Page 30 - DIY Investor Magazine | Issue 34
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    Trusts like MCT may benefit from rising prices and an economic bounce back...William Heathcoat Amory.
It hasn’t been an auspicious few months for equity investors. Rising inflation and instability caused by the war in Ukraine have combined to make it feel as though the best option may be to buy gold and, like Samuel Pepys all the way back in 1667, bury it somewhere in your garden for safekeeping.
Even if the impulse driving such behaviour is understandable given the circumstances, it’s not entirely warranted. The mix of inflation and political instability may harm some companies and regions but not all of them.
Firms active in the commodities, financial services, and property sectors are typically better able to manage the pressures that inflation brings by raising prices in line with currency devaluation. In some instances, like banks being able to levy higher interest rates on lending services, they may even benefit from it.
Wars do tend to last longer than we anticipate and spread
in ways that are hard to predict. Nonetheless, simply having less geographic proximity to the fighting means the risk of being drawn into the conflict or impacted by its side effects is reduced. And as with higher inflation, there are companies – like energy exporters – that could stand to benefit from any shortages resulting from the conflict in Europe.
Canada is in something of a sweet spot in both of these areas. The country is a net energy exporter, with substantial oil and gas reserves. It is also a major soft commodities producer, with Canadian farmers currently the world’s fourth-largest wheat exporters.
Toronto’s equity market reflects this dynamic. At the end of April the S&P/TSX Composite had a 17.6% weighting to energy companies, 13.3% to materials, and 11.6% to industrials. By
comparison, the S&P 500 only had a 4.2% weighting to energy, 2.8% to materials, and 8% to industrials.
Despite these relatively large weightings towards commodities, the S&P/TSX’s largest sectoral contributor is financial services. Firms like the Royal Bank of Canada and TD Bank are among the index’s largest constituents by weighting.
These sorts of firms are not a guaranteed way of protecting your portfolio from some of the problems we face today but, when you add in the fact that Canada is geographically distant from the war in Europe, they certainly look better able to handle them than many other investment opportunities out there today. Investors that are interested in getting some exposure to Canada may want to look at Middlefield Canadian Income (MCT).
The trust invests in Canadian companies, with the objective of delivering a high level of dividends to shareholders, along with long-term capital growth.
MCT’s income objective means that it tends to have a bias towards value and cyclical stocks, something that is likely to appeal to investors at the moment, particularly if inflation ends up being a longer lasting phenomenon than most of us are hoping for.
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