How to Avoid Canada’s Top 3 Economic Risks

One of Canada’s top economists ranks Canada’s biggest economic risks. Here’s how to protect yourself.

| More on:
The Motley Fool

In a recent op-ed in the Financial Post, Gluskin Sheff chief economist David Rosenberg listed his top 10 risks to the Canadian economy. Some of them were quite obvious, such as Quebec sovereignty, a rejection of the Keystone pipeline, and spillover effects from the crisis in Ukraine.

But there were three risks that stood out from the rest, and it is important for Canadian investors to remain aware of them. Below are Mr. Rosenberg’s top three risks, in reverse order:

3. Interest rate increases

A sharp rise in interest rates (in either Canada or the United States) would have severe effects on the economy, businesses, and of course, stock prices. Companies with heavy debt loads would see their borrowing costs rise. Consumers would be more inclined to save money rather than borrow and spend. The value of bonds and dividend-paying companies would suffer. And the prices of precious metals would take a hit, hurting the companies that mine them too.

But there is one industry in particular that would benefit from higher interest rates: insurance. Canada’s largest property and casualty insurer, Intact Financial (TSX: IFC), is a perfect example. The company takes the cash from insurance premiums and invests them primarily in bonds, which currently yield very little. In fact, stocks make up only 22% of the company’s investment portfolio. Intact is anxiously awaiting rate hikes, making its shares a great way to bet on that happening.

2. High provincial debt levels

This is an especially high risk in Quebec and Ontario, and could lead to future tax increases. Within these provinces, certain companies will be more affected than others.

The companies that have the most to lose are mining companies like Detour Gold (TSX: DGC) and Osisko Mining (TSX: OSK). Both of these companies produce all their gold from just one mine – Detour in Ontario and Osisko in Quebec. And if their taxes or royalties are raised, they cannot leave for cheaper jurisdictions. Investors worrying about this risk should probably avoid these companies.

3. A Chinese hard landing

There is no denying that this is an extremely serious risk for the Canadian economy. Many economists believe that China’s rise is built on unstable ground and that eventually the country’s economy will come back down to earth. While this is up for debate, such an outcome would be devastating for Canada’s natural resource sector, above all the base-metal miners.

For example, Teck Resources (TSX: TCK.B)(NYSE: TCK) would be seriously affected by a Chinese hard landing. The company makes its money from metallurgical coal, copper and zinc – the prices of all three of those commodities are determined by conditions in China. Investors looking to soften the blow from a Chinese hard landing should certainly avoid Teck’s shares.

Foolish bottom line

It is impossible to completely avoid every economic risk. And for that reason, it would be a mistake to worry about these headlines more than necessary. Just like in any other economic cycle, you should focus instead on buying good companies at attractive prices. And if you have enough patience, you can wait out any and all economic risks until they seem like distant memories.

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.

More on Investing

analyze data
Bank Stocks

Here’s Exactly How Many Shares of TD Bank You’d Need for $5,000 in Annual Dividends

You needn't invest a whole lot to get $5,000 in dividend income from Toronto-Dominion Bank (TSX:TD) stock.

Read more »

ETF chart stocks
Dividend Stocks

3 ETFS to Power Your TFSA Growth Strategy

Want to grow your TFSA but not sure which stocks to choose? Then ETFs are the best option.

Read more »

Happy shoppers look at a cellphone.
Dividend Stocks

How I’d Invest $6,500 in Canadian Retail Stocks to Increase My Net Worth

Retail stocks aren't getting much attention right now, but the right picks could quietly boost your portfolio in a big…

Read more »

Stocks for Beginners

Where I’d Invest $2,000 in 2 No-Brainer Canadian Stocks Under $10

These two Canadian stocks may be in the tech sector, but the cheap share prices aren't going to last.

Read more »

bulb idea thinking
Dividend Stocks

The Smartest Canadian Stock to Buy With $7,000 Right Now

Do you want long-term income for a steal of a deal? Then consider this smart stock.

Read more »

Train cars pass over trestle bridge in the mountains
Stocks for Beginners

Now Is the Time to Buy Canadian National Railway

Is it time to buy Canadian National? Here's a look at why it could be time to pick up the…

Read more »

nuclear power plant
Metals and Mining Stocks

Is Cameco Stock a Good Buy Now?

Uranium miners such as Cameco Corporation (TSX:CCO) can be lucrative options. Here's why you need to buy Cameco stock today.

Read more »

Dividend Stocks

3 Big Income Stocks to Buy for May 2025

Discover valuable insights on building an income portfolio that balances the need for immediate income and long-term growth.

Read more »