Brace for Stagflation if Oil Hits US$200

Investors need to prepare for stagflation, the worst type of inflationary period, if oil prices hit US$200 per barrel.

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The specter of a stagflation is here following oil’s biggest daily swing early this week. Alarm bells are ringing globally, as traders expect crude prices to rise to US$200 per barrel or above soon. JPMorgan Chase & Co. sees Brent crude to sell at US$185 by year-end if be disruptions of Russian oil supplies continue.

Stagflation is worse because, besides an inflationary environment, economic growth would be slow, if not stagnant. A third factor that could compound the situation is high unemployment rate. In Canada, the unemployment rate rose from 5.9% in December 2021 to 6.5% in January 2022, before the armed conflict in Eastern Europe.

A severe market correction is possible due to accelerating inflation. For investors, preparation is key to navigate stagflation risks. It would be best to have Royal Bank of Canada (TSX:RY)(NYSE:RY) and Fortis (TSX:FTS)(NYSE:FTS) as anchor stocks.

Ready for any uncertainty

RBC has been a steady performer since the start of 2022. At $136.30 per share, the big bank stock is up 2.38% versus the TSX’s year-to-date gain of 0.38%. Given the 39.06% payout ratio, the 3.47% dividend should be safe and sustainable. Canada’s largest bank and most valuable publicly listed company is the perfect anchor in times of uncertainty.

The $193 billion ended fiscal 2021 with a dividend hike (11%) and share-buyback ($5.68 billion) announcement in fiscal 2022. In Q1 fiscal 2022 (quarter ended January 31, 2022), net earnings grew 6% to $4.1 billion versus Q1 fiscal 2021. According to RBC’s president and CEO David McKay, it was the bank’s second-highest growth on record. He added that it underscores the strength and scale of RBC’s franchises.

After the Bank of Canada increased its key interest rate to 0.5% effective March 2, 2022, RBC raised its prime lending rate by 25 basis points to 2.7%. With the increase in short-term interest rates, its CFO, Nadine Ahn, expect RBC’s Canadian Banking and U.S. Wealth Management businesses to generate more than $175 million in additional revenues over 12 months.

RBC’s chief risk officer Graeme Hepworth said the bank can manage through any uncertainty because of its prudent risk-management approach and the quality of its client base. Note, too, that the bank stock’s dividend track record is 152 years.

Best defensive asset

Risk-averse stock market investors turn to Fortis when the going gets tough. TSX’s top-tier utility stock is the asset to own if you need a hedge against inflation. The $29.05 billion regulated electric and gas utility company is on track to achieve Dividend King status in 2023. Its dividend-growth streak is now 49 consecutive years.

In 2021, net earnings increased 1.8% to $1.23 billion versus 2020. The bulk of its $3.6 billion capital expenditures for the year went to resiliency, modernization, and sustainable energy projects. About $600 million was spent on cleaner energy investments.

With a $20 billion five-year capital plan (2022 to 2026), Fortis expects its rate base to be $41.6 billion by 26%. Because of the projected 6% five-year compound annual growth rate, management targets a 6% average annual dividend growth through 2025. If you invest today, the share price and dividend yield are $61.18 and 3.5%, respectively.

Protection against stagflation

The present economic conditions could lead to stagflation. Investors need protection against the worst type of inflationary period.

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.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.

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