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TSX Stocks: It’s Time to Get Defensive as Recession Odds Rise

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Double exposure of a businessman and stairs - Business Success Concept
Double exposure of a businessman and stairs - Business Success Concept

Written by Vineet Kulkarni at The Motley Fool Canada

The pandemic brought in the shortest recession ever during early 2020. However, the next such episode will likely be soon but could last longer.

According to the survey conducted by The Wall Street Journal, economists see a 44% likelihood of a recession in the next 12 months. Despite rapidly raising rates this year, inflationary pressures do not seem to wane. Apart from that, supply chain issues, rising oil prices, and higher borrowing costs have contributed to the possibility of a recession. Notably, economists indicated a 38% possibility of a recession during the 2008 meltdown.

Are we heading for a recession?

Market participants seem to be readying for an economic downturn. The TSX Composite Index has fallen 15%, while the S&P 500 has dropped by a sizeable 21% from respective highs. Notably, if the economy takes an ugly turn from here, the global financial markets could see even more weakness.

This has been a terrible year for growth investors. So, if you are thinking of betting on beaten-down names and acting on the correction, this might not be a prudent time. Bigger rate hikes along with economic uncertainty could push them further lower.

So, it’s better to move away from growth stocks to defensives and focus on stability. Slow-moving, less-volatile stocks will outperform in uncertain markets and be relatively better at protecting capital.

Top TSX, safe-haven bets

For example, top Canadian utility Fortis (TSX:FTS)(NYSE:FTS) has outperformed in several economic downturns in the past. Its stable dividends prove all the more valuable in bear markets.

When markets crashed during the pandemic in March 2020, Fortis notably outperformed and also maintained its dividend-growth streak. Note that be it recession or bull markets, Fortis has increased its dividend for the last 48 consecutive years.

Thanks to its large, regulated operations, Fortis generates stable earnings in almost all economic cycles. As a result, investors take shelter in these defensive names when markets turn rough.

FTS stock currently yields 3.7%, which is in line with TSX stocks. Though utility stocks generally trade inversely to interest rates, their stable dividend profiles will likely help them stand strong amid market turmoil.

Stocks like FTS will not make you rich overnight, but they offer stability when growth names plunder amid volatile markets.

Another such name is BCE (TSX:BCE)(NYSE:BCE). Telecom stocks also earn stable cash flows like utilities because of their low-risk business model and regulated operations. BCE also pays steady dividends and has a long, reliable dividend payment history.

Also, with 5G at the fore, BCE will likely see an even accelerated subscriber base and earnings expansion going forward. Its balance sheet strength will likely play well for higher capex needs.

BCE stock has returned 10% on average in the last 10 years, notably outperforming broader markets.

Bottom line

Note that these two might go one way up from here as recession fears rise. However, safe havens like BCE and FTS will likely outperform. Also, their stable dividends and slow-moving stocks play well when uncertainties in broader markets increase.

The post TSX Stocks: It’s Time to Get Defensive as Recession Odds Rise appeared first on The Motley Fool Canada.

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The Motley Fool recommends FORTIS INC.  Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

2022

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