Some of you may have noticed that we have a new team member. Ryan King has replaced Linh. He can be reached at 613-566-4625 or ryan.a.king@rbc.com. Ryan originally hails from Northern Ireland.
This week, we have a guest piece from Matthew Newby, an investment advisor on my team:
Prices are going up!
Many of you may notice the prices of goods and services going up as you look at your monthly expenses and as you begin to venture into the re-opening retail environment. These higher prices are in effect lowering the value of your dollar; it decreases the amount of purchasing power of each and every dollar you own. Highest and most noticeable among the price increases are some necessities that you cannot avoid: heating your home, driving your car, and feeding your family.
In a report released by RBC economics, the rate of inflation in Canada rose by 4.4% YOY (3.3% if you take out food and energy) as measured by the CPI (Consumer Price Index) basket of goods. Meat costs were a primary driver, up 9.5% in Q2.
On the positive side, footwear and clothing is less expensive as well as mortgage interest costs and communications. Recently, I purchased some new clothes at the Tanger Outlet in Stittsville and Bayshore Shopping mall in Ottawa (I was surprised to see Danier Leather has survived).
First it was toilet paper and now it is used cars!
Normally, when you purchase a new vehicles, it depreciates as soon as you drove them off the lot. Not the case in 2021, it seems that lower supply and strong demand have affected the prices in used car market.
Once you purchase your new pair of shoes and a spiffy new outfit, take a stroll onto a car lot. Don’t be surprised if you see vast areas of empty space. The Semiconductor shortage, which has affected vehicle production worldwide is mostly to blame for this lack of inventory. Light vehicle prices, especially used cars have been increasing in price due to the lack of supply. The number of inventory days, which is how many days’ worth of sales sit on the car lot are well below the normal levels. The good news is that if you are still planning that place for the perfect outdoor ball hockey tournament you have plenty of options.
How do you protect your portfolio from inflation?
- Don’t buy more fixed income than you need
- Own a high quality diversified Equity Portfolio
In order to protect yourself from inflation, we avoid investing in assets which will not keep up with inflation. Bank GIC’s and Low interest earning fixed income (secure government bonds) are almost guaranteed to lose over long periods of time when compared to rate of inflation. When you factor in taxes on top of that, the erosion of purchasing power is more significant. It is important to note that these instruments do serve a purpose in portfolio construction and cannot always be altogether avoided. They allow for liquidity to meet upcoming cash needs.
One of the best ways to protect yourself from inflation is to own a basket of high quality common stock. This equity investment represents ownership in a business with high barriers to entry. When rising prices occur, a business that has high barriers is likely able to raise its prices and pass along these costs to its end users and suppliers. This will mean that it is able to increase its cash flow in order to have a return which would not be as affected by the higher costs associated with a more inflationary environment. For example, if you own a railroad and your cost of fuel goes up, you are able to pass this cost on to your customers and protect your profit margins.
If you invested in a business with lower barriers to entry, for example a small restaurant. It is much harder for the small restaurant to pass on significant costs to your customers. You could charge higher prices, but consumers have several alternatives which includes eating at home. In this instance, the restaurant could still pass on costs, but they likely could not protect their profit margins as well as a business with higher barriers. Note that this is an oversimplification but is intended to illustrate why we choose to invest in certain companies over others.
A Final Thought
There is a certain enjoyment that comes from reminiscing about past prices and our past lives. Things were different when we were younger and there are certain prices that stick in your mind.
I remember when I could go into a convenience store with four friends and only a dollar between us, and we could come out of there with four chocolate bars, three cokes and a pack of O-Pee-Chee hockey cards. Mind you, this was before they installed security cameras.
Do you remember the prices of specific items more than others? It could be price of gas, or milk it could be the wage at your first job or the price of your first car or house. Send us a reply and tell us about the prices you remember, it could be the price of Royal Bank Shares during the Great Financial Crisis. We look forward to hearing from you and look forward to our next meeting.
-Matthew Newby 613-566-7586 or matthew.newby@rbc.com