Have you noticed the words recession, downturn, market crash, or correction showing up more frequently in business headlines?
Analysts and global economic monitoring agencies are increasingly sounding the alarm that the global economy is heading into a rough patch. The main culprit appears to be the extended trade dispute between the United States and China.
The two countries continue to negotiate toward an agreement, and daily tweets are keeping traders on their toes. One minute the news is positive, indicating progress; the next says there has been a breakdown in talks.
In the near term, it appears a partial deal might be on the way to try to shore up global confidence. This makes political sense for the leaders on both sides of the issue.
The U.S. is headed for an election next year and Donald Trump wants to avoid triggering a recession and subsequent stock market crash as he battles to win a second term as president. In China, economic growth is the slowest the country has seen in decades. The government is already dealing with protests in Hong Kong, so any expansion of unrest into the mainland caused by economic hardship would be problematic.
As such, investors should expect to see a deal of some sort emerge between the two countries in the coming weeks or months, but there is a risk the damage has already been done.
How do we know?
Central banks around the world are starting to devalue their currencies in a bid to shore up faltering economies. At the same time, global bond yields continue to plunge, with more than 25% of global government debt trading at negative yields.
The risk is that governments have limited tools available to combat the next downturn, and that would mean the next correction could be deep and last longer than normal.
Big global corporations are already starting to tighten their belts. For example, HSBC, an international bank, just announced it will cut its global workforce by 4%, or about 10,000 jobs, in an effort to reduce costs, citing a challenging global environment.
Which defensive stocks should you buy?
Whether it occurs next month, or next year, a correction is likely on the way.
The best companies to own heading into a downturn tend to be those that enjoy wide moats, provide products or services that are essential for daily life, pay reliable dividends, and operate in markets or industries that would be relatively insulated from a global economic slump.
Let’s take a look at BCE (TSX:BCE)(NYSE:BCE) to see why it might be an interesting pick today for a TFSA portfolio.
BCE is Canada’s largest communications company providing consumers and businesses with mobile, internet, and TV services. The firm also operates a large media division that owns sports teams, a television network, specialty channels, and radio stations.
Mobile and internet services are essential for homes and businesses to operate efficiently. As such, these would be the last items to be cut from most budgets in the event of economic hardship.
Phone upgrades could get delayed, which would have an impact on hardware sales and advertising spending could come under pressure, but these are relatively small parts of the overall revenue picture.
In the event of a recession, interest rates would fall and bond yield should continue to slide. This would benefit BCE as the cost of borrowing would drop, leading to lower debt expenses and therefore freeing up more cash to distribute as dividends.
BCE generates adequate free cash flow to support its generous dividend program. The company normally raises the payout by about 5% per year. Investors who buy today can lock in a yield of 4.9%.
The bottom line
The broader market is due for a correction, regardless of the trigger, so it makes sense for investors to consider adding some defensive positions to their portfolios.
BCE is one of a number of high-quality stocks in the TSX Index that tend to hold up well during a market downturn.
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Fool contributor Andrew Walker owns shares of BCE.
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