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Colum McKinley, senior portfolio manager, CIBC Asset Management.

The war in Ukraine is another dark cloud on the horizon that is contributing to uncertainty in the financial markets. Our thoughts and prayers go out to all involved for a speedy and peaceful resolution of this situation.

When we think about the impact of the war, and I think some of the other dynamics that are taking place in the global economy, like rising inflation, like rising interest rates. And we have to offset that with some of the positives, that we are reopening the global economy following the pandemic. We want to ensure as active investors that we are positioning portfolios for these shifting tides, that there is always going to be changes in the market, changes in the economy and the geopolitical sphere. That we want to think about how is that going to affect portfolios and how should we position for our clients?

And when we look at the war specifically, one of the outcomes of this situation is the aggressive sanctions that were implemented by the world against Russia. And we think that is going to have a lingering impact, that the sanctions have redefined the flow of physical goods when we think about energy or things like fertilizers. And so even if these sanctions were lifted tomorrow, buyers and sellers of commodities, they have, or they’re in the process of renegotiating shipping and purchasing agreements.

As we gain clarity on the war, we do think that the duration of the sanctions, we think that we should expect that to have a lingering effect on commodities, such as oil and fertilizers. And we think that’s going to continue to structurally higher prices.

And so, why is that? I think these are markets that already had structural imbalances in the supply and demand dynamics. And when we think about energy companies, as an example, for many years, companies have under-invested, i.e. they’ve spent less time growing their production growth, and they’ve done that to improve their balance sheets and to start to return capital to shareholders more aggressively.

And so we have been believers that the energy market, the oil market is likely to have higher prices for longer. And I think that one of the outcomes of the war and the sanctions is that energy security, where companies source their oil, is going to become more important. And as a result, countries like Canada will benefit.

I think another great example of this, where we think that there will be an ongoing lingering effect or a positive change for a Canadian company is in the fertilizer industry, so for Nutrien. Belarus and China produce almost 40% of the world’s fertilizers and so that is going through a dislocation, that countries are looking for alternative supplies and Canada is one of those places. And so we’ve seen Nutrien already increase their production guidance for the remainder of this year and into next year. We’ve seen pricing go to record levels. And so as a result, the cash flow that is generated by Nutrien will allow them to reinvest and grow their business and now, ultimately return capital to shareholders in dividends, we think is going to be above trend for a number of years.

And so we’ve seen a big reaction in the stock prices of energy companies and in companies like Nutrien. We think that that is likely to continue, that we think these businesses are very well-positioned for what is a more longer-term, structural change in industry dynamics.

So the disruption and the war have also created dislocations in specific stocks that we want to take advantage of. And so one example of that is Magna. Magna is one of the largest auto parts suppliers in the world, based here in Canada, but obviously, operates globally. They’re a technological leader. They are leading the charge in technology, in cars and electronics, in sensors and in the transition away from combustion engines into their electric engines.

And this is a very well-managed company with a strong balance sheet, great management team, and a very attractive valuation. When the war broke out, obviously production in Europe was disrupted. And we think ultimately, that is going to be transitory, that we think that there’s clearly challenges in the industry. But over the long term, when we think about the earnings power of this business over the next 5, 10, 15 years, we think nothing has changed.

It comes on the heels of… Magna was already, and the industry was already dealing with a shortage of semiconductor chips and other supply chain issues that we know are plaguing businesses. And so it is compounding what is an existing challenge. And so we saw a fairly significant reaction in the stock price, where it fell to some of the lowest prices we’ve seen in quite some time. And so, as investors, we look at that and we think about the business over the long term, and we think there’s an incredible opportunity in Magna for us to allocate capital into what we think is a great business facing a transitory issue.

CIBC Monthly Income Fund
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