Geopolitical risks lift energy and reshape global investing

Even as the ongoing conflict in Iran impacts the global macro environment, it is creating equity opportunities for non-Middle Eastern oil producers like Canada, says Eric Morin, global head of research at CIBC Asset Management.

“We believe that the balance of risk is skewed to the downside, meaning that there is a risk of an escalation, or risk that oil prices may remain higher for longer due to supply destruction,” he said in a March 27 interview.

“In the current environment, the winners are the energy producers, and the losers are the net energy importers,” he said. “So, in terms of the winners, Canada is one of them, at least on a relative basis, given that we’re net energy producers.”

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Morin said that in the near term, geopolitical uncertainty will increase the attractiveness for both the USD and CAD as a hedge. In the long term, however, investors should be wary of leaning on the U.S. dollar.

“Our long-term view on the U.S. dollar is negative, simply because, like U.S. stocks, the U.S. dollar is way overvalued valuations remain elevated,” he said.

As for equities, U.S. stocks appear overvalued, even if earnings prospects are attractive, and investors should probably diversify and reduce North American bias, Morin said.

“We may be in a situation where, over the long term, the U.S. dollar becomes slightly more cyclical due to the depreciation that we expect. As a result, that would increase the attractiveness for investors to consider having some of their U.S. equity exposure hedged.”

Certain markets in Asia have smaller valuation headwinds, including Korea and Taiwan, which are expected to experience a boost in tech-related and military spending. Morin said there’s also emerging markets to consider, like Latin American, which has indirect AI exposure through key mineral production. It could also benefit from sustained higher energy prices.

“AI and strong inelastic demand for infrastructure, such as military infrastructure, supply chain resiliency, from tech to strategic mineral and rare earth elements, we do think that there is strong, inelastic demand for those investments over the long term,” he said.

Investment in AI and infrastructure should also support global growth and offset demographic headwinds, including slowing or declining population growth, Morin added. AI investment, including data centres, will likely spread outside of just the U.S. and China. Meanwhile, Canada, Japan, China, and Germany all have plans to increase military spending in their policy pipelines.

Remember that while U.S. stocks may look expensive, many company’s earning prospects still remain strong, Morin said. So reducing U.S. exposure could make sense, just not too aggressively.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.