Time for Defence: How to Invest in a Volatile Market

Here’s where to invest during higher volatility.

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It seemed that markets began the new year on a positive note, with inflation and rate hikes probably easing. But no! We might see interest rate hikes running longer than expected, as inflation is still soaring. Markets could continue to remain volatile, with Treasuries offering better risk rewards for investors. So, how can long-term investors put their bets in these markets?

Here are some sectors and TSX stocks that could play well.

Fortis

Canadian utility stock Fortis (TSX: FTS) is a relatively less-volatile, consistent, dividend-payer stock on the TSX. It has raised its shareholder payouts for the last 49 consecutive years, implying dividend stability. Fortis has emerged stronger with its regular dividend raises, be it a financial meltdown of 2008 or the pandemic crash in 2020.

Such stability is facilitated by regulated operations. Utilities generally have stable demand for their services and are not hampered by economic cycles. So, utilities like Fortis earn stable cash flows, even during an economic boom or downturn. As a result, FTS stock has returned a decent 9% compounded annually, including dividends.

FTS stock underperformed broader markets last year. That’s because utility stocks trade lower in rising interest rate environments. So, they might continue to trade muted for the next few months. However, considering impending recession and rate hikes pausing later this year, utilities like FTS could outperform.

B2Gold

Gold trended lower in February after a significant jump since October 2022. Thanks to adamant inflation, gold has seen a notable drawdown, losing 6% in the last month. Gold miner stocks have followed and have seen rather an outsized impact. Canadian miner B2Gold (TSX: BTO) stock has dropped 20% in the same period. BTO stock looks like an appealing bet after the recent correction.

B2Gold has seen consistent production growth in the last few years. While its gold production has grown by 21% compounded annually in the last decade, its all-in sustaining costs have grown only by 1%. It aims to produce a million ounces of gold in 2023.  

If rate hikes pause in the second half of 2023, the yellow metal could gain back its sheen, with lacklustre U.S. dollar and Treasuries. A potential recession could also be an important driver for the bullion. So, gold miner stocks like BTO could ride higher due to higher financial growth prospects. Plus, BTO looks relatively discounted from a valuation standpoint after the recent drop.

Dollarama

Dollarama (TSX: DOL) stock has played well in almost all kinds of markets. Be it a bear market last year or the bull markets in the last decade, DOL stock has notably outperformed broader markets.

While many companies saw an earnings decline last year, Dollarama kept growing steadily. Its unmatched presence across Canada and value proposition in the inflationary environment facilitated its financial growth.

Dollarama aims to open up more than 500 new stores by 2031. The management has rightly recognized its fundamental strength over the years. Its geographical presence has been much superior to peers.

DOL stock has been trading range-bound for the last few months. However, it will likely create considerable shareholder value in the long term, driven by its stable earnings growth and strong execution.

The Motley Fool recommends B2Gold and Fortis. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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