Canadians: Here Are 3 Ways to Prepare for an Upcoming Recession

With recession fears looming large, here’s how Canadian investors can cope with the repercussions.

The COVID-19 pandemic has driven global equity indexes to multi-year lows. While China is likely to re-open manufacturing facilities and return to normalcy in the next two weeks, countries such as Italy, Spain, and France have seen death rates spiral upwards.

The bear market has been caused by fears of lower consumer spending, which can easily result in a recession. According to economists, a recession is a decline in economic activity that is widespread and can last several months.

A recession will impact industrial production, employment rates, and real income, which in turn will drive GDP lower. Currently, it is difficult to estimate the impact of the coronavirus on global demand, and a lot depends on how governments around the world manage the situation.

Lower spending will result in a drastic fall in the company’s top line. For firms with a high leverage ratio, repayment of interests will be a cause of concern. This would result in restructuring, cost-cutting, and widespread lay-offs.

Corporate and household debt are at record highs, which will increase default rates of banks as well. Energy prices will continue to move lower due to subdued demand, making production unprofitable for most energy players.

So, how can investors prepare in case a recession hits global economies by the end of 2020?

Have an emergency fund

The rise in unemployment rates will leave a significant portion of the working population jobless. In order to make it through these difficult times, people need to have enough savings to pay for basic necessities for at least six months.

This emergency fund needs to be kept aside for a rainy day where you can dive into your savings without having to worry about paying for basic living expenses.

Invest in a diversified portfolio

The recession is likely to impact several industries. Currently, companies in the hospitality, airlines, and tourism sectors are reeling under the pressure. Shares of Air Canada, Gamehost, and Expedia are trading 76%, 67%, and 66%, respectively, below 52-week highs. Energy companies, including Pembina, Enbridge, and Inter Pipeline, have lost considerable value as well.

Shares of consumer-facing companies such as Canada Goose are trading 75% below record highs. While multiple sectors are likely to be hit, investors can look to diversify their funds and build a robust portfolio. You need to consider different asset classes such as equities, bonds, REITs and commodities, which minimizes risks.

Keep investing in blue-chip companies

Despite the tremendous pullback in the equity market over the last month, it is impossible to time the market. This bear market provides a golden opportunity to buy high-quality stocks at attractive valuations.

In this volatile market, investors can bet on recession-proof companies such as Walmart, Krogers, and Loblaw. Utility companies such as Fortis and Canadian Utilities also safe bets.

For investors with higher risk exposure, growth stocks such as Shopify, Constellation Software, Cargojet, and Kinaxis can provide significant upside potential. Investors should view every pullback as a buying opportunity and average out their losses.

Recessions have been a constant over the years and cannot be escaped. But you can prepare yourself to come out of a recession unscathed.

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.

Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Canada Goose Holdings, CARGOJET INC., Constellation Software, Enbridge, Shopify, and Shopify. The Motley Fool recommends KINAXIS INC and PEMBINA PIPELINE CORPORATION. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

More on Tech Stocks

Hourglass and stock price chart
Tech Stocks

1 Canadian Stock Ready to Surge Into 2025

There is a lot of uncertainty about the market in general as we move closer to the following year, but…

Read more »

stock research, analyze data
Tech Stocks

Apple vs. Shopify: Which Stock Is the Better Buy for the Next 3 Years?

Apple (NASDAQ:AAPL) and Shopify (TSX:SHOP) are great tech titans, but they're ending the year with huge momentum.

Read more »

Investor reading the newspaper
Dividend Stocks

Emerging Investment Trends to Watch for in 2025

Canadians must watch out for and be guided by emerging investment trends to ensure financial success in 2025.

Read more »

nvidia headquarters with grey nvidia sign in front with nvidia logo
Tech Stocks

If You’d Invested $100/Month in Nvidia Starting a Decade Ago, Here’s How Much You’d Have Now

Nvidia has helped long-term investors create generational wealth. But is the tech stock still a good buy right now?

Read more »

chart reflected in eyeglass lenses
Tech Stocks

Is Shopify Stock a Buy, Sell, or Hold for 2025?

Shopify (TSX:SHOP) still looks like a tempting growth stock going into a new year with strength.

Read more »

A shopper makes purchases from an online store.
Tech Stocks

The Smartest Growth Stock to Buy With $1,000 Right Now

Given its solid sales growth, improved profitability, and healthy growth prospects, Shopify would be an excellent buy.

Read more »

Representation of deep learning neural networks and connectivity
Tech Stocks

Opinion: This AI Stock Has a Chance to Turn $1,000 Into $10,000 in 5 Years

If you’re looking for an undervalued Canadian AI stock with huge upside potential, BlackBerry (TSX:BB) should certainly be on your…

Read more »

chip with the letters "AI" on it
Dividend Stocks

The Top Canadian AI Stocks to Buy for 2025

AI stocks are certainly strong companies, and there are steady gainers in Canada as well. But these three are the…

Read more »