If CERB Becomes UBI, What Happens to the Stock Market?

As CERB is phased out, there’s growing chatter about a permanent UBI. This could boost the stock market and especially benefit stocks such as Dollarama (TSX:DOL).

| More on:

The Canada Emergency Relief Benefit (CERB) program could be coming to an end soon. Now, public debate has moved on to the idea of a universal basic income (UBI). While a UBI is far from a reality right now, investors should consider the implications of such a move on the stock market to be better prepared. 

Here’s how a UBI could impact stocks and alter the economy.

Basic spending

By definition, UBI is expected to be just high enough to allow citizens to meet basic expenses. This means the cost of rent, food, clothing and utilities would ideally be accounted for. 

A UBI would boost consumption of these basic necessities, which could bolster companies that provide essential goods. Basically, the program could act as an indirect stimulus package for the most essential stocks on the stock market. 

However, as this amount is paid out to everyone, some of the cash could wind up in assets and savings as well. 

Stock market drivers

Middle and high income recipients of UBI are much more likely to invest rather than spend their spare cash. As basic income flows into the real estate and stock markets, asset valuations could rise much higher.

We’ve already seen the impact of CERB on the Canadian stock market these past six months. Millions of Canadians poured benefit payments into the stock market to create additional income and speculative gains. UBI could make these lofty valuations and surging asset prices permanent. 

What about inflation?

Critics of UBI often argue that government stimulus measures expand the national debt pile, decrease the value of the currency and increase inflation. 

In theory, all of these fears are justified. However, the evidence seems to suggest otherwise. Since January 2020, the value of the Canadian dollar is down just 1% against the United States dollar. Total consumer price index (a measure of inflation) has actually declined from 2.4% in January to 0.1% now, according to the Bank of Canada.

In other words, the CAD-USD exchange rate and inflation haven’t exploded despite the fact that Canada has handed out benefits worth 15% of the economy over the past six months.  

Betting on potential winners

If this trend continues and UBI is implemented, certain segments of the stock market could emerge as clear winners. Investors should focus on high-growth essential stocks such as Dollarama (TSX:DOL).

Not only is dollarama an essential business, but it’s also proven to be a recession-proof one that directly benefited from higher CERB spending. The stock is up 10% year to date and an impressive 40% since late March. 

Despite this surge, the stock is trading at a price-to-earnings ratio of 28, as the company saw a noticeable spike in earnings during the crisis. The next crisis could bring another version of CERB or a permanent UBI, both of which will help Dollarama stock move higher. 

Even without government stimulus, the company has plenty of opportunity for growth. Acquisitions of smaller companies in developing countries could help Dollarama expand its footprint. Over the long-term, this could be one of the best performing growth stocks in the country. 

Bottom line

As CERB is phased out, there’s growing chatter about a permanent UBI, potentially boosting the stock market and especially benefit stocks such as Dollarama.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned.

More on Investing

Canada national flag waving in wind on clear day
Tech Stocks

Trump Trade: Canadian Stocks to Watch

With Trump returning to the presidency, there are some sectors that could boom in Canada, and others to watch. But…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Investing

Is Canadian National Railway Worth Buying for its 2.2% Dividend Yield?

Let's dive into whether Canadian National Railway (TSX:CNR) is a top buy for long-term investors at this point in the…

Read more »

nuclear power plant
Energy Stocks

Is Cameco Stock Still a Buy?

Cameco stock recently reported earnings that showed the Westinghouse investment is creating some major costs. But that could change.

Read more »

cloud computing
Dividend Stocks

Insurance Showdown: Better Buy, Great-West Life or Manulife Stock?

GWO stock and MFC stock are two of the top names in insurance, but which holds the better outlook?

Read more »

analyze data
Dividend Stocks

Here’s Why the Average TFSA for Canadians Aged 41 Isn’t Enough

The average TFSA simply isn't enough for most Canadians in their early 40s. Here's how to catch up.

Read more »

A plant grows from coins.
Dividend Stocks

The Smartest Dividend-Growth Stocks to Buy With $1,000 Right Now

New dividend-growth investors should consider CN Rail (TSX:CNR) stock and another top play if they're looking to build wealth over…

Read more »

concept of real estate evaluation
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It

Canadian REITs can turn your TFSA into a monthly paycheque machine for life. Here's how Morguard North American Residential REIT…

Read more »

Start line on the highway
Investing

2 No-Brainer Growth Stocks to Buy Now With $5,000 and Hold Long Term

Market conditions today are ideal for growth investing, and two rising stocks are no-brainer buys in November.

Read more »