How to Invest During Stagflation
Canadian investors are facing increasing uncertainty, and as they look to mitigate risk and hedge against inflationary pressures, it’s becoming tricky to find the right strategies. Speaking with the Investing News Network (INN), Stephen Johnston, director at asset management firm Omnigence, explained how Canadians have gotten into this especially precarious position.
“Canada has very stagflationary macro conditions, which historically haven’t been good for inflation-adjusted returns for public equities,” he said. Stagflation refers to slow economic growth and high inflation, and Johnston noted that in real, inflation-adjusted terms, GDP per capita is stagnant or even declining right now.
In Canada, these conditions began post-pandemic and have been heightening since. “They’ve sort of surfaced in the last three years, and I think they’re going to be very sticky, they’re going to be hard to fix,” Johnston told INN. Added to those conditions is ongoing geopolitical strife with the US as well as China, with both countries levying a wide variety of tariffs on imports of Canadian products, from soy to steel.
“Tariffs are just going to exacerbate Canada’s stagflation problem. They’re going to weaken the Canadian dollar, drive up inflation and they’re of course going to negatively impact the Canadian economy,” Johnston said. “Those are classic inflationary effects,” he added. “And when you layer those on top of what are already stagflationary conditions in the Canadian market, that’s not a very promising set of conditions for public equity returns.”
Canada’s GDP contracted by 1.4 percent in 2024, marking the second year in a row where it shrunk by over 1.2 percent. Contributing factors were declining labor productivity, a struggling housing market and trade disruptions.
Investors were probably willfully ignoring the stagflation risk, with hope it would go away, or dissipate or gradually improve. But I think now the tariffs have just made it unambiguous.
Investors need to start now looking at their portfolio and saying, “I need to have things in there that generate returns, (that) are effectively short growth and long inflation.” They will flourish in this stagflationary world.
In a stagflationary environment, Johnston suggests investors ask themselves if their investments are long growth and short inflation, and if the investments rely on robust middle-class demand.
“Because in a stagflation world, the middle class comes under a lot of pressure,” he said. “During stagflation, you see a big contraction in people who are in the middle cohort of incomes, and you tend to see the very wealthy and very poor grow in size.”
So which investments are short growth, long inflation? Johnston shared three investments that fit within that strategy.
1. Farmland provides greener pastures
“An example of something that is short growth, long inflation is farmland. Farmland is short growth because people don’t change their dietary behavior,” Johnston said. “They don’t change their (food) consumption during a recession.”
Farmland is also a real, non-depreciating asset that can hedge inflation, as shown by past performance. “In the 1970s, farmland went up 400 percent during the stagflation,” the expert continued. “It beat inflation by 275 percent in real terms — it outperformed by a long shot, by an order of six or seven times public equities, bonds and commercial real estate.”
2. The long automotive value chain
The electric vehicle (EV) market has been a top investment segment for the last five years as investors look to secure profits up and down the EV supply chain. As outlined by the International Energy Association, one in five cars sold in 2023 was an EV, and the market share for EVs is forecast to grow over the next decade.
3. Opportunity in mandatory services
The last investment area Johnston suggested is environmental services. As he explained in conversation with INN, the environmental services sector has shown strong, consistent growth, often outpacing GDP by two to three times over the past 10 to 15 years.
Ultimately, as inflation persists, investors may benefit from shifting focus toward industries like farmland, automotive maintenance, and environmental services, which thrive in different economic conditions.
