- Advice for investors in the face of stubbornly high inflation
- Investor strategies include favoring Canadian equities and sustainable assets, locking in borrowing costs
TORONTO, November 19, 2021 / CNW / – With rising inflation and pressure on interest rates creating more risk, BMO Economics has released a report on how investors can cope.
“We continue to believe that inflation will be more persistent than initially thought, and that interest rate hikes could come sooner, proceed more quickly and reach a level a little higher than expected,” said Robert kavcic, Senior Economist, BMO Capital Markets.
Mr. Kavcic noted that today’s environment does not look like stagflation at all. âWhile the focus is primarily on constraints on the supply side, the reality is that demand is extremely robust, labor markets are tight, and the unemployment rate is falling. It is certainly an environment. inflationary “less bad” than some past episodes such as the 1970s. On the contrary, periods such as reconstruction after World War II or the 1960s (social spending and in times of war with low unemployment, low interest and new technologies) are closer parallels. “
âAt BMO Global Asset Management, we believe inflation will be transient, but likely to stay longer than most people expect and into the first half of 2022,â said Sadiq S. Adatia, Chief Investment Officer, BMO Global Asset Management. âWe want to continue to remain overweight equities and focus on areas where we see good upward offsets for inflation and interest rates. . “
The report suggested several strategies for investors in this environment, including:
- Focus on actions, choosing carefully. Canadian equities have been resilient as yield and dividend growth take on added importance in a real total return environment. High growth / multiple market sectors tend to struggle as discount rates increase.
- Choose companies with pricing power that are able to pass most of the increases in wages and costs on to customers. Firms that face limited competition and sell items with inelastic demand (due to a lack of close substitutes) are likely to preserve their capital during periods of rising inflation. Canada has many names with a rich history of dividend increases that match the bill.
- Real estate has managed to post positive returns during times of inflation, even after accounting for price gains, meaning it has offered good protection. Commercial real estate looks less bloated at this point and should hold up fairly well under still strong underlying economic conditions, although the office sector faces longer term challenges related to remote working.
- Other durable assets play a role, including traditional inflation hedges, such as commodities such as precious metals and gold. While some would characterize cryptocurrencies as a form of digital gold – which could make it a substitute for the modern era – they have a limited history as hedges against inflation and may well sell alongside it. other assets if interest rates rise too high.
- Buy inflation protected tickets. Inflation-protected Treasury securities pay a fixed real rate of return plus a variable return linked to the prevailing inflation rate. The higher the inflation, the larger the combined payment.
- Diversify geographically. Inflation is not rising everywhere. from Japan The CPI rate, for example, was practically zero in September. Although its economy would still suffer from a global export slowdown, it would have a better chance than high-inflation countries to avoid a recession given the low interest rates.
- Park funds in the money markets before central banks pull the trigger on rates. Although money market returns are tiny today, they will increase when the Bank of Canada and the Fed is raising its key rates, expected in the second half of 2022.
- Keep an eye on the debt. Rising inflation can be a cold comfort to overburdened households if interest rates rise too quickly, straining service costs. For those with already strained finances and limited salary bargaining power, the safest strategy might be to pay off debt if possible, or at least avoid taking on new loans. Bundling loans into lower rate products is also a good option.
- Lock in borrowing costs. In a climate of rising inflation and rising interest rates, borrowers can save money and reduce the risk of default by choosing fixed rates. As an example for mortgages, given our baseline forecast for the Bank of Canada to raise policy rates by 150 basis points from mid-2022, and the current 100 basis point differential between 5-year variable and fixed rate mortgages, borrowers would save moderately over the five-year period. years by standing still.
To view the full report, visit: https://economics.bmo.com/en/publications/detail/32530858-7711-4e79-839d-98171e26e6f5/
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