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Credit Suisse’s prominent global equity strategist Andrew Garthwaite is forecasting significant inflation pressure in the midterm, setting up a potential financial disaster for retired Canadian investors and those who thought they were close to retirement.

Mr. Garthwaite’s thesis is plausible (I posted a research report excerpt on social media here). At base, he believes central banks will allow annual inflation to run higher, to about 3 per cent in the U.S., until employment levels approach pre-pandemic levels. He also notes that Democratic presidential candidate Joe Biden plans to increase the U.S. minimum wage significantly higher. Furthermore, the de-globalization process – the onshoring of manufacturing facilities previously done in the developing world- will push consumer goods prices higher.

Inflation is terrible for savings and investments. As the prices of goods climbs, the spending power of existing savings declines. Money runs out sooner.

In investing terms, the higher bond yields associated with inflation push the prices of dividend-bearing equities lower. Investors in utilities and REITs, for example, will still get the income they expected. But, the stock prices and net asset values of the underlying companies will decline as portfolio managers sell them in favour of rising risk-free government bond yields.

There are other strategists, like Morgan Stanley’s Michael Wilson, who are also expecting inflation pressures. The Financial Times’ (free to read with registration) Alphaville site also commissioned U.K. portfolio managers Teun Draaisma and Ben Funnell to write “Inflation is Coming,” complete with Game of Thrones metaphors.

For now, I remain unconvinced of the inflation arguments. Chronically weak consumer demand in the developed world, caused in large part by economic inequality, has been a feature for the global economy for many years and is likely to keep inflation in check.

I am inclined to expect a pseudo-Japanese, demographics-related scenario where demand and prices remain low for the long term. Scotiabank strategist Hugo Ste-Marie‘s forecast for North American bond yields is ‘lower forever’. He writes, “U.S. 10-year yields’ muted reaction to the re-opening phase contrasts with the equity market … We believe bond yields are hostage to secular forces.”

Mr. Garthwaite’s argument is too solid to completely ignore. Defensively positioned Canadian investors should remain vigilant regarding rising bond yields and prices. It’s too soon to prepare now, but the time may come when investors will need to switch to inflation fighting asset classes like raw materials and gold, in what would represent an uncomfortably major change from the successful investing strategies of the past decades.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Goodfood Market Corp. (FOOD-T) This growth stock has rallied 79 per cent so far this year and could be set for a volatile week with its earnings being revealed this Wednesday. Quebec-based Goodfood produces and delivers fresh meals kits and grocery items purchased on its website from one of its six facilities located across the country. Seven of eight analysts rate the stock as a buy, and the company has a number of tail winds at its back. Jennifer Dowty has a profile of the stock. (for subscribers)

Shopify Inc. (SHOP-T) The white-hot run of Shopify shares has widened the company’s lead over Royal Bank of Canada for the title of the country’s most valuable company – and added billions to founder Tobias Lutke’s net worth, moving him closer to becoming the richest Canadian. Shopify Inc. was the best-performing stock on the S&P/TSX Composite Index in the first half of the year as investors came to believe that COVID-19 will damage many legacy retailers and make e-commerce supreme. David Milstead reports. (for subscribers)

The Rundown

Top Canadian biotech investor on the firms most likely to turn COVID-19 drug trials into treatments and when a vaccine may arrive

The global pandemic has sparked a gold rush in the health-care and biotech sector, as companies of all sizes scramble to bring COVID-19 treatments to the market at breakneck speed. Along with those companies pursuing legitimate lines of medical research, less-credible actors saw an opportunity to profit from the flood of investor money into the space. Brian Bloom, chief executive of Bloom Burton, a Toronto investment banking firm specializing in health-care companies, spoke to The Globe and Mail about the role of Canadian health care in the race for a cure and where investment opportunities may reside. (for subscribers)

Also see: Biotech blind spot: How Canada’s big investors missed the boom happening right now

What BlackRock’s chief strategist for Canada is predicting for the second half of 2020 - and how investors should prepare for it

A quick summary of some dominant investing trends of the past decade: Low inflation, strong bond returns and the dominance of U.S. stocks. The 2020 midyear outlook from the global investment firm BlackRock suggests the coronavirus will drive changes in each of these areas and more in the months and years ahead. To find out more about how investors should adjust their portfolios as we work through the effects of the pandemic, Rob Carrick spoke with Kurt Reiman, BlackRock’s chief investment strategist for Canada. (for subscribers)

Is it the end of bonds as ballast?

The days of using safe bonds as ballast for equity-heavy investment portfolios may now be numbered for many investors – although what replaces them is a much more complicated business. As asset managers take stock at midyear of a shocking redrawing of the investment map in 2020, one of the biggest question marks lies over the traditional role of government bonds in mixed-asset portfolios as a hedge against future equity slumps. Mike Dolan of Reuters reports. (for subscribers)

Others (for subscribers)

The highest yielding stocks on the TSX, plus risk data

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: One of Canada’s richest people invests a further $3-million in this dividend stock

Ask Globe Investor

Question: I recently gifted stocks, which had a market value below my cost price, to three of my four adult children. I planned to use the loss to offset capital gains I had last year, or to offset future gains. The fourth child chose not to receive the shares, so I sold the same number of shares that the others received, again generating a capital loss, and I paid him the cash.

When I told my accountant what I had done, she said that by giving the shares to the three children I could not use that loss for tax purposes, but I could do so where the stocks were sold and cash given to my son. However, my broker disagreed and said I could use the entire loss for tax purposes. Who’s right?

Answer: Your broker is correct. When you transfer securities to an adult child, in the eyes of the Canada Revenue Agency you are considered to have disposed of the shares. For tax purposes, it’s the same as if you had sold the shares at their market value at the time of the transfer.

If you have capital gains in the current year, you must first use the capital loss to offset those gains. Any remaining losses may be carried back up to three years or forward indefinitely to offset gains in those years.

It seems your accountant may have been confusing the gifting of stocks to your adult children with a “superficial loss.” A superficial loss occurs when you dispose of securities at a loss and you or a person affiliated with you purchases the same securities within 30 calendar days before or after the sale (and continues to hold them 30 days after the sale). According to the CRA, an affiliated person includes a spouse or common-law partner, for example, or a corporation controlled by you or your spouse.

If you transferred the losing shares to your spouse and elected to do so at their fair market value, this would also be considered a superficial loss because your spouse is an affiliated person. However, under CRA rules “the writer’s adult children are not affiliated persons,” said Dorothy Kelt of The capital loss is therefore allowed, she said.

--John Heinzl

What’s up in the days ahead

Scott Barlow looks at the strong stock market rally that has co-existed in recent months with Depression-like economic data - and finds clues on whether these trends can continue.

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

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Compiled by Globe Investor Staff

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