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

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

Being a resource-rich index hasn’t been a boon for the TSX in recent years, but inflation expectations and a commodities boom helped propel Canada’s main benchmark past 20,000 for the first time ever during intraday trading Tuesday. It ended the day just below that level, but still at a new all-time closing high of 19,976.

Materials and energy represent 25 per cent of the TSX, compared to 5 per cent for the American S&P 500. The higher weighting has helped the TSX outperform its U.S. counterpart year to date.

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

Martin Pelletier, portfolio manager at Wellington-Altus Private Counsel, says he likes the materials sector, agriculture, and oil and gas. He expects the TSX to continue to benefit from the higher weighting of those sectors.

“In our view, many are underestimating the inflationary pressures beyond being transitory, as commodity producers have been under-invested in over the past decade. Meanwhile demand is surging as economies re-open,” Pelletier told Yahoo Finance Canada.

“What makes today’s situation different is that the fiscal flood gates are being opened and central banks are not too keen on tightening any time soon, which we think could trigger the beginning of another commodity supercycle.”

Pelletier also thinks the clean tech trade is ahead of itself and expects money to flow back into cyclical, commodities, and value segments of the market.

He says his firm holds Nutrien (NTR.TO) for agriculture exposure and Cenovus (CVE.TO), Canadian Natural Resources (CNQ.TO) and Suncor (SU.TO) for energy.

ETFs to play commodities boom

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

“There's a reason to be cautious this time around, especially since the catalysts of inflation seemed to be related very much to supply chain disruptions surrounding the coronavirus pandemic,” Daniel Straus, National Bank's head of ETF research and strategy, told Yahoo Finance Canada.

“An increase in price because of global supply chain disruptions and factory slowdowns may be transitory, or it might be still be considered 'inflation' of a kind—we will only know in hindsight.”

Straus says it might seem prudent to look for a basket of commodities in the form of an ETF, but investors need to be careful because most of them hold futures contracts.

“These are relatively simple as far as derivatives go, but a commodity-based ETF must periodically roll futures (say, every month) to avoid taking physical delivery of the underlying commodities,” said Straus.

“This means that effects in the shape and term structure of the futures curve will impact their performance compared 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 those. Straus likes the Purpose Gold Bullion Fund (KILO.TO) for exposure to gold prices, iShares S&P/TSX Capped Materials Index ETF (XMA.TO) for materials miners/producers, iShares S&P/TSX Global Gold Index ETF (XGD.TO) or BMO Equal Weight Global Gold 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.

Canadian mining stock picks

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

“Of course, the way governments are throwing money around and with interest rates where they are, inflation does seem to be rearing its head as I predicted and I doubt that it is just a blip,” Gallander told Yahoo Finance Canada.

Gallander says he likes Black Diamond Group (BDI.TO), which has exposure to the oil patch among other things.

“They rent and sell modular space and workforce accommodation solutions. Doing some in the oil and gas patch but more and more of it outside the resource sphere like for schools, fires, construction, real estate, etc." Gallander says he sees a lot of upside for the stock. “Currently at $4.17 and my target is $10.24.”

Gallander also likes a pair of Canadian miners. "I like SSR Mining (SSRM.TO) based in Vancouver and with numerous mines,” he said. “Orvana (ORV.TO) is another that I own and think has more potential if commodities continue their run. Mines in Spain, Bolivia and expanding into Argentina.”

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

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