The investment team continues to believe that inflation is investors’ greatest current risk and that portfolios need to be positioned both to protect against erosion of purchasing power and also to take advantage of the fact that in general, consensus investor positioning continues to be too defensive and negatively impacted by rising rates.
At this point cash is not a good option given its ongoing loss of purchasing power. Commodities entered the current period of conflict having already entered a structural or secular bull market after many years of under-investment. North and South America both offer ample investment opportunities and remain furthest from the conflict.
Large proportions of the major U.S. indices continue to be made up of tech, consumer and healthcare, most of which is negatively impacted by rising rates and inflation. Much smaller parts of the major indices such as energy, materials and financials are better suited to the current environment for both appreciation and dividend growth.
In the case of energy and materials, an already tight supply-constrained market has had the added boost in supply/demand dynamics driven by the war in the Ukraine. Pricing power in these groups is likely to remain in place in at least the intermediate term.
Newmont Corporation (NEM NYSE)
Newmont is the largest gold producer with production of over six-million ounces per year supported by eight world-class assets and two emerging world-class assets, with 90 per cent of production in top-tier jurisdictions. There are a number of optimization opportunities across the portfolio that will help NEM offset the costs that are impacted by rising inflation. In addition to the strong growth pipeline that NEM has, it has been consistent in its dividend growth strategy, and share buyback program.
Canadian Natural Resources (CNQ TSX)
Strength in current crude oil prices, coupled with CNQ’s strong balance sheet and operating leverage should allow the company to continue to generate strong cash flow which management had committed to returning to shareholders through regular dividend increases and share buybacks. We’ve seen a change in tide in oil and gas producers in this latest cycle, where the emphasis has been on shareholder returns vs. production growth, this positions CNQ very well with their long-life, low-decline assets as they can invest in moderate production growth and M&A, yet still allocate a substantial portion of FCF towards dividends and share buybacks. The company recently increased its dividend by 28 per cent.
Teck Resources Ltd. (TECK.B TSX)
Benefitting currently from strong steelmaking coal prices, which continues to ramp up and makes up ~47 per cent of revenues. Management is rumoured to be in talks to sell a stake of this business to help fund their copper growth story. QB2, one of the world’s largest undeveloped copper resources, is now 77 per cent complete, and on track for first production in the second half of the year, and positions TECK to deliver meaningful copper growth in 2023 and onward. The new mine, a low-cost and long-life copper mine in Chile, will double consolidated copper production next year. We believe that selling the coal business could be an important catalyst for investors.
Source: BNN Bloomberg