The Canadian Value Investor’s Perspective on Interest Rates, Inflation and Future Opportunities

October 16, 2023

As a Canadian investment advisor with a strong inclination towards value investing, I believe in seeking long-term investment opportunities based on the intrinsic value of assets. With recent economic developments, there have been growing concerns about the rising interest rates and inflation in Canada. Today, I’d like to share my thoughts on how these factors impact the investment landscape and what this could mean for investors.

The Current State of Interest Rates

The Bank of Canada’s gradual normalization of interest rates from their historic lows, follows the trends of other central banks globally. Is the institution done raising interest rates? Only the economy’s response to their current rates and the inflation rate can guide us in this assessment. These increases primarily are thought to be needed to keep inflation in check and stabilize our economy.

For value investors, rising interest rates can have both direct and indirect effects. Directly, higher interest rates increase the cost of borrowing, which could affect companies with significant debt. Indirectly, they could lead to a recalibration of asset valuations as the discount rate used for future cash flow evaluations rises.

Understanding Inflation

Recent statistics suggest that Canada is experiencing inflationary pressures, with the Consumer Price Index (CPI) witnessing an uptick. Several factors contribute to this, including supply chain disruptions and pent-up demand post-pandemic.

For investors, inflation is a double-edged sword. While it can erode purchasing power, it also provides an environment where certain assets, like real estate and commodities, tend to appreciate. Companies with pricing power, or those that can pass on increased costs to their customers, are better positioned in canadian and american dollar as background inflationary environments.

What This Means for Investors

  1. Re-evaluation of Bond Holdings: With rising interest rates, bond prices are expected to drop, especially those with longer maturities. Value investors may consider adjusting their fixed income portfolios to mitigate this risk.
  2. Opportunity in Interest-Sensitive Stocks: Financial institutions, particularly banks, tend to benefit from a rising interest rate environment as the spread between lending and borrowing rates widens.
  3. Commodities and Tangible Assets: In inflationary times, tangible assets like gold, silver, and even certain real estate investments can act as a hedge against the eroding power of currency. Using index or mutual funds to invest in these spaces can be less volatile than direct commodity investments.
  4. Look for Companies with Pricing Power: Firms that can adjust their product or service prices in line with inflation without losing customers are solid bets in these times.

In Conclusion

While rising interest rates and inflation can be concerning, they also present a myriad of opportunities for the discerning investor. By keeping the principles of value investing in mind and focusing on the long-term, we can navigate these challenging waters and potentially uncover some fantastic investment prospects.

Interested in a consultation on your current portfolio? Reach out to me today. And be sure to tune in monthly in 2023 for my continued thoughts on the markets, how they may change and what to expect.

Looking to make a change, want a second opinion, or looking for additional advice? Feel free to reach out to me any time by phone or email.

Author Steve McBride, Investment Advisor, Echelon Wealth Partners, looks forward to connecting with you about your future wealth management needs.

Disclaimers

This blog is solely the work of Steve McBride for the private information of his clients. Although this author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and this author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of this author alone, and they have not been approved by, and are not necessarily those of, Echelon.

Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by authors. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

The opinions expressed in this report are the opinions of this author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute this author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements. Echelon Wealth Partners Inc., its divisions, subsidiaries, and affiliates, do not provide any income tax advice and does not supervise or review any income tax returns. Please consult your accountant.

Sources:

  1. Bank of Canada’s official statements on monetary policy: www.bankofcanada.ca
  2. Statistics Canada’s monthly CPI report: www.statcan.gc.ca
  3. BMO Capital Markets report on bond valuations: www.bmocm.com
  4. CIBC World Markets research on tangible assets during inflationary periods: www.cibcwm.com