When it comes to investing, the global traders are generally focused on the U.S. markets. It makes sense since the U.S. is the largest economy in the world and home to the tech-heavy NASDAQ. But the Russian invasion of Ukraine has pushed up commodity prices at the same time that central banks are raising their key lending rates to tame scorching inflation.
This unlikely combination benefits the energy, materials, financials, and agriculture sectors and is helping Canada’s stock market outpace U.S. stocks.
How Is the Russian/Ukrainian War Impacting Canadian Stocks?
In the U.S., the S&P 500 is up 1.5% year-over-year but is down 11.1% year-to-date. Meanwhile, the Dow Jones Industrial average is up 4.7% year-over-year but has lost 9.3% of its value in 2022 and the NASDAQ is up just 0.9% over the last 12 months but has fallen 15.6% so far this year.
Meanwhile, in Canada, the TSX is up 16.5% year-over-year, outpacing all U.S. indices. It’s also up approximately one percent year-to-date, far outpacing every American index. Why? Canadian stocks are doing better thanks to its heavy exposure to energy, financials, and materials—three sectors that benefit from higher interest rates and the current economic and geopolitical environment.
According to the International Energy Agency (IEA), Russia exports roughly 60% of its oil to Europe, which accounts for a third of Europe’s oil demand. The U.S. also gets seven percent of its oil from Russia. Energy buyers from around the world are looking to buy more and more oil and gas from countries that are much more politically friendly and stable than Russia.
At $115 per barrel, West Texas intermediate crude oil is trading at its highest level in almost 10 years. As the world’s fourth largest oil producer, Canadian oil could be a solution for countries facing an energy supply crunch.
The war in Ukraine and sanctions against Russia are also putting pressure on commodity prices. Together, Ukraine and Russia account for around 14% of global wheat production and are responsible for 26% of all wheat exports.
Since the middle of February, wheat futures have soared around 50% and are at their highest levels since 2008. Higher commodity prices make it more expensive to manufacture foods, and those higher costs get passed onto consumers. Canada is the third largest exporter of wheat and is responsible for 14.1% of all exports.
Gold and silver miners and companies linked to commodity demand have also been experiencing strong growth.
How Will Higher Interest Rates Affect Canadian Stocks?
Higher interest rates are a boon to Canadian financial stocks. In January, Canada’s annualized inflation hit a 30-year high of 5.1%. To combat red-hot inflation, the Bank of Canada raised its key lending rate by a quarter percentage point to 0.5%.
By the end of 2022 the benchmark rate is projected to hit 1.25% and 1.75% in 2023. Higher rates mean banks can charge more interest. Canada’s big banking stocks are reporting strong gains and provide dividends of around three percent each.
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Rising interest rates and the war in Ukraine are a headwind for most stock exchanges, but the Canadian stock market, which is heavily weighted in energy, materials, financials, and agriculture, is now one of the fastest growing. While these tailwinds will not last forever, the trading experts at Learn-To-Trade.com can teach investors how to spot market.
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