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The upside of downturns.

Have you had enough recession yet?

Consumers, businesses, investors are being inundated with economic downturn woes. Outlooks and updates are bleak. Predictions are gloomy. Will it be recovery late 2009 or a prolonged slump lasting years? The reminders that global trade has collapsed, Canadian exports have stalled and that corporate earnings will be decimated are everywhere. So expect more job losses. The speed and scale, breadth and depth of the deterioration is alarming to even those who foresaw the downturn. Strategists offer the perfect hedge: it may get worse before it gets better. (Talk about standing on the fence).

Now marketing departments have ramped up. Anyone with anything to sell is fighting over a now smaller consumer pie. Advertisers trumpet a ‘beat the recession’ theme and ‘recession-busting’ prices. No-name over name-brand. Condo fire-sales. Back to basics. Budget. Tighten that belt. (How does one bargain shop while hunkering down and cutting back)?

The Conference Board of Canada suggests, however, that while Canada’s unemployment rate is now up to 8.4%, there are still over 91% of Canadians working. 1/3rd work in food or food processing, health services, education and the public service sectors. Regardless of the direction of the economy, people still need food, health care is not discretionary and in a recession more money is spend on retraining and adult education not less. As ever, government employment and spending is growing not declining.

Further, Harvard professor, Tom Nicholas reminds us of the broader points made by depression-era economist Joseph Schumpeter. To paraphrase: ‘during a recession, underperforming companies are destroyed. Capital moves to more productive companies or sectors’. Downturns can be a time of strategic opportunity. Cull the herd. The strongest emerge. (So Investment Banking job loss isn’t all bad).

For investors, the see-saw debate between half-empty and half-full is exhausting and are advised to look at the upside to a downturn.

Long-term investors, who are still accumulating assets, may not want a stock market recovery (just yet). A persistent sideways drift (think: months or years) gives investors time to buy more at lower prices, to re-invest dividends and to re-balance bonds and bond interest payments into now higher dividend yielding stocks.

Some investors may need time to rebuild their plan, rethink their investment policy and asset mix and importantly to revisit their risk tolerance. Others may need time to rebalance or replace high-cost mutuals for lower cost index or exchange traded funds. Some may need time to find a new advisor.

Investors would be wise to side-step any panicked debate. Never mind the ‘is now the time for’ this or that product du jour. Rather, focus on (re)building what always works under any economic scenario – a balanced, globally diversified portfolio.

Originally published March, 2009.

Doug Cronk CFA is Manager, Investments for a Canadian Pension Fund.

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