The strong finish of the TSX to end the first week of November 2022 isn’t a sign of reduced market volatility. While nine of the 11 primary sectors gained and 55% of the total issues advanced, the index remains in the red year to date (-8.35%). Investors should be cautious, because the market could still tumble.
Economists believe the Bank of Canada will proceed with its rate-hike strategy, despite the significant gain in the labour market and accelerating wage growth last month. Stephen Brown, a senior Canada economist with Capital Economics, said the wage growth could be a worrying development for the central bank.
Andrew Grantham, a senior economist at CIBC Capital Markets, said the jobs number shouldn’t change the narrative that we are closer to the end of the current rate-hiking cycle than the beginning. He added that the narrative supports a 50-basis-point hike, not a 25-basis-point hike, in December.
If a potential market downtrend because of these speculations worries you, the best counter is to own defensive stocks like Metro (TSX:MRU) and Brookfield Business Partners (TSX:BBU.UN). You’d have capital protection and consistent returns, regardless of the economic environment.
Hedge against market volatility
Metro’s lofty position in the food and pharmacy industry is a competitive advantage and an ideal hedge against market volatility. Its network of food stores (950) and drugstores (650) deliver consistent earnings every year. The average net income in the last three fiscal years is $776.6 million. After three quarters in fiscal 2022, the net income is $680.8 million.
In the third quarter of fiscal 2022 (quarter ended September 30, 2022), sales reached $5.86 billion. The figure is staggering, considering it was 2.5% higher than in the third quarter of fiscal 2021, when sales were extremely high due to the pandemic. Eric La Flèche, Metro’s president and chief executive officer (CEO), said management was pleased with the performance of the food and pharmacy businesses.
He said it was achieved in a challenging environment that included increasing inflationary pressures and labor shortages. According to La Flèche, Metro will contend with both issues that could impact margins. Nevertheless, he expects food sales to grow at a higher rate in the near term and prescriptions growth in pharmacy to moderate.
Building long-term value
Brookfield Business Partners represents the Private Equity Group of Brookfield Asset Management, the leading global alternative asset manager. This $2.09 billion business services and industrials company owns and operates high-quality businesses. Besides providing essential products and services, the said businesses boast strong competitive positions.
While revenue in the third quarter of 2022 increased 22.3% to US$14.73 billion versus the third quarter of 2021, Brookfield Business Partners incurred a net loss of US$44 million. Still, management said the quarterly results were strong, given the challenging environment. Its CEO Cyrus Madon noted the excellent progress on capital-recycling initiatives.
Madon said the proceeds from the sale of nuclear technology services operation would enhance corporate liquidity meaningfully. It should also position Brookfield well to continue building value in the business. At $28.05 per share, this industrial stock trades at a discount (-27.01% year to date). However, the 1.12% dividend should be super safe, too.
Inherent qualities
Metro and Brookfield Business Partners are defensive investments, because business stability and endurance are inherent qualities.
