Canadian investors are facing increasing uncertainty, and as theylook to mitigate risk and hedge against inflationary pressures, it’s becoming tricky to find the right strategies.
Speaking with the Investing News Network (INN), Stephen Johnston, director at asset management firm Omnigence, explained how Canadians have gotten into this especially precarious position.
“Canada has very stagflationary macro conditions, which historically haven’t been good for inflation-adjusted returns for public equities,” he said. Stagflation refers to slow economic growth and high inflation, and Johnston noted that in real, inflation-adjusted terms, GDP per capita is stagnant or even declining right now.
In Canada, these conditions began post-pandemic and have been heightening since.
“They’ve sort of surfaced in the last three years, and I think they’re going to be very sticky, they’re going to be hard to fix,” Johnston told INN. Added to those conditions is ongoing geopolitical strife with the US as well as China, with both countries levying a wide variety of tariffs on imports of Canadian products, from soy to steel.
“Tariffs are just going to exacerbate Canada’s stagflation problem. They’re going to weaken the Canadian dollar, drive up inflation and they’re of course going to negatively impact the Canadian economy,” Johnston said.
“Those are classic inflationary effects,” he added. “And when you layer those on top of what are already stagflationary conditions in the Canadian market, that’s not a very promising set of conditions for public equity returns.”
How to invest during stagflation
Canada’s GDP contracted by 1.4 percent in 2024, marking the second year in a row where it shrunk by over 1.2 percent. Contributing factors were declining labor productivity, a struggling housing market and trade disruptions.
In 2022 and 2023, nationwide productivity saw six consecutive quarters of decline, which hindered economic growth, while housing affordability challenges persisted, with prices surging far beyond income growth.
Meanwhile, US tariffs implemented this month have further strained exports, contributing to an estimated 2.5 to 3 percent GDP decline. Combined, these factors have weakened the country’s economic momentum.
“In effect, the tariffs are like the straw that broke the camel’s back,” Johnston explained.
“Investors were probably willfully ignoring the stagflation risk, with hope it would go away, or dissipate or gradually improve. But I think now the tariffs have just made it unambiguous.”
Amid the widespread volatility, Johnston recommends investors “arm” themselves through a series of questions.
“The average investor in the last 20 years has effectively been long middle-class demand, long growth and short inflation,” he said. This strategy aids portfolio growth if there is no inflation and middle-class demand remains robust; however, that is not the current…
Read More: Navigating Uncertainty: 3 Investment Strategies for Volatile Times