Adding inflation protection to your portfolio

Inflation is a subject on everyone’s mind as the Trump Administration wrecking ball paralyzes global trade.

The price of some goods, including food  has already started to rise. What’s next? How high will inflation go? How long will it last? And what can you do about it?  

The larger impact is probably three to six months away as companies run down inventories and reorder with tariffs added. Statistics Canada says core inflation measures heated up in April including the cost of groceries, even though the overall rate eased somewhat to 1.7%. This was because of the one-time impact of the removal of the carbon tax.

 Loblaw (TSX:L) says higher prices for canned food and health and beauty products are on the way. Metro (TSX:MRU) likewise. Walmart Canada and its parent (NYSE:WMT) have warned about price increases for several home goods categories. You can add Best Buy, Ford and Ralph Lauren to a lengthening list. Amazon says up to 70% of its products come from China and CEO Andy Jassy said sellers on the platform would likely react to tariffs by raising prices.

For some perspective on inflationary pressures, I spoke to Elliot Johnson, chief investment officer at Evolve ETFs in Toronto. He thinks higher inflation is on the way and sectors that offer some protection include those selling essential goods and services, like utilities, groceries, healthcare, and consumer staples. They are always in demand and can pass along their higher costs. Commodities as well, including energy and gold. Evolve, which markets a number of  cryptocurrency funds, favours digital currencies such as  Bitcoin “as gold for the digital age.”

Here’s a condensed version of the conversation:

Are we entering an era of higher inflation?

 Yes, for a few reasons. The first is there’s too much debt to GDP in the developed world. Last year, the US spent more on interest on their debt than they spent on defence. Interest payments   were more than the income tax paid by individuals, which is something like a third of the total. Inflation is the only way you get the debt down [in real terms.]

The other inflationary pressure is tariffs, though that impact is a question mark because it depends on whether businesses pass along the costs or not.

What should investors do?

Invest in things you need. Food, electricity, nondiscretionary things like utilities. You have to eat and you have to heat your home. Sit down and think about the places where you can’t stop spending money. 

Then build out your broader portfolio. Commodity producers are great. So are materials and mining. We think energy. You’re probably overweight tech in some areas. 

You need a significant allocation to a hard monetary asset. Many people like gold, which is at an all-time high.  We prefer Bitcoin.

 Why is that?

Bitcoin offers advantages that make it more suited to the digital age. While both are scarce, durable, and globally recognized stores of value, Bitcoin is fundamentally more efficient. It is easier to store securely, transfer across borders, divide into smaller units. You can verify its authenticity instantly. In many ways, Bitcoin represents an upgrade to gold: a modern, programmable store of value built for today’s connected world.

We offer five cryptocurrency-related funds, with our flagship product being the Evolve Bitcoin ETF (TSX: EBIT), launched in 2021. EBIT invests in physical Bitcoin to provide an easy way to hold it in a brokerage account. It is easily accessible through brokerage accounts and is eligible for registered plans such as TFSAs and RRSPs.

Are crypto currencies safe?

The key reason investors can trust Bitcoin is it is fundamentally different than any other asset. It is a bearer asset, you don’t have any counterparty risk. It is secured by cryptography, not authority. It is transparent, anyone can verify the transactions and address balances in the blockchain. Yet you won’t know who owns which balances unless they verify their identity cryptographically for you. 

Traditional assets fail these tests. The world has never seen anything like Bitcoin. 

What else is attractive in an inflationary environment?
Financials should do well, because net interest margins should expand.  

Real estate?

Yes, but the challenge is that it’s affected by interest rates and we’re not clear on where that goes. Corporate real estate is struggling from the lockdown and the hybrid work environment. Residential real estate is struggling from interest rates.

What will do less well? 

We think tech stocks are going to suffer. But there’s a nuance to this. Technology continues to be the biggest story in investing. Every day you’ve got a new invention. AI is its current trend.

But there are many semiconductor companies that are not Nvidia. Other examples are  cybersecurity, software as service and streaming companies?

What about bonds and fixed income?

Stick with credit quality. We like US government bonds, if you’re going to be in fixed income. We’ve got long bonds, 20 year treasuries in our funds.

Do you have a summary comment?

Be careful not to get whipsawed by the news. Announcements from the Trump Administration are going to cause market volatility. Think longer term. Don’t get scared out of the equity market. That would be a mistake.