Wednesday, August 07, 2024

Canada’s stagflation presents investor concerns


ByDr. Tim Sandle
DIGITAL JOURNAL
August 7, 2024

City of Toronto. — Image by © Tim Sandle.

Why are traditional 60/40 investment portfolios at risk as the Canadian economy enters a prolonged period of economic stagflation? To answer this question, Stephen Johnston, a private equity manager and director of Omnigence recently wrote a white paper along with solutions for investors to mitigate risk and grow their portfolio.

Stagflation refers to an economic situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high.

A new report from Royal Bank of Canada has found that the economic momentum that propelled the country through the 20th century has faded in the 21st, and appears to have worsened since the pandemic. Canada will likely see the lowest real growth of any country in the Organisation for Economic Co-operation and Development over the next three years.

Higher interest rates have slowed per-capita output since 2019, but the problems run deeper. Johnston states: “The Canadian economy is now smaller than it was in 2019 when adjusted for inflation and immigration, and pretty much in the same place it was a decade ago.”

Drawing out an international comparison, Johnston reports: “According to the report, anyone who invested $1,000 in Canada’s main stock index in 2000 would have $4,400 today; the same investment in the U.S. S&P 500 index would be worth $6000—a more than 35 percent difference.”

Johnston believes that the Canadian economy has entered into a prolonged period of economic stagflation that could spell even more trouble for Canadian investors if they do not begin to allocate capital differently.

The problem and solutions can be distilled down to two important economic questions, which Johnston answers.

How might stagflation affect investments?


Johnston assesses: “A reasonable starting point is to understand that the approaches that worked in the last twenty years during above trend growth and below trend inflation are less likely to work over the next decade if Canada’s economy enters a prolonged period of low growth and above trend inflation, also known as stagflation.”

What investments will generate better returns?


in terms of solutions, Johnston suggests: “Stagflation traditionally benefits real asset investments, which are colloquially known as “hard assets.” This includes Canada’s large and competitively priced agriculture industry, which is heavily reliant on foreign markets rather than Canada’s own domestic consumption.”

He also adds: “Stagflation may also benefit investments that are less linked to the growth of Canadian GDP such as low cost casual dining and automotive maintenance because both sectors do well when the middle class struggles.”


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