BMO Economics published a report Nov. 19, entitled Livin’ on the Hedge: Inflation and Your Finances, which gives advice for investors facing down what could be a case of stubbornly high inflation.

“We continue to believe that inflation will be more persistent than most initially thought and that interest rate hikes could come sooner, unfold faster and reach a level that is somewhat higher than expected,” says Robert Kavcic, senior economist with BMO Capital Markets. 

Sadiq Adatia, chief investment officer with BMO Global Asset Management adds that the firm believes inflation will be transitory, but is likely to remain longer than most are expecting, well into the first half of 2022.

The firm suggests investors favour stocks, but choose carefully. They also encourage investors to pick companies with pricing power that are able to pass most wage and cost increases on to consumers. “Firms that face limited competition and sell items with inelastic demand (due to a lack of close substitutes) are likely to preserve capital during periods of rising inflation. Canada has many names with a rich history of dividend increases that fit the bill,” they write.

Real estate, they say, has also managed to post positive returns through inflationary periods, even after accounting for price gains. “Commercial real estate looks less inflated at this point,” they write.

Precious metals and gold 

Hard assets such as precious metals and gold also have a role, they add. Historically, they say the TSX has outperformed somewhat in inflationary environments, thanks to its higher concentration in sectors like energy and materials, including gold. They add that it also benefits from having a relatively low concentration of growth-oriented names that would see valuations cut deeper in an inflationary environment.

Cryptocurrencies, meanwhile, have a limited track record as inflation hedges “and could well sell off alongside other assets if interest rates rise too much.” 

The firm also says inflation protected notes and parking some funds in money markets before rates rise, can also be good ideas. “Though money market returns are tiny today, they will increase when the Bank of Canada and Fed (Federal Reserve) raise policy rates, expected in the second half of 2022.” 

Finally, the firm encourages investors to keep an eye on debt. “For those with already stretched finances and limited wage bargaining power, the safest strategy might be to repay debt if possible, or at least avoid taking on new loans. Consolidating loans in lower rate products is also a good option.” 

Locking in borrowing costs is also a good idea at this point. “Our base case forecast for the Bank of Canada to raise policy rates by 150 basis points, starting in mid-2022.”