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The stock market has corrected and is heading towards stagflation and a looming recession. Moreover, geopolitical tensions between Russia and Ukraine and China and Taiwan have created global supply disruption. The macroeconomic environment is driving stock prices more than company fundamentals.
Canadian stocks that could benefit from stagflation
Stagflation is a situation where the economy stagnates because of rising inflation. The rising prices crumple consumer demand and discourage buying of goods and services that are non-discretionary. The only way to fight stagflation is to increase interest rates and encourage savings. As demand falls, it puts downward pressure on inflation, improving the value of money.
But this whole economic cycle of stagflation, recession, and recovery could take years. So, you need stocks in your portfolio that can thrive in all market cycles. I have identified two stocks that are less volatile than the market and perform in stagflation, recession, and recovery environments.
Energy and food are expenses whose prices drive inflation to unacceptable levels. Within energy, oil and gas prices are volatile, as geopolitical conflicts in oil-rich countries cause supply disruption. But pipeline stocks are not significantly affected by oil and gas prices and still benefit from the supply crunch, as pipelines run at full capacity.
TC Energy (TSX:TRP)(NYSE:TRP) is one such pipeline stock. It fell during the pandemic when U.S. president Joe Biden rejected its Keystone XL pipeline project. But it surged as the natural gas shortage was aggravated amid the Russia-Ukraine war.
Its 670-kilometre Coastal GasLink project will open up global liquefied natural gas (LNG) markets for Canada. The European natural gas crisis arising from reduced imports of Russian gas has sent Europe looking for long-term LNG supply agreements. The Coastal GasLink project could make Canada an LNG supplier for Europe and lead the way for more such projects.
TC Energy stock has lower volatility than the market, because it is cushioned from energy prices. Most economic events don’t impact oil and gas demand to the level that it dries up pipelines. While the TSX Composite index is down 7.8% year to date, TC Energy stock is up 5%, as inflation positively impacts oil and gas prices and other energy stocks. When a recession reduces energy demand, you can buy the stock at a lower price and lock in a higher dividend yield.
While TC Energy benefits from inflation, telecom stocks are less affected by inflation. Telecom companies pass on higher costs to customers. Consumers do not give away their broadband and network subscriptions in a recession due to their growing dependence on the internet for almost everything. Canada’s largest telecom operator BCE (TSX:BCE)(NYSE:BCE) benefits from more subscriptions.
A looming recession won’t affect BCE’s 5G subscriptions that command a higher price. The stock has shown a lower correlation with the market risk, making it an all-season stock. Moreover, the telecom sector is an oligopoly market with three companies having a controlling market share. That ensures BCE is too big to fail. When the stock falls, it is a good time to buy it and lock in a higher dividend yield of over 5.5%.
Make your portfolio stagflation ready
To fight stagflation, you need stable stocks that are less prone to economic stagnation. At the same time, you need stocks that benefit from inflation, as they are not worried about demand.
The above two stocks are less volatile, so they won’t give you capital appreciation in a growing economy. They might underperform growth stocks. But they outperform in a weak economy. In sports, you sometimes have to play defence instead of attacking to win the game. Similarly, create your investment strategy of attack or defence by looking at the market environment.