The Bank of Canada cut the interest rate by half a percent Wednesday, citing the “material negative shock” of COVID-19. The move was not entirely unexpected but larger than predicted. The central bank said in its press release that it expects the situation to worsen: “Before the outbreak, the global economy was showing signs of stabilizing. However, COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted.”
The TSX didn’t move much on the news at first, most likely because investors had assumed for a long time that a rate cut was on the way. And while the cut will provide some fiscal relief, its necessity has underlined the seriousness of the downturn. However, even with the rate cut baked in, the TSX Index nevertheless slid 1.5% by the next day.
How to play the rate cut
A “buy, trim, and hold” strategy is called for, with overvalued names in the cross-hairs and some beaten-up quality joining the shopping list. The pre-virus thesis for swapping black gold for real gold is still strong. Green utilities offer a mix of growth, defensiveness, and passive income.
Consumer staples stocks represent another strong play for bear market investors. Restaurant Brands would ordinarily be a straightforward TSX dividend stock for a recession portfolio. However, the social aspect of its business may be a concern during the COVID-19 outbreak. Throw in some uneven PR, and the thesis for holding this stock through a potential pandemic weakens considerably.
Consider instead stocks with a “social distancing” play built-in, such as Loblaw Companies (TSX:L). This top-tier Canadian retail stock is well suited to the current situation. Its mixed online shopping aspect is ideal for a low-contact society. Meanwhile, its pharma exposure through Shoppers Drug Mart is apt during a potential pandemic. Grocery exposure also makes Loblaw a top stock for consumer staples investing.
Check that encouraging performance against some of the best TSX dividend stocks in other sectors. TD Bank is down 6% for the week, for instance. Midstream giant Enbridge similarly ditched 2% on the Canadian interest rate cut. Even the mighty Fortis, ordinarily a top stock for defensive investing, was trading flat this week. As the coronavirus spreads, gold, healthcare, and consumer staples are the order of the day.
Loblaw would also suit a buy-and-hold retiree feathering a Registered Retirement Savings Plan with top Canadian businesses. Loblaw is also a strong buy for a Tax-Free Savings Account due to its status as a consumer staples dividend stock. A 1.75% yield will accumulate over time, and with a 42% payout ratio, it’s well covered with room for dividend growth.
The bottom line
Every stock carries risk, but if investors can reduce risk in a portfolio, its performance throughout a correction should remain steady. Loblaw offers exposure to several key areas necessary throughout a health-scare-related downturn, such as food and medical supplies. Up 2.7% this week, it’s a popular play for coronavirus investing.
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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 Victoria Hetherington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends RESTAURANT BRANDS INTERNATIONAL INC.