Fitch Ratings is one of the big three credit rating agencies in the world, and it has been keeping a close eye on proceedings, as the pandemic and its effects unfold on economies worldwide. On June 24, 2020, the credit rating firm stripped Canada of its AAA credit ratings.
Moody’s and Standard and Poor’s are the two other firms that have yet to make moves regarding a change in Canada’s AAA status. Fitch stated that the company expects Canada’s response to COVID-19 will raise the country’s debt levels to 115.1% of the Gross Domestic Product (GDP) in 2020, which would be a massive hike from 88.3% last year.
Should you be worried as an investor about the downgrade in Canada’s credit rating? What can you do to secure your long-term prospects? I’ll discuss the situation and a value stock you could consider investing in for its potential a few years down the line.
Not the worst-case scenario
Fitch downgraded Canada’s rating from AAA to AA+, with the outlook of Canada’s debt-to-GDP stabilizing in the medium term. The company’s change in rating with the anticipation of debt-to-GDP stabilizing is not all bad for Canada.
Canada’s response to COVID-19 led to $150 billion in costs for the country. It led to the financial situation, which caused Fitch to downgrade the country’s credit rating. According to the Finance Minister Bill Morneau, Canada’s response was also why the country is not in a worse position.
The government’s response ensures that businesses and workers in the country have ample financial support to weather the ongoing crisis and make an excellent recovery once the situation subsides. The government plans to continue being fiscally responsible and protecting the country and economy.
Things could be worse
Parliamentary budget officer Yves Giroux was also not overly concerned by the downgrade. One rating agency downgraded the country but with a stable outlook. It came as a surprise to Canada, but it could be worse. He went on to tell BNN Bloomberg that if Moody’s and Standard & Poor’s also follow suit, the situation could raise alarms for Canadians.
A downgrade from all three globally recognized credit rating agencies for Canada, while the other G7 countries retain their status could send the kind of signals that throw off investor confidence. It would show that Canada’s markets are riskier than other countries, or that it has not managed its fiscal responsibilities well in dealing with the pandemic.
Protecting your future
While nobody can predict when the global health crisis will end, things will return to relative normalcy. Economies have already started to open up. The short term might not look bright, but the most successful investors have a long-term outlook, and I will discuss a stock that can help you capitalize on fantastic gains over the next decade.
I think Brookfield Renewable (TSX:BEP.UN)(NYSE:BEP) is the ideal play for investors who want to leverage the future of energy. There is a growing demand for renewable energy, and Brookfield is ahead of the curve. The pure-play renewable energy company has an assortment of diversified renewable assets.
Over the next 10 years, this sector is likely to see an increase in demand due to its eco-friendly and cost-effective energy production. BEP is well positioned to benefit from the rise in demand. The company has installed 19,000 megawatt-capacity assets with 13,000 megawatts in the pipeline.
At writing, the stock is also up 9.79% from its price at the start of 2020, as it trades for $65.05 per share. It also pays its shareholders at a juicy 4.59% dividend yield with no signs of slowing down. The company offers investors a unique mix of growth, defence, and income.
Brookfield’s earnings are backed by power-purchase agreements. The long-term and inflation-indexed agreements help the business continue to expand, despite economic slowdowns.
Whether Canada’s credit ratings become worse or get an upgrade soon, the short term will be a challenge for the economy and investors alike. Investors with a long-term horizon should look for promising prospects like Brookfield Renewable and other sectors that will boom in the coming decades.
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 Adam Othman has no position in any of the stocks mentioned.