Although many economists continue to believe that another recession can be avoided, my gut instinct tells me a downturn is more likely than not. At the very best, we can expect a period of slow growth.
That's why I have been advising caution on new equity purchases. There will always be investment opportunities, of course, but you have to be very selective and exercise price discipline.
In this context, I presented four broad investment themes for 2012 during my workshop at the World MoneyShow Toronto last month. They are gold, bonds, dividend-paying stocks, and income trusts/limited partnerships. Here's what I had to say about each.
A price of $2,000 (U.S.) an ounce looks very possible. Interestingly, the metal is doing better than the mining stocks. The S&P/TSX Global Gold index, which reflects the performance of several gold producers, was up far less.
I have never been a gold bug, and I have always been skeptical about claims that it would climb to $5,000 or more. But we are living in extraordinary times.
I have seen many crises over the years but I can't recall the world being in quite such disarray during peacetime as we are experiencing now. Entire countries are teetering on the edge of bankruptcy, people have lost confidence in their leaders, and corporations are stockpiling cash and hunkering down. It's a mess.
It is in conditions like these that gold thrives.
It's the one universal store of value in a time when paper money is being degraded. It doesn't matter where you are in the world – gold is accepted as a sound investment and a viable alternative when markets and economies are in trouble. Suffice it to say, there are still some good profits to be made.
As of the close of trading last Friday, the Dex Universe Bond Index, which reflects the performance of the broad Canadian bond market, was ahead 7 per cent for 2011. That is an astounding outperformance when compared to most major averages.
That means that if your portfolio was equally balanced between bonds and stocks that tracked those indexes, you be marginally in the black year-to-date. That result was totally unexpected; back in January, hardly anyone predicted a strong year for bonds.
We have many good dividend stocks, a large number of which have yields beyond 3 per cent. I suggested to the audience that they look closely at these in particular:
Income Trusts/Limited Partnerships
Many investors don't realize that there are still a few income trusts and limited partnerships (LPs) despite the imposition of the new Canadian trust tax on January 1. Here are two that I discussed at the MoneyShow. We have not recommended these in The Canada Report, but they are worth a look.
Inter Pipeline Fund
Calgary-based Inter Pipeline is in the business of petroleum transportation, bulk liquid storage, and natural gas liquids extraction. The business is recession-resistant, so there is not a lot of downside here.
This limited partnership pays a monthly distribution of 8 cents per unit (96 cents a year, figures in Canadian dollars), and raised its payout by 6.7 per cent at the beginning of the year despite the new tax.
Brookfield Renewable Power Fund
This is one of the largest power income funds in North America.
The business is the production of electricity from environmentally friendly and renewable resources. The fund indirectly owns or holds interests in 42 hydroelectric generating stations and two wind farms in Quebec, Ontario, British Columbia, and New England.
As with all the securities in this group, cash flow and relatively low risk are the main attractions. Any capital gains are a bonus.
Of course, none of these picks except the bonds is immune from a severe stock market downturn. But unless you retreat 100 per cent to cash you have to accept some degree of risk.
I believe that a portfolio that is strong in these four areas will hold up well in the period ahead, while throwing off some cash flow in the process.