The Best Canadian Stocks for a High Inflation World

Unexpected inflation could deliver a nasty hit to rate-sensitive growth stocks, but where are the best places to defend against such an environment?

money cash dividends

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Inflation, inflation, inflation. That’s the unavoidable hot topic you’re likely to hear about ad nauseam these days when you tune into any financial TV show. Here in Canada, inflation is running hot at just north of the 3% mark. In the U.S., inflation is that much scarier, with the Consumer Price Index (CPI) at 4.2%. With worries that the Federal Reserve will pivot with its policies, many investors are bracing themselves for what could be a rocky finish to 2021.

Inflation: Ready or not, here it is

With more COVID jabs being put in arms, though, the economy faces its biggest boom in years. The economy could very well overheat, and the Fed may be more inclined to keep rates low despite any inflation, which won’t reveal itself as transitory until many months down the road.

Indeed, the Fed is between a rock and a hard place right now.

Warren Buffett did warn that there would be consequences of the unprecedented stimulus to avert the disaster that could have been earlier last year. The man has no idea what’s up next, though. He’s remaining humble but is prepared for whatever Mr. Market is going to throw his way next. Investors should do the same in the face of unprecedented uncertainty as the inflation genie is released from the bottle.

Could even more unexpected inflation be on the way?

Whether or not there will be a fourth major wave of COVID-19 remains to be seen. The latest variant recently discovered in Vietnam is a mutation of a mutation. It’s more contagious, but there isn’t enough conclusive data to determine if vaccine efficacy rates will be severely impacted.

Undoubtedly, we’re still in a race between variants and vaccines. At this juncture, it seems as though vaccines will come out on top, with rampant inflation and an overheating economy on the other side of this pandemic. Should we see a fourth wave of COVID-19, restrictions could be imposed once again, and more stimulus could stand to exacerbate and prolong the recent bout of inflation.

Where should investors be amid such an inflationary environment?

I’d urge investors to position their portfolios in a way such that they won’t be wiped out should worse come to worst, and we’re dealt with even more unexpected inflation that could mark the end of an era. For growth-hungry young investors, that means curbing exposure to speculative and unprofitable high-growth stocks, as these are the names that will continue to feel the brunt should rates ascend over a Fed surprise or data that suggests inflation could be permanent.

Now, don’t sell all your growth stocks here, as they have the most upside if it does turn out that the Fed is right and inflation is transitory. Instead, balance your bets and ensure you’re well-diversified with the perfect blend of profitable value and unprofitable growth.

For names that will fair well in inflationary environments, consider commodity plays like oil producer Suncor Energy, best-in-breed gold miner Barrick Gold, high-rate beneficiary TD Bank, a resilient REIT, or a firm with immense pricing power like Disney. It’s these such names that can help you better weather an inflation storm that many investors may be ill-prepared for.

In terms of inflation hedges, it’s tough to match gold. Warren Buffett had ditched his shares in 2020, but I do think he has a plethora of reasons to get back in despite his prior distaste for the unproductive shiny yellow metal.

Foolish takeaway

Nobody knows if inflation will be tamed over the next year. But why not prepare yourself for the worst as you hope for the best?

Should inflation run wild, I think gold could be in for some major outperformance versus the stock market. And if you’re not ready for an inflationary environment and the prospect of much higher rates, it’s only wise to back your portfolio with gold, shares of profitable businesses with pricing power, commodity plays, and the big banks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette owns shares of TORONTO-DOMINION BANK and Walt Disney. David Gardner owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney.

More on Stocks for Beginners

calculate and analyze stock
Stocks for Beginners

Top TSX Stocks for Beginners in July 2022

Buying these top TSX stocks in July 2022 could help stock market beginners receive handsome returns on their investments in…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Should You Buy Canadian Bank Stocks After the Recent Correction?

Dividends and fairly valued Canadian bank stocks look attractive. But the macro picture could be a spoiler!

Read more »

consider the options
Stocks for Beginners

TSX Investors: These International Stocks Look Insanely Cheap

Diversification can help grow and protect your TSX stock investment portfolio. Here are two international stocks that are selling at…

Read more »

Young adult woman walking up the stairs with sun sport background
Stocks for Beginners

New Investor? Start a Portfolio With These 3 Stocks

Are you a new investor looking for a start in the stock market? Here are three stocks you should buy…

Read more »

financial freedom sign
Stocks for Beginners

5 Investing Hacks to Build a Million-Dollar Portfolio  

Its not difficult to build a million-dollar portfolio. Here are five simple investing hacks that take less than 10 minutes…

Read more »

Volatile market, stock volatility
Stocks for Beginners

3 Top TSX Stocks to Buy in Volatile Markets

Sitting on cash? Consider these three TSX stocks for the long term.

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

1 Canadian Growth Stock That Could Double Your Money in an Economic Recovery

The market downturn is an opportunity to lock growth during the economic recovery. This stock is a blend of value,…

Read more »

edit Safe pig, protect money
Stocks for Beginners

2 Safe TSX Stocks for Beginners to Buy in a Market Correction

These two TSX stocks are still solid long-term buys today, despite the recent market correction.

Read more »