Earlier this year, the biggest threat investors faced was inflation. Now, the war in Eastern Europe threatens to unleash a more problematic trend: stagflation. The global economy hasn’t experienced stagflation for over four decades. That’s why it’s difficult to prepare for such a scenario. Here’s what investors need to know about preparing for such an outcome.
What is stagflation?
During periods of ordinary inflation, businesses can raise prices and employees can ask for higher wages. However, stagflation is an economic environment where high inflation meets low growth. In other words, the cost of living rises substantially while people lose jobs and wages decline or stagnate.
The rebound from the pandemic had already put inflationary pressure on the global economy. However, Russia’s invasion of Ukraine threatens the global energy, commodity, and food supply. Lower economic growth and supply shortages could induce stagflation. Most stocks and real estate suffer during such a cycle; however, some stocks tend to outperform.
Stagflation stock #1
Nutrien (TSX:NTR)(NYSE:NTR) is a top pick for investors worried about stagflation. The Saskatoon-based company provides fertilizers for the North American agricultural sector. Under normal circumstances, this service is absolutely essential. This year, it’s our only hope.
25% of the world’s grains are produced in Russia and Ukraine. Now that one country faces an invasion and another faces sanctions, supply is undoubtedly disrupted. To make matters worse, Russia is also the world’s top exporter of fertilizer. Canadian fertilizer companies Nutrien will have to plug the gap.
Nutrein stock has already tripled since 2020. Despite that surge, the stock trades at a price-to-earnings ratio of 18. As the value of fertilizers skyrockets, Nutrien stock could see further upside in 2022 and beyond. That’s what makes this stock a safe haven during stagflation.
Stagflation stock #2
Barrick Gold (TSX:ABX)(NYSE:GOLD) is another potential stagflation bet. Academic literature suggests that gold prices should skyrocket during periods of inflation or stagflation. This is because the value of currency plummets and a hard metal like gold serves as a safe haven. Gold certainly had a good run during the 1970s stagflation crisis.
However, it hasn’t taken off yet. Gold prices are up only 15.6% over the past year. That’s decent performance, but not enough to cover the risk of inflation or stagflation. Over the same period, Barrick Gold stock is up 21%. Again, that’s excellent performance but below the pace of growth in rent, oil, and food prices.
Gold could be lagging behind in this cycle. However, investors need to keep an eye on it for the months ahead to see if prices accelerate. Nevertheless, gold is performing better than most tech and growth stocks, so it could still cushion your portfolio in 2022.
Stagflation stock #3
Utility giant Fortis (TSX:FTS)(NYSE:FTS) is my favourite pick for safety. The stock sustained its value throughout the 2020 correction. Year to date, it’s flat. However, energy costs are rising, which means Fortis could see its top line expand throughout 2022.
Even before the crisis, Fortis management estimated 5-6% growth in cash flows. That means it can sustain its 49-year track record of annual dividend growth. If we face an inflationary or stagflationary crisis in 2022, this robust Dividend Aristocrat should certainly be on your radar.
