By Constantine Lycos
December 17
As I write this on Dec. 16, I look back and see that all the way through 2022 we have been talking about facing tougher conditions such as supply-chain disruptions, inflation, higher interest rates, and the likelihood of a recession.
We have probably been in a global recession in 2022, but we are not going to know until we get all the data sometime in 2023. Even if we aren’t, we are close to zero GDP growth in inflation-adjusted GDP in U.S. dollars. Many people are expecting the global recession will continue into 2023 with things possibly getting worse for U.S. and Canada, which fared better in 2022 than Europe, especially when we measure GDP growth in USD, as the U.S. dollar appreciated in 2022 against most currencies.
Under this scenario, you typically want to be investing in high-quality businesses that can withstand recessions. Keep in mind that the stock market typically bottoms six to nine months before the recession is over, so it is difficult to time the market.
When the market bottoms out, the more cyclical and lowerquality stocks and the ones that got taken down the most will outperform. No one has a crystal ball to determine the absolute bottom for the market. For that reason, I will stick to picking good quality stocks and that are not too expensive. And if we have a few more months of economic and/or market turmoil, so be it.
RLI Corp (NYSE: RLI - $126.71 – don’t pay over $133.00)
My first pick is a property and casualty insurance company, RLI Corp. They have been doing quite well over the last year, and before that. I think property and casualty insurance companies are interesting in a relatively high short-term rate environment because typically insurance companies match the duration of their assets to the duration of their liabilities. That means they hold shorter-term bonds quite a bit.
Life insurance companies and other investors that held longer-term bonds in 2022 saw the value of those bonds decline substantially. If you only held shorter term, not only did you not get a big drop in the valuation of your portfolio, but you got to reinvest the money at much higher rates than you were getting before.
That is something that is not within the control of this business, but it is a tailwind, as they say, for the business. So we will take it.
Tricon Residential (TSX: TCN – $10.25 don’t pay over $11.30)
There are going to be good businesses where the stock price has gone down enough that they become quite interesting. One such business is Tricon Residential. They own residential real estate in multiple locations in Canada and the U.S., in areas where population is growing, and rents are going up. The business is still quite good. The rental income from the properties that they own and manage has gone up significantly, yet the stock price is down quite a bit. The reason for that is that stock investors sell publicly traded real estate companies very quickly when interest rates go up, way before the value of the underlying real estate declines. With the stock down 47% in 2022 it is an interesting price to get into it. It may have a little more downside, but probably not much left.
Celanese Corp (NYSE: CE – $101.53 - don’t pay over $106.60)
And the third pick is going to be an industrial company Celanese Corp. They are the world’s largest producer of acetic acid and downstream derivative chemicals, kind of a chemical company.
Typically, these sorts of businesses tend to be cyclical, so their earnings deteriorate during recessions. But I believe a lot of that expected deterioration is already priced in the stock. With the stock being down some 39% year to date, you are getting a good business at a good price. Again, there could be some headwinds with the economic activity slowing down in the next year or so. Nonetheless, it’s a good idea to buy good businesses at a good price. This fits the bill.
As always, please consult your financial adviser to see whether these stocks fit in your hopefully already well diversified portfolio – or give us a call. Happy New Year!