1 Canadian stock to buy if you fear stagflation
Image source: Getty Images
The risks of stagflation seem to be increasing day by day, with the Ukrainian-Russian crisis and the ongoing COVID pandemic, which could severely exacerbate the levels of inflation we have witnessed. Indeed, rate hikes by central banks such as the Bank of Canada (BoC) or the US Federal Reserve still seem relevant despite the recent geopolitical turmoil. Undoubtedly, such rate hikes could dampen economic growth, with some fearing we could plunge into a recession. Indeed, the flattening of the US yield curve does not look pretty right now.
If it reverses (chances are it will at some point over the next few months), the timer is on for a possible economic recession. Arguably, the uncertainties are greater today than they were around two years ago, when COVID hit the markets, sending them into a sharp tumble. Today, the latest worrying COVID variant, Omicron, appears to be declining. But could it be that a new variant is waiting just around the corner? It’s hard to say. Either way, investors are entitled to adopt a more risk-oriented mindset, but shouldn’t be looking to panic sell at this stage after an already brutal correction to kick off the year.
Stagflation: a growing possibility
Now stagflation is hard to call. It includes persistently high levels of inflation (it looks like we’re getting that) and weak economic growth. With fears of a coming recession, it looks like the 1970s style of stagflation could be making a comeback in broader equity markets.
With the Fed and BoC likely to play by ear, seeking to strike a balance between controlling inflation and keeping jobs and the economy stable, Canada is unlikely to or the United States is thrown into a severe economic downturn. Although the yield curve may indicate this, I don’t think investors should bet on a recession. That said, there is always a chance that the crisis between Ukraine and Russia will escalate, dragging the global economy into some contraction in global economic growth. So, in short, stagflation is a possibility, but the most likely outcome.
For investors looking to prepare for a potential environment of high inflation and low growth, there are many intriguing options. Above all, grocer at the top Loblaw (TSX:L) looks poised to continue to outperform, even as the economy stumbles, with rampant inflation.
Loblaw has done an excellent job of dodging and circumventing past inflation over the past few years. The company found a way to thrive in an industry with very thin margins. Indeed, consumer staples are well-prepared to do well as the economy takes another hit. Recession or not, groceries are a necessity, and Loblaw is arguably one of the top value-conscious choices for Canadians. The company can absorb some of the inflation hit while stealthily passing on some cost increases to consumers. In addition, Loblaw has done an excellent job of improving operational efficiency. Such improvements could last long after these difficult times are over.
While L stock is hitting new highs at nearly $115 per share, the stock is still cheap, at just 21 times earnings. For a high-quality commodity that does a lot of things right, Loblaw is a great place to build wealth in an inflationary environment that could see growth plummet.