The last two months have been a volatile ride for global equity investors. Stock markets are swinging wildly, as investors and economists continue to evaluate the impact of the COVID-19 on the world economy. The pandemic has wreaked havoc and resulted in a stock market crash. But a few analysts believe the worst is yet to come.
We know countries have shut down their economies as well as their borders. Global and domestic travel has come to a standstill, and consumer spending has fallen sharply. People around the world are spending on essentials and delaying other purchases. These factors drove stock markets lower by 35% between February 19 and March 18 of this year.
Since then markets have staged a comeback due to economic aid and relief packages. The slowing number of cases and rising optimism (on some days) against the COVID-19 have also played a role in market recovery. But is this just a temporary upward spiral?
Central banks have cut lending rates, but will it be enough to offset rising unemployment rates and push demand higher? Will government aid packages be enough to spur consumer demand? What about high debt levels for Canadians that may also push mortgage default rates higher? It is no wonder that analysts expect the upcoming recession to be far worse than the financial crisis of 2008-09.
During the 2008-09 crisis, the S&P 500 fell over 55%. In case recession fears come true, there will far more volatility for investors in store for the rest of 2020. The iShares S&P/TSX 60 Index ETF is down 19% from record highs and can move significantly lower by the end of this year. The upcoming quarterly results will provide significant insights into the state of the economy.
Investors need to diversify their portfolios
With interest rates nearing record lows, equities continue to remain attractive investment options. You can consider alternative investments such as gold mining stocks in the market crash. Investors park their money in safe havens such as gold during economic recessions.
Gold mining stocks such as Barrick Gold, Kirkland Lake Gold, Eldorado Gold, and Franco-Nevada have returned 33%, -16%, 3%, and 30%, respectively, in 2020, easily outperforming the broader markets.
Investors also need to keep an eye on large-cap companies such as Enbridge, Royal Bank of Canada, Canadian National Railway, and Toronto-Dominion Bank that have strong fundamentals, robust cash flows, and high dividend yields. These companies have been part of several economic cycles and have the expertise to tide over a recession.
Stocks in the utility and telecom sectors tend to be recession-proof, making companies such as Fortis and Telus attractive buys in the current market.
The sell-off has decimated real estate investment trusts (REITs). The REITs are categorized into four types: residential, healthcare, retail, and hotel. While retail and hotel REITs pose a significant amount of risks in the near term, Canada’s healthcare and residential trusts have significant potential for capital appreciation.
Canadian investors can also look to short major indexes in case they are totally bearish on the economy. But this is a high-risk strategy, as it is difficult to time the markets.
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.
David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway and Enbridge. The Motley Fool recommends Canadian National Railway. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.