Money manager Craig Jerusalim isn’t waiting to find out if the recent spike in inflation will prove to be temporary or lasting. What matters most, he says, is whether investors start to worry about a long stretch of higher prices.
The U.S. consumer price index jumped 5.4 per cent in July versus a year earlier, the Labour Department reported Wednesday, adding to recent big price gains in the United States and Canada. Still, a debate continues about whether inflation will moderate in the months ahead, or prove to be a longer-term problem.
“The psychology aspect of it is that, as inflation heats up, even if it is transitory, people might not believe it and it could spook markets from a valuation perspective,” says Mr. Jerusalim, a senior portfolio manager with CIBC Asset Management in Toronto, who focuses on Canadian equities.
That’s why he’s making some shifts in his portfolios away from high-growth stocks and toward those he believes will benefit from rising inflation, regardless of how long it lasts.
“I’m shying away from some of the expensive growth companies that have typically found their way into my growthier portfolios and overweighting the higher quality, more modest growth companies that are trading at more reasonable valuations,” he says.
Mr. Jerusalim manages about $5.5-billion in assets including three main funds; The Renaissance Canadian Dividend Fund, the CIBC Dividend Growth Fund and the Renaissance Canadian Growth Fund. The funds have each returned between 29 and 31 per cent, after fees, over the past year, as of July 31.
He believes stocks in general are a good way for investors to defend their portfolios against rising inflation. Here are some of his picks:
Telus Corp. (T-T)
Telecommunication companies can be good plays in a rising inflation environment because of their ability to pass on higher prices to consumers. Plus, they provide services Canadians increasingly depend on, such as wireless and internet.
Mr. Jerusalim likes Telus in particular, for its high customer retention levels and strong growth prospects. “Telus is the highest-quality player with the lowest churn and probably the highest growth avenue out of all the incumbents,” he says.
He also points to the company’s diversification into other growing sectors, such as Telus International – the digital customer experience and IT business that recently went public – as well as the Telus Health digital health care segment and Telus Agriculture, which uses data and technology to boost crop yields.
The risk for Telus is increased regulation, but Mr. Jerusalim believes that could be less of an issue in the future as Canadians increasingly rely on technology at work and at home.
Brookfield Asset Management Inc. (BAM.A-T)
Brookfield’s diverse assets make it a good bet in a rising price environment as well as a market where investors are looking for alternative assets, Mr. Jerusalim says. Brookfield’s assets are benefiting from the low-interest-rate environment and improving economic growth coming out of the pandemic.
“That is about as perfect a backdrop for an asset manager that owns and operates real assets – everything from toll roads and bridges to rail networks and renewable sources of [power] generation around the globe – as well as private equity and real estate,” he says.
“As its subsidiaries grow, as its assets under management grow, the fees are all accrued by the parent, Brookfield Asset Management,” he adds.
As for risks, since Brookfield is well diversified globally, it’s susceptible to a slowdown in global GDP, especially if interest rates rise too quickly. However, he believes Brookfield can still outperform its peers in that type of scenario.
Canadian Banks
Working for a large Canadian bank puts Mr. Jerusalim in a conflict when recommending them, but he believes it’s hard to ignore how they are expected to benefit in a rising inflationary environment, and from higher fees for their services.
Of the Big Six banks, his top picks are Royal Bank of Canada (RY-T), Canadian Imperial Bank of Commerce (CM-T) and National Bank of Canada (NA-T), for different reasons. He says RBC is the “clear leader” given its size and strong brand, which he says justifies its premium valuation, while National Bank has been a “consistent grower” that has exceeded its peers “and I expect that to continue.” His bank, CIBC, has traded at a discount in recent years because of “tactical mistakes, growing too fast or too slow” in international markets, he says. “But now the stars have aligned and things are working,” he says, which means the discount it has traded at relative to its peers should start to narrow.
“But there’s, there’s nothing wrong with any of the Big Six banks,” he adds. “All are very well capitalized with excess capital well above the regulatory minimum levels, as well as any self-imposed buffers that they put on themselves,” he says.
Also, the banks are expected to boost their dividends once the Office of the Superintendent of Financial Institutions lifts restrictions placed on them last year amid the economic crash.
While Canadians’ debt levels are rising, he doesn’t see it becoming a major issue for the banks. “I do think that interest rates will likely begin to move higher sometime next year; however, I don’t anticipate that it’s going to be very quick or sharp … so it’ll be manageable for Canadians to adjust.”
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