To no one’s surprise, Canada is now officially in recession, having posted its sixth straight month of negative GDP growth. This is certainly very concerning for every Canadian investor. But what’s the best way to react? Below we take a look at three key things every investor must do.
1. Understand what kind of recession this is
Let’s make one thing very clear: this recession is being caused by low commodity prices, especially oil. As a result, the economic impact varies significantly province by province. The hardest hit are Alberta, Saskatchewan, and Newfoundland & Labrador—three provinces that rely heavily on energy production. Meanwhile, Ontario and Quebec are benefiting from the weak Canadian dollar.
So, if you’re investing in companies that have little exposure to these provinces, you should be fine. A perfect example is Toronto-Dominion Bank (TSX:TD)(NYSE:TD), whose Canadian business is heavily concentrated in Ontario (as its name implies). TD also has a big focus on the United States East Coast, a region whose economy benefits from lower gasoline prices.
Some investors may go for a bank like Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) instead, simply because it is the most international of Canada’s banks. But trying to avoid the Canadian economy in this way can backfire. BNS operates in many countries that also depend on high commodity prices. For example, Mexico is the world’s largest silver producer. Colombia relies heavily on coal exports. Peru and Chile are big copper producers.
To put it simply, you must understand that this is a commodity-induced recession, nothing more, nothing less.
2. Be very wary of high dividends
Over the past 12 months, we’ve seen numerous high-yielding companies cut their dividends, especially in the energy sector. So, most investors should have learned this lesson by now. But for those who haven’t, you should think twice before buying any dividend yielding more than 6%. These companies tend to be on shaky ground, or have unsustainably high payouts, or both.
And there plenty of examples outside the oil and gas industry, including names like TransAlta Corporation (TSX:TA)(NYSE:TAC) and AGF Management Ltd. (TSX:AGF.B). When times are good, these kinds of dividends tend to last. But when times are tough, these dividends rarely survive intact.
So, with Canada technically in a recession, you should be careful before jumping at a high-yielding stock.
3. Don’t panic
Remember, no one is truly shocked that Canada is in a recession. So, these concerns are already priced in to Canadian stocks. In fact, investors often overreact to economic trends such as this, meaning there may be some opportunities to pick up cheap bargains.
Bank of Nova Scotia is a prime example—its shares now trade at only 11 times earnings after declining by 12% this year. Meanwhile, the bank just posted some very strong numbers.
If you stay calm and don’t panic like so many other people, you should find some great investment opportunities. One such opportunity is revealed in the free report below.
