In this column, which appears every two weeks, we give you concrete ideas for investing.
Contrary to what many economists had predicted, Canada is not yet in recession despite an economic downturn this summer. But as the gloom continues, investors are asking themselves: Should I adjust my portfolio?
• Also read: The Smart Investor: Wealthsimple’s Meager Returns
• Also read: In the eyes of Quebec Inc.: CGI’s CEO makes a lot of money
“In recent months I have had a few clients who have had concerns about economic developments, but my message is always the same: the ideal is to stay invested and not worry about short-term economic news,” says Ian Gascon, president of Placements Idema.
Ian Gascon photo from LinkedIn
“It is not because we are announcing a recession that we have to change the composition of portfolios,” he adds.
The stock markets react in advance
The portfolio manager points out that in the stock and bond markets “there is not necessarily a connection between a recession and market returns in the short term.”
Why then? Because if Canada went into a recession, the Toronto Stock Exchange would have had time to anticipate it. A recession is a decline in gross domestic product (GDP) for at least two consecutive quarters, so we generally expect it to be imminent.
“What will move the markets? [de façon importante]it’s more like when expectations change,” explains Mr. Gascon.
Benjamin Felix, head of research at PWL Capital, recently wrote in the Globe and Mail that of the seven recessions Canada has experienced since 1957, three have resulted in negative stock market returns and four have resulted in positive returns.
Recessions are therefore far from always harmful for an investor. Better yet, in each of the seven recessions, Canada’s main stock index peaked less than three years later. This means that a recession shouldn’t keep a long-term – or even medium-term – investor from sleeping.
Chart from RBC Global Asset Management website
Not to mention, it is impossible for all of the world’s economies to fall into recession at the same time. A geographically balanced portfolio shouldn’t suffer too much if a recession hits a region, except perhaps North America, where Canadians invest the majority.
To avoid the impact of a recession on your portfolio, you need to be able to predict when markets will fall due to fears of an economic slowdown, and then predict when they will rise again.
But stock markets often recover better “shortly after a recession begins,” Vanguard points out. An exception to this rule was the 2008 financial crisis, which caused investors to remain stagnant for 16 long months.
The risk of missing out on recovery
In short, if you exit the market as a recession approaches, you risk missing out on the recovery, which can be costly.
In his article, Mr. Felix pointed out that a study published in 2019 by two renowned economists, Eugene Fama and Kenneth French, proved that selling stocks to buy bonds when the stock market has moved is counterproductive in terms of returns Economic indicators worsen.
Benjamin Felix photo from PWL Capital website
However, if you’re worried about the prospect of a recession, there’s nothing stopping you from giving your stock portfolio more weight to securities that generally resist better when the economy turns upside down.
Examples include “defensive” stocks (supermarket and pharmacy chains, manufacturers of essential products, etc.) and low-volatility stocks (well-established companies with a relatively stable track record of profitability).