The U.S. economy is strengthening, and Canada will continue to benefit from this, says Shailesh Kshatriya, associate director for client investment strategies at Russell Investments Canada.Michelle Siu/The Globe and Mail
Location, location, location: Canadian investors looking to escape the carnage in financial markets may soon realize the wisdom of real estate agents and find benefits in living next door to an 800-pound gorilla of an economy.
That's the message from money managers as the S&P/TSX Composite index formally entered correction territory this week as concerns over growth in Europe, cooling inflation in commodity-hungry China, and the impact of the Ebola virus jolted financial markets.
Canada isn't alone. Stocks across the world have taken a pounding. too.
"It's never pretty when this happens, but as long as you believe the fundamentals have not changed – which they haven't – this is a buying opportunity," said Toronto-based Shailesh Kshatriya, associate director for client investment strategies at Russell Investments Canada.
The United States is strengthening, and Canada will continue to benefit from this, he adds. The economy in Europe is slow, but that has been true for the past couple of years, and China will still continue to grow, he says.
"Fundamentally, not a lot has changed over the past couple of months," said Mr. Kshatriya, adding the selloff is presenting buying opportunities, as many companies are now trading below fair market value.
Here are a few ideas for investors looking for refuge from the storm.
Stocks
While concerns over global growth, which has weighed on commodities, are unlikely to help the TSX in the near term, the index will draw strength from a rising U.S. dollar and a strengthening economy there, money managers say.
The International Monetary Fund, which slashed its global growth forecast for 2014, recently upgraded its expectations of U.S. growth to 2.2 per cent this year and 3.1 per cent in the next.
In such an environment, stocks of companies that export to the United States, and those tied to domestic demand in North America, will do well. Grocery companies and convenience store chains such as Metro Inc. and Alimentation Couche-Tard Inc. are safe bets.
"Large cap dividend stocks are the place to hide. When you have a situation where the market has dropped rather quickly, the risk is of people panicking, and liquidity drying up," said Pat McHugh, chief investment strategist at Kaspardlov, Laverty and Associates, a wealth management firm in Windsor, Ont.
Companies focused on growing dividends are another safe bet, Mr. McHugh says. That would include Canada's big banks and telecommunication service providers.
Exchange traded funds
ETFs have captured the imagination of investors and traders alike, owing to their low cost and ease of trading.
Investors have done well with popular offerings such as the iShares S&P/TSX 60 Index Fund and SPDR Gold Trust Shares. But with innovation spawning newer and increasingly specific ETFs, some whose underlying assets aren't as liquid, investors should evaluate their holdings carefully.
"I'm not sure I want to be holding an ETF that tracks one disease indicator on a particular type of cancer, if the market really plunges," says Elvis Picardo, market strategist at Global Securities Corp. in Vancouver.
Real assets
Investing in hard assets, such as pipelines, utility companies and toll roads, isn't new by any means, but a lot of investors overlook them in times of volatility.
"Investing in real assets works very well," said Michael Underhill, chief investment officer at Pewaukee, Wis.-based Capital Innovations LLC, who sub-advises on the Sprott Real Asset Class fund.
With low correlation to Canadian stocks and bonds, the Sprott fund is designed to provide diversification, protect investors from inflation and capital loss, and provide strong returns over the long term. He says the fund can switch between assets that rise in an inflationary environment and those that work well at times like these, when pricing pressures aren't as visible.
He cites "master limited partnerships" that are publicly traded companies operating in energy and other infrastructure assets. Say a company that manages an oil pipeline gets paid a fixed rate for every barrel of oil that is transported, irrespective of the price of oil. "People will still need to drive and that oil will still need to be shipped," Mr. Underhill said.
REITs
Canadian real estate investment trusts could provide shelter from volatile markets.
"REITs would certainly be a good place to hide at a time like this," says Mathieu Roy, portfolio manager at Louisbourg Investments Inc., in Moncton, N.B.
While rising interest rates can hurt REITs, which frequently raise capital in the debt markets, analysts believe that the recent selloff has given enough of a cushion for REITs.
"Prices are falling and rates are falling, which is counterintuitive," said Heather Kirk, an analyst at BMO Nesbitt Burns Inc. in Toronto. "But given how low rates have fallen, there's a lot of wiggle room in REITs if rates did start going up."
Your mortgage
Probably the biggest impact most people could have on their level of risk exposure is on their home loan. "A house is, hands down, the single-biggest investment most investors will make," says Robert McWhirter, the Toronto-based president of Selective Asset Management.
Whether you're shopping for a condo in downtown Toronto or looking for a five-bedroom house in the pricey Shaughnessy Heights neighbourhood of Vancouver, there's no getting away from the fact that we're the closest to an interest rate hike than we have been in five years.
If rates start to rise, those once-in-a-generation low rates will vanish, pushing up debt-servicing costs for those with flexible-rate mortgages.
"Someone looking to adjust [fix] their mortgage rate at 2.8 per cent for five years makes a lot of sense," Mr. McWhirter said. "To me, that is worth the peace of mind."
Gold
No discussion of safe havens is complete without the yellow metal.
Anyone who was invested in gold these past few years has probably taken it on the chin. But given the intense selling pressure elsewhere, bullion prices could move up for the short term, as they did this past week, rising to a one-month high.
That move, however, is more an aberration and less an emerging trend, analysts say, as the increase will likely come up against a tightening monetary stance from the U.S. Federal Reserve and a stronger U.S. dollar, which will likely offset any safe-haven inflows.
Gold prices hit a low of $1,180 in June of 2013 when then-Fed Chairman Ben Bernanke announced the decision to taper bond repurchases. The metal retested the low in December, and again recently this year.
"We've seen the low, which may well hold. But I don't see a lot of upside potential from where we are now," said Patricia Mohr, commodity market specialist at the Bank of Nova Scotia.