If you’re following a dollar-cost averaging plan, carry on with it. If you have new money to invest, emphasize conservative funds.
Look towards these conservative funds in the wake of a recession
Our current thinking
It could get worse before it gets better. More and more economists and strategists are viewing recession as inevitable.
There are several leading economic indicators that are currently signalling a recession. One such indicator is copper, whose price has declined by about a third since March. In the U.S., indicators such as business and consumer confidence and manufacturing new orders suggest a recession may be coming.
In Europe, meanwhile, soaring energy costs caused by the war in Ukraine is hurting consumption and industrial activity. S&P Global Ratings predicts Europe will face a rough winter and increasing credit risk. And it adds the U.K. is already in a recession.
Much of the economic weakening around the world can be attributed to tightening by central banks. But these banks may not be in a position to cut interest rates in a recession if high inflation continues to persist. And this could exacerbate recessionary conditions.
A recession, of course, puts corporate profits at risk. Many strategists feel current earnings estimates are too rosy and will have to be cut significantly to reflect economic realities. Lower estimates would generate selling pressure on stocks and could lead to lower lows for stock market indices in the months ahead.
The good news in all of this is that we generally regard lower stock prices as long-term buying opportunities. Stock prices may continue to weaken in the months ahead, but this would let you benefit from dollar-cost averaging, which lets you buy more shares at lower prices with a set amount of money.
Strategies to adopt
For the core of your portfolio, we suggest emphasizing conservative Canadian funds such as Fidelity Canadian Large Cap, Fidelity True North and Leith Wheeler Canadian Equity.
More aggressive investors with long investment horizons might want to add to beaten down aggressive funds like Fidelity Canadian Growth and Fidelity Canadian Opportunities.
The resource sector has lately taken a turn for the worse due to recession concerns. But Canadian resources should be in strong demand on the other side of a recession as energy will likely be in short supply and other resources for the building of a greener economy will be in great demand. RBC Global Resources Fund should get its share of the action. You might want to begin buying now.
We suggest not adding to U.S. stock funds for now. The stronger greenback makes U.S. assets more expensive to purchase now. Plus, it will weigh on U.S. corporate profits and act as a headwind to stocks in the quarters ahead.
But emerging markets funds, depressed for about a year now, look attractive for long-term investors who don’t mind extra risk. RBC Emerging Markets Equity Fund offers a good choice to participate in the above-average, long-term growth we expect from these markets.
This is an edited version of an article that was originally published for subscribers in the October 7, 2022 issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846
Money Reporter •12/29/22 •