As investors continue to worry about rising inflation during the Covid-19 recovery, it’s time to view equities through an inflation-protection lens, a CIBC portfolio manager says.
“I would argue that stocks are one of the best ways to protect portfolios against inflation, specifically companies that can offer inflation protection,” said Craig Jerusalim, senior portfolio manager at CIBC Asset Management, in an interview last month.
“Given the relative positive fundamental backdrop of strong GDP growth, rapidly improving employment trends and demand outstripping supply,” he said, investors should be thinking about higher interest rates — and particularly their negative effect on growth stocks trading at high multiples.
Jerusalim, who manages the CIBC Dividend Growth Fund, likes the big Canadian banks, Brookfield Asset Management and Telus Communications Inc. as stocks that will hold up in an inflationary environment.
Strong demand for Telus’s telecom services allows the company to increase prices and pass higher costs on to consumers, he said. Telus has high corporate leverage after spending big on a recent spectrum auction. But it can offset that debt through its health and agriculture businesses, or by selling real estate assets, he said.
In its wireless business, roaming and overage charges have recovered after dropping during the pandemic, Jerusalim said. And on the wireline side, Telus’s biggest competitor, Rogers Communications Inc., is distracted with its acquisition of Shaw Communications Inc., he said, giving Telus a competitive advantage.
“With Telus you get it all: you get growth, stability and the yield,” said Jerusalim.
Brookfield Asset Management, as the owner of real assets, has built-in inflation escalation in their pricing, he said. While there are a lot of moving pieces with the company — including spinning out its reinsurance business and the purchase of American National Group — they all have a similar theme: “Alternatives and real asset valuations benefit from low interest rates and improving economic growth.”
As Brookfield’s public subsidiaries for infrastructure, renewables, private equity and insurance grow, the fundraising accelerates and “the fees accrued by the parents begin to snowball,” Jerusalim said.
“What sets Brookfield Asset Management apart is their global reach, ability to operate assets and the propensity to invest in regions where capital is scarce and others don’t see the valuation that they see,” he added.
Finally, Canadian banks had a conservative outlook at the onset of Covid-19, setting aside billions for loan-loss provisions, but they’re set to benefit from the release of those reserves.
“The banks are very well capitalized, with excess capital levels well above regulatory minimum levels, as well as any self-imposed buffers,” Jerusalim said.
Once the Office of the Superintendent of Financial Institutions lifts a dividend moratorium imposed early in the pandemic, dividend payouts could increase anywhere from 5% to 25%, he said.
In addition, with the mortgage growth that fuelled 2021 results, Jerusalim expects a pickup in commercial loan growth to drive results in 2022.
All of these factors point to “a very attractive risk-reward profile, in our opinion,” he said.
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