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We’ve never seen this before: a two-year pandemic followed immediately by a shooting war in Europe involving a nuclear-armed nation. It’s a situation no one expected. What do you do in a scenario no one could have imagined two years ago?
Start by taking a deep breath. Think about the probabilities of what the world will look like a year from now.
The worst-case scenario, obviously, is that everything goes completely mad, and we experience the ultimate nightmare: a nuclear exchange. If that horror should happen, your investments will be the least of your worries, assuming you survive at all. I think the odds of this are very low but Vladimir Putin’s rocket-rattling is unsettling.
More probably, I believe a year from now we will have an uneasy ceasefire in Ukraine. Russia will find ways to minimize the impact of Western sanctions, but the price will be a new Cold War.
Western governments will rapidly increase military spending. Traditionally neutral countries like Sweden and Finland will seek territorial guarantees. Meantime, Russia will draw closer to China as its main economic prop.
Oil and gas prices should start to ease as the world adjusts to life without Russian energy. That will help relieve inflationary pressures and central banks may pause their interest rate increases. The economies of Canada, the U.S., and Europe should continue to rebound, with the help of public spending and new private sector investments.
With this in mind, take a fresh look at your portfolio. You may want to make some tweaks, such as adding exposure to defense stocks and natural resources. But the main emphasis should be on protecting capital. That means focusing on stocks that have minimal exposure to geopolitical fault lines. Here are four sectors to consider.
Most of their income is regulated and guaranteed through long-term fixed rate contracts. Revenues are stable and much of their income is inflation-protected. They are not exposed to geopolitical upheavals. That’s why the S&P/TSX Capped Utilities Index is up 1.34% for the year to date, while many other sectors are floundering. Stocks I like include Fortis Inc. (TSX: FTS), Emera Inc. (TSX: EMA), and Canadian Utilities Ltd. (TSX: CU).
The same argument can be made for telecommunications companies. Their revenue is stable and, for the most part, predictable. Their business is not threatened by foreign wars. Like utilities, these companies pay healthy dividends, which are regularly increased. The S&P/TSX Communication Services Index is ahead 5.1% year to date. My favourite stocks are BCE Inc. (TSX: BCE) and Telus Corp. (TSX: T).
This sector was battered after being overbought in 2020 and early 2021. It’s slowly turning around now as investors realize that energy generated by domestic wind, hydro, or solar power is not exposed to geopolitics, except to the extent their cost becomes more competitive as oil and gas prices rise. While the sector has been under pressure year to date, I still like Brookfield Renewable Partners LP (TSX: BEP.UN) and Algonquin Power and Utilities (TSX: AQN).
Russia’s new energy link to Europe, Nordstream 2, now looks like it may be doomed to rust away under the Baltic Sea. But North American pipeline companies are an excellent defensive choice. Despite a recent pullback, TC Energy Corp. (TSX: TRP) is up almost 20% year-to-date. Enbridge Inc. (TSX: ENB) has gained about 16%. Pembina Pipeline Corp. (TSX: PPL) is up 28%.
Short of Armageddon, all these stocks will limit downside risk and provide cash flow in these unpredictable times. Check your portfolio and discuss with your advisor before making any trades.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2022 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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