5 Strategies for Investing Safely in 2016

Gordon Pape | February 22nd, 2016

Our struggling economy has many Canadians worrying more than ever about their financial well-being. Here, five strategies for safe investing and staying the course during unsettling times.

These are difficult times for investors. Interest rates are near rock bottom, economic growth is tepid, the loonie is floundering, the depression in the oil and gas sector continues, and stock markets are unusually volatile. Faced with these conditions, many people are just keeping their heads down and trying to preserve what they have.

I wish I could say that the situation is only temporary and that normalcy (whatever that is) will return soon. Unfortunately, I cannot offer any such assurance. We are going to have to contend with the current situation through 2016 and beyond. What we need are strategies that will minimize any financial damage and put us in a position to make a reasonable return on our investments.

To that end, I’ve compiled a list of some of the key areas to watch in the year ahead, along with my suggestions for appropriate action.

Here they are.

1 The U.S. economy

The one ray of light in a rather gloomy scenario is U.S. economic growth. It gradually gained momentum in 2015 after a slow start caused by a horrendous winter. Ideally, that momentum would continue through 2016 but some experts feel that’s too optimistic. The Federal Reserve Board forecasts a growth of 2.4 per cent this year, which would be about the same as 2015. That projected growth rate isn’t terrible but neither is it going to inspire much confidence. As a result, I expect the U.S. stock market to move broadly sideways in 2016, with a lot of volatility along the way, as Americans await the result of the November presidential election.

Action

In these circumstances, investing in the broad market, for example through exchange-traded funds, is not a good strategy. Instead, focus on individual stocks that are likely to outperform, with a special emphasis on those with a history of regular dividend increases. The information technology, health care, and consumer staples sectors are worth special attention.

2 Slowdown in China

The rate of Chinese economic growth has slowed significantly and the ripple effect has been far-reaching.

In the first quarter of 2013, Chinese GDP was expanding at an annualized rate of 8 per cent. By the fourth quarter of 2015 it was estimated to have fallen to 6.9 per cent.

Any Western nation that achieved that level would be ecstatic but for China’s burgeoning population such a precipitous decline in growth, and the jobs that come with it, is a major cause for concern. The People’s Bank of China (China’s central bank) projects the country’s growth rate at 6.8 per cent in 2016, which means the situation is not expected to improve this year.

China’s slowdown has hit world commodity markets hard. With demand falling for materials ranging from copper to coal, prices have dropped dramatically. Share prices of producing companies, many of them Canadian, have melted down in response. Teck Resources, one of the giants of the industry, saw its share price fall from more than $35 in early 2013 to about below $5 at the time of writing.

Action

Resource prices are notoriously cyclical and they will recover at some point. But given the tepid outlook for Chinese growth in the next couple of years, that rebound is not likely to occur in 2016. Stay away from the sector unless you have the patience to wait a few years for a profit.

3 Europe in turmoil

Europe is facing a series of challenges unprecedented since the Second World War.

First came the near collapse of the Eurozone over the Greek crisis; next the sanctions against Russia, which hurt European exports; then the tidal wave of refugees from Syria and other countries; and finally the terrorist attacks in France that led to the imposition of border controls.

The united Europe envisaged by post-war planners appears to be splintering before our eyes. Surprisingly, European stock markets held up reasonably well in the face of all this bad news.

In fact, at the time of writing key indexes in Germany and France were comfortably in the black over the previous 12 months, well ahead of their U.S. and Canadian counterparts.

Action

It may be too much to expect more of the same in 2016 but the fact European stocks were able to withstand such great social, economic, and geo-political pressures is encouraging. I have always maintained that broad global diversification is essential in any well-balanced portfolio and these results serve to strengthen my conviction.

4 Panic in the Oil Patch

It may cost a lot less to fill the gas tank, but we as a nation are paying a high price for cheap oil.

Capital spending in the energy sector has been slashed by billions of dollars, thousands of people have been laid off, Alberta is in recession and facing a deficit, the Canadian economy is stalled and no one knows what impact the Paris climate deal’s carbon tax and cap on emissions will have on the big producers.

On top of that, the collapse in the oil price has knocked down the loonie to its lowest level in more than a decade. That may be a boon for exporters but it has driven up the cost of imported goods, including food.

On balance, low oil prices are bad news for this country. There’s no relief in sight. We are caught in the middle of a global struggle for market share with Middle Eastern producers, led by Saudi Arabia, attempting to drive upstart American shale oil companies out of business.

So far, the strategy has shown only modest success. Shale production in the U.S. has declined in recent months but not by as much as expected. The December OPEC meeting made it clear the Saudis are in for the long haul so cheap oil is here to stay, for a while.

Action

Here again we have a situation in which the price will eventually come back, but don’t expect that to happen soon. If you want to invest in energy, choose industry leaders with downstream assets (e.g. refineries, retail distributors) such as Suncor and Imperial Oil. They have held up better than most.

5 Interest rates

In mid-December, the U.S. Federal Reserve Board finally pulled the trigger and started raising interest rates for the first time since 2006.

Although the move was not a surprise, it pushed the loonie down even further and set us on a divergent track with the U.S. after our central bank cut its key rate twice last year.

Don’t expect the Bank of Canada to raise rates in 2016 – if anything, we might see another cut. Our economy is very fragile, which the new Liberal government recognized with its promise to provide infrastructure spending. The central bank is not likely to negate the effect of that initiative by raising rates.

There is no reason to expect better returns on your bonds and GICs this year. If anything, we could see rates sag even lower. Some European sovereign bonds are now quoted at negative returns, meaning people are willing to pay governments to keep their money safe for them.

Action

If you must invest in interest-bearing securities, stay short term. That’s the best way to minimize risk, even though returns will be minimal.

The bottom line is that 2016 is not shaping up as a great year for investing so focus on capital preservation.

One of the best ways to do that is to keep a portion of your assets in U.S. cash. If the loonie continues to depreciate, which is a possibility, you’ll make a nice profit on the exchange rate.