A recession may be right around the corner, but fear not, as various pundits, including analysts over at RBC Capital, believe that the next downturn will be “short-lived.” Undoubtedly, a mild recession isn’t something that many of us are used to, especially given that many TFSA investors were scarred by the events of the 2008 and 2020 market crashes and ensuing economic downturns.
With job numbers holding their own as central banks hike rates, we’re about to enter a pretty weird time. Cash cushions can still absorb some of the shock, as consumers face pressure from 8-9% inflation and seemingly stagnant wage growth. In any case, markets are at a critical turning point, as we await the latest round of inflation data that should point to the much-awaited peak.
A mild recession could be in the cards
Indeed, inflation has likely peaked. But the question on TFSA investors’ minds is, how fast will inflation roll over? It’s expected that the Consumer Price Index (CPI) should fall 2% or so to around 6% by year’s end. Over the next two to three years, inflation could settle even lower at 3-4%. Though the 2% range that we’ve grown used to seems out of sight, investors must not discount the potential for lower-than-expected inflation data as results come flowing in.
It’s not just the Fed and the Bank of Canada that are fighting inflation. Various firms who’ve paused on hiring or have conducted layoffs are also causing a bit of disinflationary pressure. Many firms may not even be under considerable amounts of distress yet, but many within the tech sector are still hopping on the bandwagon just to err on the side of caution. If there’s no recession, or if it is mild, such firms can always re-hire or even make up for lost time!
Mild recession or not, the road ahead will surely be full of surprises (good and bad). And in this piece, we’ll check out one lowly correlated stock to navigate the volatile times.
Fairfax Financial Holdings: A TFSA top stock pick?
Led by its brilliant CEO Prem Watsa, Fairfax Financial Holdings (TSX:FFH) is a rather unorthodox investment that could zig when markets zag. The insurance and holding company also has somewhat of a hedge-fund-like flavour to it, given Watsa’s bold bets and his knack for hedging in response to macroeconomic trends. Now, Watsa is a really smart man, but he can be wrong. In recent years, his bets haven’t been able to avoid the blow of COVID disruptions. Though Watsa helped steer Fairfax through the 2008 Great Recession, the 2020 coronavirus crisis clearly came too fast to react accordingly.
The stock sports a 0.94 beta (slightly less volatile than the broader market) and a mere 0.9 times price-to-book (P/B) multiple, well below the insurance industry average P/B of around two. Such a multiple implies a single-digit percentage discount to book value. For the calibre of management you’re getting, I’d say that’s a great deal.
In any case, I think Fairfax is well equipped for the road ahead. Amid the market chaos, Fairfax seems hungry for a bargain. The firm recently shed light on a $1.2 billion proposal to takeover Canadian restaurant chain Recipe Unlimited, formerly known as Cara Operations. The firm, which owns Canadian staples such as Swiss Chalet, Harvey, and The Keg, saw shares pop over 45% on the news.
After flirting with 2020 lows, I think Fairfax could be walking away with a bargain with Recipe Unlimited (Fairfax already owns a 46% stake in the firm). Yes, there is baggage, but Watsa and his team could bring out the most in the iconic brands. For $1.2 billion, Watsa could be walking away with one of the best bargains of the year.