It's time to take defensive action against stagflation says Purpose CIO

While the economy and equities are ticking along for now, Canada could get caught in a high inflation, low growth scenario

It's time to take defensive action against stagflation says Purpose CIO
Steve Randall

We’ve had some surprises recently and they haven’t always been bad ones, but the warning signs are there for things to take an unwanted turn says Purpose Investments’ chief investment officer.

Markets have shown both volatility but also resilience, earnings have endured rather than dipped, and the economy has batted away inflation, rate hikes, and constant murmurings of incoming recession.

But for Greg Taylor, CFA, now is not the time to be complacent or ignore a scenario that could occur if conditions stay as they are, such as weakening Canadian GDP, growing struggles for consumers, and concerns about how the housing market may be impacted.

“A slowing economy with high inflation is one of the worst scenarios for economists. It is commonly referred to as Stagflation, and if conditions persist, it is becoming closer to the expected future outcome,” wrote Taylor in a piece on the Purpose Investments website.

He also advises that having an allocation towards real assets is one of the only ways to remain defensive against the threat of stagflation.

September stumble?

Taylor believes that recent GDP stats should mean that the Bank of Canada, which paused interest rates at its September meeting, will continue to do so for the foreseeable future with expectation of beginning to cut rates in 2024.

With the autumn months often proving challenging for investors, Taylor says that there is a chance of a September stumble with central bank decisions and other data points incoming.

While the equity markets should see some benefit from increased trading volume post-summer, he warns that “investors are becoming more cautious, and bearish sentiment is growing, which could spark a bounce at any time.”

“So far, 2023 has gone much better than most feared, but it’s not over yet. If there is any window for a stumble, this is the time,” he concludes.