Financial advisor explains why he isn't surprised by higher CPI numbers, explains which assets he believes can protect clients
David McGruer, CFP®, PFA, CEA, wasn’t surprised by yesterday’s inflation print. In August, the Canadian consumer price index rose four per cent—as announced on Tuesday—rising back to its quickest pace since April according to Statistics Canada. The print was higher than economists expected.
McGruer is a financial advisor at IA Investia Financial Services inc. in Ottawa, On. and a longstanding student of economic history. He sees in the most recent inflation print how contemporary government fiscal policy has reflected the 70s and early 80s, when deficit spending caused rampant inflation. He knows, as well, that the impacts of inflation can be devastating for clients, especially retirees and those living on a fixed income.
“I simply will not take on clients if they want to live on a fixed income,” McGruer says, “It makes no sense to me, it’s suicidal. For any goal that is more than medium-term there has to be a large allocation to assets that protect you from the rising cost of living.”
To McGruer, the assets that can best protect clients from inflation are the “great businesses” of the world, supplying goods and services that people need. Those businesses, he argues, will be the recipients of higher demand during periods of inflation, and can adapt and grow in these environments in a way that fixed income investments like bonds cannot.
In making the case for a focus on businesses to his older and retired clients McGruer will ask them if their first house cost less than their last car. Often times among older Canadians, the answer is yes. That question demonstrates the point made by economist Jeremy Seigel in his book Stocks for the Long Run which shows a history of various asset classes over time—including during periods of inflation.
McGruer takes time to clearly outline the two sides to inflation: the effect—cost of living—and the cause—fiscal and monetary policy. He also lays a significant portion of the blame for current conditions on policies designed to limit fossil fuel consumption in Canada, the United States, and Europe. These policies, he notes, increase the price of energy which remains a fundamental input for everything we consume, resulting in higher prices. By focusing on the causes of inflation, he can prepare his clients for the effects.
Over the past 18 months, a knock-on impact of inflation has been greater uncertainty on equity markets and a bear market year last year due in part to rate increases. Much of that uncertainty has persisted, but McGruer has greeted it warmly, explaining to his clients that interest rates rising to between four and seven per cent represents a return to “normal” conditions. He proudly states that his clients remained allocated to equities during this period of uncertainty, confident in their long-term growth potential.
McGruer’s inflation concerns go beyond just his retired clients. He sees in the present economic situation a dire picture for younger Canadians and those seeking home ownership.
“Inflation causes pain and it primarily causes uncertainty,” McGruer says, “people don’t know what the cost of things will be, so it makes it more difficult to plan, to think, to clearly make decisions.”
He sees that uncertainty clouding many of his younger clients seeking to buy homes, either as residences or investments. Given the still uncertain state of both inflation and interest rates, McGruer emphasizes the significant risk involved in a real estate purchase, where borrowing costs could rise significantly and impact someone’s long-term financial wellbeing. He says he does not want to be a “forecaster of doom,” but rather it’s his job to alert these clients to possible unconsidered risks, ensuring they can achieve their goals sustainably. As he and his clients wait for this uncertainty to pass, McGruer remains focused on the businesses he thinks can hedge against inflation.
As other advisors consider the prospect of inflation persisting for longer, with the possibility of more unexpected increases like we saw in August, McGruer thinks now is a good time for advisors to reflect.
“It’s always a good time to go back and check your premises,” McGruer says. “And on the advisor side that would mean asking yourself: ‘what is a suitable asset allocation for a particular type of client goal?’ ‘What are your inflation assumptions?’ ‘Do you have an honest and thorough understanding of the sources of inflation?’ ‘How important is inflation when you build a financial plan, and does that plan stand up to scrutiny?’
“It’s not necessarily about doing something different, but it’s a good time to double down on your fundamental ideas and make sure you’re rock solid in how you communicate them to clients.”
