In any market, there are opportunities for investors to exploit. An inflationary environment is no different, said Colum McKinley, senior portfolio manager with CIBC Asset Management.
Rising interest rates will reverse some of the stimulus that was pumped into the economy during the pandemic, basically taking “the medicine away from the patient,” he said. The result? Slower economic growth.
What makes this cycle unique and interesting to watch, McKinley said, is the exceptionally low unemployment levels and consumers’ pent-up demand to spend.
“This is creating significant changes for businesses, and it creates uncertainty for investors — and that creates volatility in the marketplace, and ultimately leads us to opportunities,” he said.
In an inflationary environment, he said investors need to look for companies that have pricing power. Fixed-cost businesses like the Canadian railroads that can reprice their products on an ongoing basis are able to remain profitable.
Over the past 10 years, Canadian Pacific Railway and Canadian National Railway Company have consistently raised their prices. The physical footprint of their business spans North American, so they are able to raise prices as they improve service and delivery times for their customers.
Railroad companies are also incredibly profitable, he said. Both CP and CN generate net margins of about 25% to 30% — well in excess of the average company. In an environment where companies foresee price increases that could challenge profitability, the railways are starting from a high level of profitability and will continue to generate strong cash flow.
“Both the rails are well positioned to continue to prosper in the coming economic period,” McKinley said.
However, there is still a lot of uncertainty for Canadian equities. For example, McKinley said auto parts manufacturer Magna International Inc. has seen its stock pressured by a number of factors, including supply chain issues and the war in Ukraine.
But McKinley said these factors are transitory. And because Magna is a well-managed company with very low debt, he said they have become a go-to supplier for auto companies looking for the best products. Therefore, the stock is incredibly mispriced and provides an opportunity for investors, he said.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.