After a short return to green last week, it became apparent that stock markets are hardly out of the woods. I would liken the market’s recent volatility to something like: “We are still stuck in the woods. We found some nice stimulus berries. Look! That might be a trail to get out of here, but it looks precarious and untrodden.”
We have a long journey ahead
All analogies aside, the Canadian economy truly does face a tough journey. Canadian markets have to face not one, but two angry bears. First, there is the obvious COVID19 crisis which has shut down much of Canada’s service-based economy. The second is Canada’s depressed oil and resource sector.
Without dealing with the first bear on a global scale — getting people back to work, driving, flying, manufacturing — there’s little hope of overcoming the second. Neither of these are easy issues to resolve. Unfortunately, Canadian investors need to be prepared for bearish volatility for the next few months.
The economy will merge back to normal
However, when we look forward to a year or two from now, society will have found a way forward, which could be that social distancing completely isolates the coronavirus or that we discover a vaccine.
It’s important to remember that crises, time and time again, ignite the best in human ingenuity, creativity, and transformation. That’s why we can trust the economy and stock markets will merge back to normalcy. While merging may take longer than anyone would wish, we will find a path forward.
Build your investment toolkit
If you’re courageous enough to think very long-term, there are some excellent opportunities to invest. Similar to the way a hike in the woods demands some key gear, I suggest incorporating some of these ideas into your portfolio toolkit.
Utilities
Utilities are like the boots you wear when hiking. You hardly ever think about your boots on the journey, yet without them, the excursion wouldn’t be possible. Utilities are an excellent portfolio foundation. They provide a safe space in which to hold your capital and earn a consistent yield.
Algonquin Power (TSX: AQN)(NYSE: AQN) is well equipped to operate during a recession. It is weighted 65% to regulated utilities and 35% to renewable power generation. Investors get secure, safe cash flow from the regulated utilities and growth and development opportunities from the renewable segment.
In both segments Algonquin has a collective $9.3 billion of development projects. From this, management estimates it can on accrete 15% annual adjusted EBITDA growth for the next five years. That’s higher than most industry peers.
Right now, Algonquin yields an attractive 4.2%. Lock that dividend in and if history serves correctly, you can expect it to grow annually by 8-10%.
REITs
REIT’s can be likened to a quality, waterproof jacket. Humans need shelter to survive and thrive in work, life, and play. The enduring need for spaces to live and work in and to sell things will return after the crisis. There are some fantastic REIT’s that are well hedged to manage the COVID19 crisis and come out of it thriving.
Canadian Apartment REIT (TSX: CAR.UN) is a great example. It is one of Canada’s largest REITs. It owns over 64,000 rental suites across Canada as well as stakes in Irish Residential REIT and European Residential REIT. The COVID19 crisis will undoubtedly impact CAP’s first-half results, but the long-term story remains intact.
CAP is sitting on $470 million in cash with a very conservative leverage ratio of 35%. Financially, it’s well covered to manage COVID19 risks.
It has a significant amount of dry powder and opportunities remain plentiful, as Canada faces a significant housing shortage. CAP pays a 3.25% yield, which compensates investors while they wait for the crisis to subside.
The bottom line
The investors’ path to wealth is often full of ups and downs. No one can predict what the temporary horizon will look like. Yet, if you are brave enough, there are opportunities aplenty that will far outlive this present crisis.
