank of Canada

Last Updated: Thursday, October 14, 2021 4:15 PM | MT Newswires

Just as some port authorities agreed this week to help in easing supply chain bottlenecks by extending hours of operations, so too the floodgates appear to have simultaneously re-opened to stock markets and many investors are sailing in to do some buying across North American markets.

While in the United States the S&P and NASDAQ both added around 1.7% on Thursday, Canada's main stock market, the Toronto Stock Exchange, fell just single digit points shy of reaching all time record closing highs while adding another 200 points to the 200 points gained over the prior two days of this holiday shortened week. Markets were closed Monday for Canada Thanksgiving.

For its own part, the resources heavy TSX has also been buoyed by higher commodity prices, and now sits within 100 points again of all time record highs around 20,900 hit in early September 2021, before selling pressure pushed the index all the way down to nearer the 20,000 mark. Year to date, the TSX is up near 20% as National Bank of Canada looks like it could be right in saying buy Canada stocks if you want to be protected from inflation.

National Bank has in recent times noted the risk of global stagflation is increasing and it estimates the probability of this scenario at 30%. How then, the bank asked in a note Thursday, would asset classes be likely to behave if inflation persists? National cited a chart suggesting its own research shows that historically, commodities generally provide positive real returns during inflationary periods, as do real estate assets. As for equities, National found that the S&P/TSX provides a much better hedge against inflation than the S&P 500: an average annualized return of plus 2.3% versus minus 5.9% for the S&P 500.

"Interestingly," National said, "large pension funds continue to reduce their exposure to Canadian equities although this asset class has historically provided better protection against inflation. We understand that carbon emissions are now at the heart of investment decisions and that ESG considerations play a key role in capital allocation, and rightly so. At the same time, we cannot ignore the fact that Canada's geographic opportunities, geological makeup, existing infrastructure, collaboration and industry partnerships position our country's energy sector to become a world leader in carbon capture, utilization and storage (CCS/CCUS). As our colleague Amber Brown and the NBF Energy Team recently noted, Canada currently operates 15% of the world's CCS/CCUS projects."

Among sectors today, Energy was up 1.4% today, leaving it up near 12% in the last month. Materials was up 1.3% and Financials rose 0.9%, with all sectors higher.

Of commodities, gold settled higher on Tuesday as the dollar weakened again and bond yields fell but failed to hold the US$1,800 mark. Gold for December delivery settled up US$3.20 to US$1797.90 per ounce, the highest close in a month, even as it rose as high as US$1,801.90 during the session.

Also, West Texas Intermediate crude oil prices rose to a new seven-year high after the International Energy Agency (IEA) said the OPEC+ group is undersupplying the market by 700,000 barrels per day as it sticks to its schedule of monthly supply increases even as shortages of natural gas, LNG and coal boost oil demand, while U.S. inventories rose more than expected.

WTI crude for November delivery closed up US$0.87 to US$81.31 per barrel, Marketwatch reported. December Brent crude, the global benchmark, was up $0.80 to US$83.98 while Western Canada Select was up $1.33 to US$67.11 per barrel.

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