Top Investments To Hedge Against Inflation in Canada: Should you be concerned about restructuring your entire portfolio to focus on picking the top Canadian inflation stocks?
Of course, given the continued persistence of inflation tendencies in 2023, that is easier said than done.
When we began 2022, just a very tiny group of market gurus were talking about inflation (shout out to Larry Summers). Then, as central banks continued to lag behind the inflation curve, it became clear that they would have to hike interest rates at the quickest rate in decades.
Because of the failure of the showy tech stocks of the past, investments like those on our list of the Best Canadian Dividend Stocks—which had previously appeared to be somewhat boring—were being considered as inflation hedging assets.
WHAT IS INFLATION AND WHAT MAKES A “BEST INFLATION HEDGED INVESTMENT”?
Let’s take a moment to step back and quickly review how we got here before discussing the greatest inflation stocks for 2023.
The progressive rise in the monetary cost of goods and services is known as inflation. The topic of inflation is covered in many graduate-level business and economics courses, yet there are several facts that most econo-nerds currently believe to be self-evident.
1) We probably don’t know very much about inflation, despite the fact that many bright people are studying it. We can be quite certain of this because we’re lousy at projecting where inflation and interest rates will go in the future.
2) Inflation generally outperforms deflation.
3) Deflation has been our main concern for the past ten years, and we have done all in our power to prevent it.
4) The majority of central banks worldwide strive for a moderate inflation rate of 1% to 3%. This low inflation rate is advantageous for a variety of reasons. This level of mild inflation tends to be associated with consistent, stable economic growth.
5) High inflation rates (let’s say in the 8–15% range) are often not good for an economy or the standard of living of its population.
6) When the rate of inflation rises above 15%, we begin to talk about hyperinflation, which is the type of situation that results in economic breakdowns and global wars.
7) Although the math is complex, the current yearly inflation rate is between 4 and 5 percent, which is substantially lower than the 15%+ rate.
Hence, when talking heads on television refer to “inflation,” they actually mean this. Furthermore, bear in mind that when journalists say something like, “Inflation increased at a rate of 5% in September,” they likely mean something different from what you may assume.
What they ought to say—but don’t because most viewers stop reading or stop watching the news when esoteric economic topics are brought up—is:
This month, prices increased a bit. We calculated the rate of price increases for a wide range of goods and services. Certain goods and services saw significant price increases, while others saw little to no change. Prices increased on average across all categories of goods and services. 42%.
If prices increase at that rate for a whole year, our inflation rate will be 5%. Because this figure is an average, you might feel like inflation was more or lower for you depending on where you live or what you bought this month.
Okay, so prices are rising a little more quickly than they used to, and it would probably be ideal if they didn’t.
Most readers of this post are probably wondering: Okay, so inflation is sort of a bummer, but are there any assets that do better?
Investors might reduce their risk in the event that high inflation persists by making assumptions based on historical inflationary episodes. A “hedge” is a method of risk management like this. The goal is to “hedging” (protect) against a particular event or condition.
Of course, there is a cost associated with this inflation investment strategy: if persistently high inflation doesn’t continue, your profits will likely lag those of the market as a whole. In order to protect themselves against the risk of inflation, many risk-averse investors are fine with lowering their ceiling (especially if they believe that risk is a massive one).
In the past, we’ve written articles about stock hedging tactics and how to use option trading to hedge profits. Here, we’ll focus on the most effective defenses against inflation and hyperinflation.
WHAT TO INVEST TO HEDGE INFLATION
We can use historical data to make reasonable predictions about which industries will perform best during this time of rising inflation. We can also draw valid conclusions from what Canada might look like with higher inflation in terms of interest rates and government support.
Looking at the expected monetary policy that the Canadian government will implement is arguably the most important component in determining the best inflation investments.
Tiff Macklem, the governor of the Bank of Canada, stated at the end of 2022 that interest rates were still being raised to combat inflation.
While many “second tier impacts” of inflation and the attendant government response may or may not materialize, we’re fairly certain that the following will:
- The situation for businesses with a lot of debt gets worse as interest rates rise. (Typically, higher growing firms are meant.)
- Banks have more room to profit from deposits than loans when interest rates rise.
- Prices will affect businesses in competitive industries more and more as they struggle to pass on rising expenses to customers.
- Companies (also known as oligopolies) can more easily raise prices concurrently with cost increases the more price protection they have, such as wide moat Canadian stocks.
- Businesses that derive their value from hard assets or commodities typically make effective investments for inflation since their underlying assets hold their value well.
- Canadians have more savings than ever before, and the more money they lose by keeping it in a chequing account as inflation rises, the more reason there will be to spend now rather than later.
So then, which inflation hedge stocks am I targeting?
BEST CANADIAN INFLATION STOCKS IN 2023
1) Banks in Canada. My investment safety net is represented by Canadian bank stocks. They have repeatedly shown to be quite secure and to be very good at transferring costs to a tolerant Canadian consumer base.
Many bank companies made the list of the greatest dividend stocks in Canada, and they continue to rule the Canada Dividend Kings chart year after year, for a variety of reasons.
Although it’s difficult to go wrong with any of the Big Six Banks, I agree with analyst Mike Heroux of Dividend Stocks Rock in naming RBC, National Bank, and TD as my current “best in class.”
