Conversation for March 15, 2022

Market volatility and investor turmoil

The escalation of the devastating war in Ukraine, rebuttal sanctions against Russia, knock-on effects in commodities markets, and underlying inflationary pressures have caused extreme market volatility – which undoubtedly puts retail investors in a state of turmoil.

We get it and it’s exactly why we are here – to provide you with investment solutions that help navigate this complex investment environment. It’s also where alternatives come in. Uncertainty stemming from increasing inflation, geopolitical tensions, and a tight labor market is driving market momentum toward alternative investments, which have proven to improve portfolio diversification, help manage risk, provide income, and enhance risk-adjusted returns.

In such challenging investment environments, institutional investors around the globe consider alternative asset classes critical to meeting their investment objectives. Managers of Canadian benefits and pension plans – for groups like teachers, civil servants, and unionized workforces – rely heavily on alternatives. At the Canadian Pension Plan it was to the tune of 57% percent of their portfolio allocation in 2020 (Source: CPPIB Annual Report 2020).

To level the playing field for retail investors, Canadian securities regulators broadened mutual fund regulation in 2019 to allow for the creation of liquid alternative mutual funds which are now available to all Canadian investors. That’s where we come in.

We’ve launched two new liquid alternatives over the three weeks alone. And how topical they’ve become.

Shaking Off the Canadian Energy Sector Cobwebs

Last week we launched the Ninepoint Energy Income Fund, just as the price of oil hit all-time highs in Canadian dollars. Asset flows have been excellent and our friends at the NEO Exchange said the first day of trading exceeded their high-end projections!

Canadian energy sector has entered an aggressive period of free cashflow, with lean cost structures, low debt, and a commitment to deliver shareholder returns. The timing was right to launch this energy income fund to provide investors with income and capital appreciation by investing in dividend paying, Canadian energy companies.

As our energy portfolio manager Eric Nuttall believes with conviction, the impact of global events on the oil and gas market will be long-lasting and offers an obvious conclusion: the world needs more, not less, of Canada’s safe, reliable and ethically produced oil and natural gas. Canadian oil producers are well-capitalized to further unlock our abundance of energy resources and their investors will benefit from the return of meaningful capital in the months and years to come. 

All of us at Ninepoint Partners are true champions of Eric Nuttall – his insight and thoughtful advocacy for the Canadian energy patch, his skillful active management in energy investments, and his ability to deliver impressive returns to shareholders as we see continued upward pressure on the price of oil.

The Energy Transition, in transition

As the world acknowledged an urgent global need to transition away from authoritarian oil toward responsible and ethical sources, investors indeed flocked to the Canadian energy sector. This upward pressure on the price of oil also caused downward pressure on carbon markets, which hit historic lows last week.

Global policy makers were faced with the polarizing question: is the transition away from authoritarian sources of energy the priority, or is it to move away from carbon-intensive sources? At Ninepoint, we believe the answer can be a both. It’s all about sequencing and timing. While global leaders agreed this week that Europe can no longer be dependent on Russian oil and gas, some leaders went further to call for more renewables to be added into the mix. Germany accelerated its goal to reach 100% renewable electricity sources by 2035.

The European Union ETS (EUA), California/Quebec (CCA) and US Eastern States (RGGI) carbon markets – the diversified carbon emissions allowance futures held by the Ninepoint Carbon Credit ETF (NEO: CBON) – reacted to the uncertainty. We saw significant plunges early in the week, ending in a late-week rally, then coming out relatively flat this week in these carbon emissions markets. For those who believe that the disorderly energy transition needs to be a little more orderly and that it will be measured in decades, not years, a hedging strategy between oil and renewables could be an approach worth considering.

As we watch how the carbon markets move in the days and weeks to come, we’ll provide more insight into how it’s all evolving… and where we believe it will end up. (Hint: it’s to the tune of $22 trillion dollars*.) Watch this space.

The Ninepoint Team!