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Global economists and pundits are split into two camps, with inflation as the pivot issue.

One side, led by the Federal Reserve, sees inflationary forces as a pandemic-caused temporary phenomenon. Morgan Stanley chief Asia economist Chetan Ahya, who has been based in New York recently, is decidedly on the other side of the debate.

Mr. Ahya not only believes that rising prices are here to stay, his weekend research report The Paradigm Shift forecasts a multi-decade period of rising U.S. wages as a percentage of GDP. These wage gains would come at the expense of corporate profits.

We need to address Mr. Ahya’s scenario on two fronts: socioeconomically and market-focused. In the first case, few Americans can argue against measures to address their nation’s ludicrous wealth inequality with a straight face. The rich getting richer trend is less prevalent domestically (although the housing market is certainly not helping), but even here the prospect of broad-based wage increases would be broadly welcome.

Investors would be much less happy with a backdrop of rising wages and prices. Credit Suisse strategist Andrew Garthwaite estimates that labour makes up 65 per cent of non-financial sector corporate costs. Companies without pricing power – the ability to pass higher expenses on to consumers – will see an immediate drop in profit margins and stock prices as wages rise.

Morgan Stanley’s confidence in a paradigm shift arises primarily from politics. Mr. Ahya notes that political pressure to address U.S. economic inequality had been building for years, and “when the burden of the COVID-19 recession fell most heavily on lower income households, policy-makers were galvanized into action.”

The result was the largest fiscal support initiative since World War II and a Federal Reserve that has adjusted its mandate to ensure loose monetary reaches the lowest income Americans.

Corporations have become targets while government support for Main Street gained acceptance. Higher corporate taxes are planned and the momentum towards anti-trust legislation for dominant technology companies continues to build. Plans for minimum global corporate taxes would prevent tax arbitrage.

A decades-long bout of inflation and anti-corporate political sentiment will result in much lower broad asset market returns than investors have become accustomed to over the past 40 years of falling bond yields. Portfolio managers will have to become far more selective, emphasizing companies with pricing power and producers of real assets like commodities.

Mr. Garthwaite at Credit Suisse helpfully provided a list of 22 U.S. stocks the firm believes have pricing power to combat inflation. The selection criteria included valuations relative to the peer group, stock price volatility versus the index and profitability in terms of cash flow return on investment.

Prominent names on the list include Microsoft Corp., Johnson & Johnson, Walmart Inc., Pfizer Inc., Phillip Morris International, 3M Co., Lockheed Martin Corp., Fiserv Inc., Northrup Grumman Corp., Intercontinental Exchange, Smucker Co., Campbell Soup Co., and Graco Inc. (Full list posted to social media here)

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Diversified Royalty Corp. (DIV-T) This Vancouver-based corporation has royalty streams from six royalty partners: Mr. Lube, representing 41 per cent of total adjusted revenue in the first quarter; AIR MILES (17 per cent); Nurse Next Door Professional Homecare Services (14 per cent); Sutton Group Realty Services (12 per cent); Oxford Learning Centres (10 per cent) and Mr. Mikes Restaurants (6 per cent). Right now, the stock is locked-in a trading range with the share price moving sideways since the beginning of the year. However, investors may be rewarded for their patience in the second half of 2021. The stock has a unanimous buy call with an expected potential total return of 35 per cent, which includes the current dividend yield of 7.8 per cent. Jennifer Dowty has this profile of the stock.

The Rundown

High-flying tech stock, and a decades-old steelmaker, among new additions to TSX Composite

Stelco Holdings Inc. will return to Canada’s primary stock index nearly two decades after its predecessor company was delisted, joined by one of Canada’s hottest IPOs of the past year. S&P Dow Jones Indices, manager of the S&P/TSX Composite Index, said these will be two of four companies that will join prior to the open of trading on June 21. David Milstead reports on the latest changes being made to the Canadian benchmark stock index, including two stocks that are getting bumped off.

As the battle over bitcoin heats up, all eyes are on El Salvador

El Salvador declares bitcoin to be legal tender. Half a world away, China arrests more than 1,000 people for using the profits from crime to buy cryptocurrencies. Meanwhile, the Basel Committee, an international forum for financial regulation, suggests draconian new regulations aimed at discouraging banks from speculating in digital tokens. It has been a busy week for cryptocurrencies. As Ian McGugan reports, consider it a taste of more tumult to come.

Others (for subscribers)

The most oversold and overbought stocks on the TSX

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: Company leaders are trading these four dividend stocks

Globe Advisor

Global financial firms look to take a slice of soaring private capital industry

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Question: My 25-year-old son wants to set up a TFSA account. When we tried to do this through my financial institution, I was advised the account would only be allowed to invest in a select suite of products and they all seem to have significant management fees and so-so performance. That approach doesn’t interest us.

My wife and I have always managed our TFSA accounts. They are mostly invested in blue chip Canadian dividend paying stocks. This approach seems to have handily outperformed what the funds offered by my financial institution do, especially when management fees are considered. They say: “the rules have changed” and self-directed accounts are no longer offered. We smell a rat here. Can you recommend a financial institution where we could set up a self-directed TFSA account, so my son can get started? Thanks. – Garth L.

Answer: There are many options. MoneySense ranks Questrade as the No. 1 discount broker in Canada with low fees for stock trades and no annual charge for a TFSA account.

The Globe’s Rob Carrick gives Questrade a B+ rating in his annual review of discount brokers, calling it “a top choice for younger investors who want a fast, smart online investing experience, cheap commissions of 1 cent a share ($4.95 minimum, $9.95 maximum) and don’t mind the lack of online trading for bonds and guaranteed investment certificates”. He ranks Qtrade Investor and TD Direct Investing as his top choices, giving them both A ratings. - Gordon Pape

What’s up in the days ahead

Rob Carrick outlines an aggressive ETF portfolio for renters who want to build wealth that will put them on a roughly equal footing with homeowners building equity.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff