In an unexpected move, the Bank of Canada increased the interest rate in June to 4.75% as April inflation surged to 4.4% (4.3% in March). May inflation has fallen to 3.4%, its lowest since June 2021. Hopefully, this will encourage the Bank of Canada to pause the rate hike at the upcoming July 12 meeting.
But the slowdown in May inflation is because of reduced gasoline prices. Food inflation remains high, and the central bank wants to reduce that. It is difficult to say whether or not the central bank would increase interest rates further. While you can’t do anything about interest rates, you can prepare your investment portfolio for these rate hikes.
Stocks to invest in when interest rates keep climbing
The right stocks to buy in a high-interest environment are defensive stocks like staples, gold, and logistics, and complement them with the financial sector. Defensive stocks tend to outperform in a market downturn and financial stocks in a recovery.
Defensive stocks – Descartes Systems
Descartes Systems (TSX:DSG) is a resilient growth stock. Its supply chain management solutions help companies get trade intelligence, customs solutions, and logistics planning, both domestic and international. While Canada’s consumer demand fell, inflation surged, and rising interest rates slowed business activity, Descartes continued to report double-digit revenue growth.
The company benefits from its diversified customer base across the world. Its wide product offerings cater to trade complexities, from Brexit to the pandemic to the Russia-Ukraine war-led supply chain disruption. Descartes’ stock fell in the tech stock sell-off in the first half of 2022. But it was also the first to return to its pandemic peak of around $110 in April.
Industry experts expect a recession sooner or later because of the inverted yield curve. The short-term interest rates are higher than long-term rates, hinting at lower confidence in future growth. If the anticipated recession does materialize, Descartes’ stock will fall in the short term as investors panic. But it will be among the first to recover due to its diversified growth.
Even if you buy the stock above $100, it is on a long-term growth trajectory and could enjoy double-digit growth. Those who brought the stock near its 2020 peak of $75 enjoyed a 33% upside in three years.
Defensive stocks – Rogers Sugar
Another defensive stock is a consumer staple that people consume even in a recession. Rogers Sugar (TSX:RSI) is among Canada’s largest sugar companies. Sugar is a commodity, and sugar stocks are affected by global sugar prices as demand is stable. As I noted at the start of the article, food inflation continues to remain high, which benefits Rogers Sugar.
The stock dipped 8.4% since May as inflation eased. Now is a good time to buy the stock as it is not too volatile. Plus, you can lock in a 6% dividend yield. While Rogers has cut dividends in the past, it is unlikely to do so soon. Investing your money in this stock will protect your portfolio from the downside while giving dividends even in a recession.
The finance stock to buy
While Descartes’ resilience and Rogers Sugar’s low volatility can preserve your portfolio, Power Corporation of Canada (TSX:POW) can give you growing dividends. The financial sector grows in the early stages of rising interest rates. But when the rate hike starts increasing credit risk, bank stocks fall. Amid a liquidity crunch, a financial services holding company like Power Corporation of Canada gives you a contrarian edge.
A holding company earns money from dividends paid by its subsidiaries. It does not face operational risk but it has exposure to investment risk. POW reduces this risk with its diversified holdings in three contrarian companies – life insurance, wealth management, and private equity and real estate – that operate in the United States, Europe, and Canada.
Diversification helps POW reduce risk and sustain its dividend payments. That explains why POW did not slash dividends despite being badly hit by the 2008 Financial Crisis.