2) Shares of Bell and Telus, two Canadian telecom companies. The ideal way to describe the Canadian telecom industry is as secure oligopolies that can easily pass on rising expenses. Since that Rogers ultimately finished acquiring Shaw Communications this year, the “Big 3” Canadian telcos will soon have even more pricing power.
Simply said, I believe that these businesses are about as recession-proof as you can get because many people won’t give up their phones until the very last minute!
Canadian National Railway 3. Never before have moving shipping containers made so many top page news! Consider me among the investors who weren’t disappointed to learn that their planned acquisition of a significant American railway had fallen through and that going forward, management’s priority will be optimizing the effectiveness of their current assets.
Moving things for a living is a lucrative profession to be in for the foreseeable future, especially when there is only one other player in the field. Learn more in our post on the top Canadian railroad dividend stocks.
4) The Whole Canadian Market is HXT! Well, so I’m kind of cheating here by including an ETF on a list of the top inflation stocks, but the fact is that even if there are strong cases to be made for Canada’s consumer goods, energy, and materials sectors, I’m not as sure I can currently identify the true winners in this situation.
Oil prices have so far in 2023 started to move down into the $70 range.
In fact, this is a key factor in the decline in overall inflation.
Even though it’s still a highly profitable price for Canadian oil corporations, the profits from last year’s boom will undoubtedly be lessened.
OPEC’s recently announced Saudi volume cut is expected to stabilize prices at $80+, according to some. With gold approaching $2,000 per ounce this year, Canadian gold firms have performed somewhat better.
Due to the way supply and demand work in the commodity markets, a number of other commodity-driven businesses in Canada are mostly resistant to inflation.
I’m just unsure which of these commodities will advance the more in the future. Thus, I think it makes more sense to own the entire market.
You won’t likely be significantly hurt by the TSX’s pretty well-known REITs and consumer staples either.
What gives me more confidence is that Canada is very well positioned to at least suffer the least from inflation, if not benefit from it. Because of this, my HXT inflation ETF for Canada is just a standard Canadian index fund.
We simply don’t have nearly as many high-growth companies as many other industrialized nations, especially the USA, that have valuations in the nosebleed range.
While there are probably not many companies “on sale” in the Great White North relative to other stock markets around the world, our current CAPE ratio and P/E ratio seem to indicate that we are likely fairly priced by historical standards – with excellent prospects to experience lower volatility in the short- and medium-term.
Hence, if you’re really concerned about inflation, simply raising the percentage of Canada in your portfolio would probably be a good bet.
BEST INVESTMENTS FOR INFLATION – FAQ
Exists a stock that is best for a hyperinflation?
I assume that by definition there must be a “best hyperinflation investment,” but in reality true hyperinflation typically indicates that your economy will collapse soon.
Which stocks perform the best against inflation?
Inflation cannot be “beaten” per se.
You can protect yourself from the risk of inflation by making sure your net worth is invested in assets, such as stocks, rather than losing value in a savings account.
Are there any equities in Canada that are inflation-proof?
Companies that can increase their prices as quickly as their costs rise are the ones with the greatest inflation-proof stocks in Canada.
Certain Canadian stocks have actually been able to increase their prices more quickly than their costs, which has increased their profit margin.
Clearly, this is the best option if you’re seeking for Canadian stocks that are inflation-proof.
I believe that Canadian railroad stocks consistently outperform other inflation-resistant investments, but there is also a case to be made for more volatile commodity stocks.
What Canadian dividend stocks do the best against inflation?
The strongest Canadian dividend stocks for inflation are likely RBC, TD, National Bank, Canadian National Railway, and a number of energy companies.
That’s presuming current trends continue. Remember that it’s challenging, if not impossible, to foresee inflation.
Will the American or Canadian stock markets do better during an inflationary period?
the stock exchange in Canada.
It is likely that neither stock market will fare particularly well IF we have continued high inflation. In spite of this, the Canadian stock market will probably do better than the American stock market during times of high inflation if you possess index investments in both the S&P 500 and the TSX 60.
This is because a diverse range of businesses power the US stock market, but huge IT companies—which thrive in low-interest rate environments—are becoming more and more important. The oil and mining sectors, on the other hand, should enjoy a boost in value during inflationary circumstances, and the general Canadian stock market is full of financial service corporations that can pass along any inflation concerns to consumers.
What asset mix is the most effective inflation hedge?
A varied selection of low-risk, free-cash-flowing businesses represents the optimal asset allocation for inflation hedging for the majority of investors.
Typically, this free cash flow results in reliable dividends that can keep up with inflation.
Investors have a great opportunity to buy assets that can keep up with inflation by investing in stocks with a wide moat.
What stocks are the best for inflation and a recession?
The secret is to avoid riskier stocks that have taken on a lot of debt (or “levered”), even if selecting the best equities for a recession and the inflationary world we currently live in is never simple.
Both increasing interest rates and falling consumer spending will have a negative impact on those stocks.
The best investments during a recession and an increase in prices are consistent, somewhat monotonous blue-chip firms that simply churn out predictable profits.
BOTTOM LINE – STOCKS THAT DO WELL IN INFLATION
When it comes to investing for inflation, there is a case to be made for buying tangible assets like real estate, but in my opinion, the data now points to plain old top Canadian dividend stocks as the greatest investments for inflation.
It’s difficult to dispute the long-term value of organizations like BCE, Telus, TD, RBC, NB, and CNR when you consider both their tremendously strong competitive positions and their rock-solid financial sheets.