Fergal Smith and Alexander Schummer

TORONTO, (Reuters) – As Russia invades Ukraine, it disrupts global economic activity and raises oil, metal and gold prices. To protect their investment portfolios against the effects of rising inflation and shortages of supplies, Canadian investors have embraced Canada’s commodity linked stock market.

Inflation has been a major problem in financial markets worldwide in the recent months as countries recover from the coronavirus epidemic. This was compounded by an increase in commodity prices following sanctions against Russia (the world’s largest oil exporter and top exporter of wheat).

Canada is a good place to hedge. It produces many of the energy, metal and agricultural products in short supply, while its main stock index, the S&P/TSX Composite, has a 27% weighting in energy and materials, indicating that the earnings of a large chunk of the market are directly tied to rising commodity prices.

While inflation-linked bonds offer a safer hedge against price increases, some investors prefer to remain exposed to the equity markets.

Kurt Reiman is a senior investment strategist in North America for BlackRock (NYSE:). “The TSX represents a preferential allocation among global equities given the relatively inexpensive valuation still and the less muted macroeconomic impact of war on Canada’s economy,” he said.

Toronto is one of few global major indexes that has moved in positive territory since January 1, having gained 0.5% compared with a decrease of 11.3% for the U.S. benchmark.

At 14.6, the 12-month forward price-earnings multiple for the TSX is slightly below its average for the last 10 years, data from Refinitiv Datastream shows, and well below the S&P 500’s multiple of about 18.5.

Angelo Kourkafas from Edward Jones, St. Louis, Missouri, said that the large amount of resources shares in Toronto’s market “provides an excellent hedge for global investors against any prolonged commodity supply shock.”

Statistics Canada reports that foreign investors took notice and put a net C$46 billion (or $36 billion) into Canadian equities in 2016. This was the highest amount of any year since 2016.

Investors love Hudbay Minerals Inc (NYSE:) Inc. It trades at a forward pricing-to-book ratio 1.24 compared to the industry average 1.61 according to Refinitiv data.

Sprung Investment Management president Michael Sprung stated that the valuation of the company should be a catch up because the company “laid the foundation” for growth.

Avenue Investment Management portfolio manager Paul Gardner says that the price of bullion is generally cheaper in the gold sector than the silver. Agnico Gold (NYSE:) Mines Ltd, which he views as a long-term purchase, and Canadian Natural Resources (NYSE:) Resources, Canada’s largest oil producer, will benefit from the rising oil price.

EYE ON DIVIDENDS

It’s more than just sharing resources that make Toronto different. The market has 31% of financials, which is a heavyweight.

Elvis Picardo is portfolio manager for Luft Financial and iA Private Wealth. “Inflationary environments generally coincide with rising interest rates which are beneficial banks and insurers,” he said.

The Bank of Canada increased its key interest rates for the first-time in three years earlier this month and indicated that more hikes were on the horizon. Expect the Federal Reserve to announce Wednesday a lifting in U.S. rates.

The current economic environment is attracting more financial and energy shares than any other sector, thanks to high dividend payouts.

BlackRock’s Reiman explained that the importance of the dividend increases when there is concern about global growth. Canadian stocks are more likely to perform because they have greater sector exposure.

($1 = 1.2743 Canadian dollars)