Think a recession is on the way? Fund managers and economists do.
According to the latest Bank of America study, which surveyed 230 fund managers that control more than $600 billion in assets, the risk of a recession in the next 12 months is at a new high. Roughly one-third of those surveyed believe a downturn in 2020 is likely. That may not seem overly concerning, but keep in mind that in mid-2008, months before the financial crisis hit, around one-third of those surveyed expected a recession. In conclusion, a one-third response rate is a deeply concerning figure.
According to the National Association for Business Economics, 42% of economists expect the U.S. to enter a recession in 2020, with another 25% expecting one to occur in 2021. In total, around three-fourths of economists anticipate a recession over the next 24 months. This is troubling news considering the U.S. is Canada’s biggest trade partner, and the fact that the U.S. helped pull Canada into a recession in 2008. Global accounting firm Deloitte put it succinctly in a recent report: “The main message is that we are in the midst of a global economic slowdown that threatens to weaken Canada’s growth prospects.”
But all is not lost! Even if a recession hits, you can still grow the value of your portfolio. How is that possible? A Harvard Business Review study found that 14% of publicly traded companies accelerated their growth rate and increased profitability during the previous bear market. Discovering these stocks can save your nest egg from destruction. Fortunately, two TSX stocks have a proven history of handling sizable market disruptions.
Now this is stability
It’s tough to find a more stable business than Hydro One (TSX: H). That’s because Hydro One has a powerful partner behind it: the government.
Hydro One transmits and distributes power to Ontario’s citizens. Its network covers 98% of the province’s citizens. In early 2015, the company was actually owned by the federal government, but that November, 15% of its shares were sold to the public through an IPO. In April of 2016, another 15% was sold. In May of 2017, an additional 20% was floated, giving the public half of the company.
Due to its history of government ownership, 99% of revenues are still rate-regulated, meaning the company knows exactly what it can charge customers, often years in advance. And because power demand is incredibly consistent, even through the deepest of recessions, future profitability is highly predictable. All of this predictability helps fuel a fully covered 4.1% dividend.
Unparalleled guidance
Sometimes, a little guidance can be extremely valuable. That’s what you get with Fairfax Financial Holdings (TSX: FFH).
Managed by one of the greatest investors of the past century, Prem Watsa, this stock has returned 17% annual returns since 1985. Most impressively, during the financial crisis, this stock actually rose in value. Before the bear market occurred, Watsa took out massive bets against the U.S. housing market. When markets sank by 50%, Fairfax Financial posted one of its biggest profits in its history.
Armed with cash-producing insurance businesses that allow Watsa to invest during any part of the economic cycle, this stock has advantages other companies simply don’t possess. With Watsa still at the helm, Fairfax Financial stands a great chance at exiting the next recession even stronger than before.
