Canadian investors are facing increasing uncertainty, and as theylook to mitigate risk and hedge against inflationary pressures, it’s becoming tricky to find the right strategies.
“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.
“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.”
How to invest during stagflation
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.
In 2022 and 2023, nationwide productivity saw six consecutive quarters of decline, which hindered economic growth, while housing affordability challenges persisted, with prices surging far beyond income growth.
Meanwhile, US tariffs implemented this month have further strained exports, contributing to an estimated 2.5 to 3 percent GDP decline. Combined, these factors have weakened the country’s economic momentum.
“In effect, the tariffs are like the straw that broke the camel’s back,” Johnston explained.
“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.”
Amid the widespread volatility, Johnston recommends investors “arm” themselves through a series of questions.
“The average investor in the last 20 years has effectively been long middle-class demand, long growth and short inflation,” he said. This strategy aids portfolio growth if there is no inflation and middle-class demand remains robust; however, that is not the current market landscape.
“They 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,” said Johnston.
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.’
Canada houses nearly 65 million hectares of farmland and is the fifth largest agricultural exporter globally. The nation is also the top producer of potash, a key ingredient for soil health and crop growth.
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.
In fact, since 2019, EV-related stocks — including automakers, battery manufacturers and battery metals companies — have outpaced broader markets and traditional carmakers. Between 2019 and 2023, these companies saw higher relative returns on investment, with the market capitalization of pure-play EV makers surging from US$100 billion in 2020 to US$1 trillion by the end of 2023, peaking at US$1.6 trillion in 2021.
Battery manufacturers and battery metal companies also experienced significant growth over the same period.
Now, with 100 percent tariffs on Chinese-made EVs and the North American economy in disarray, Johnston suggests looking elsewhere in the automotive value chain for investment opportunities
‘But during stagflation, you don’t want to be invested in the auto sector, because you tend to find the demand for cars is stagnant, or even contracts. So you’re better off investing in automotive maintenance.’
He explained that investing in automotive maintenance can be a strong strategy during stagflationary times, as demand for repairs rises when people keep their cars longer. While maintenance growth aligns with the economy in normal economic conditions, during stagflation it outpaces GDP growth. As vehicle lifespans extend, the need for repairs increases, making the sector resilient even in periods of weak growth and high inflation.
Today, the automotive services and maintenance service sector could benefit from US President Donald Trump’s plans to re-industralize America’s economy, amid threats to shut down Canada’s auto sector. This move could prove disastrous for Ontario and Québec, two provinces that serve as North American manufacturing hubs.
“(The US) is going to pull the automotive sector out of Canada — to the extent that they can — and of course we’ll be buying cars from US producers with a weak currency. So the price of cars in Canadian dollar terms will go up. That’ll also force out the period of time that people own their existing cars,” he said.
‘That’s terrible for Canada, but it’s good for that particular (maintenance) industry.”
3. Opportunity in mandatory services
The last investment area Johnston suggested is environmental services.
Unlike other industries, the environmental services sector’s expansion is being driven by regulatory changes rather than economic conditions, making it highly resilient to recessions and inflation.
“The pricing of these services tends to increase rapidly in inflationary times, because these are non-discretionary services,” he said. “If the regulation is there, you have to comply. You have to buy the services.”
Demand remains steady since businesses must comply with environmental regulations, giving companies in the sector strong pricing power.
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.
Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.