The patient has taken a turn for the worse, and now they parade specialists by the sickbed, each offering a grimmer diagnosis then the last, as the symptoms grow ever more pronounced.
Former Obama economic advisor Larry Summers estimates at least a 1 in 3 chance of renewed recession. Reagan economics guru Martin Feldstein (lately of Harvard) is up to a 50% probability of a relapse. And noted Canadian economist David Rosenberg now calls another recession “a virtual certainty,” though he’s been predicting it for months.
Helpfully, Rosenberg also discusses the optimal investment strategy for the renewed downturn:
- He suggests a “core” position in commodities, and in particularly foodstuffs, seeing secular growth in demand as a result of rising incomes in emerging markets.
- He believes gold and gold miners will benefit “as the economic downturn inevitably prompts more money printing, not just out of the Fed, but other major central banks as well.”
- He favors corporate debt from issuers with solid balance sheets.
- He also recommends long/short hedging strategies betting on high-quality stocks with low exposure to the economic cycle and against low-quality cyclical plays.
I believe my recommendation of Annaly Capital (NLY) fits into this thinking as a counter-cyclical high-yielder. And there are other yield plays that afford investors plenty of protection in lean times. Here are a few that look particularly interesting.
Kinder Morgan Energy Partners (KMP): The leading operator of energy infrastructure (natural gas and crude oil pipelines, shipping terminals, storage facilities, etc.) is a master limited partnership paying out the bulk of its profits in quarterly dividends. At the current price, it’s yielding 6.5% on an annualized basis. Much of the revenue is guaranteed by long-term contracts, and energy demand is on of those secular global growth stories that should help offset a recessionary US decline.
KMP has invested in expanded capacity to transport energy from new shale reservoirs in the central and southwest US, and these are growing and low-cost production basins that should hold up even if overall energy demand frays a bit. In recession-plagued 2009, the partnership was able to boost payout per share even as revenue slumped.
Singapore Telecom (SGTCF.PK): It’s hard to think of a more recession-proof hidey hole than the national telecom of Asia’s fastest-growing and most stable jurisdiction. This year, its dividends yielded 8%. And there’s a high likelihood that the Singapore dollar will continue to appreciate against the greenback in line with government policy, further increasing the attraction for US investors.
Aes Tiete (AESAY.PK): The owner of 16 hydroelectric plants in the Brazilian states of Sao Paolo and Minas Gerais pays out all of its income via quarterly dividends. On a trailing basis, it yields 8.9%. Aes Tiete projects Brazilian generating capacity to grow 4.5% annually through 2019, with hydropower expanding almost as quickly.
Brazil’s slumping stock market is flashing serious slowdown signals after a series of rate hikes meant to slow inflation, so power demand may moderate in the near-term. But utility stocks tend to outperform in periods of falling interest rates, and Aes Tiete should remain a long-term beneficiary of Brazil’s development, spurred by Asia’s demand for its minerals and crops.
Honorable Mention: SeaDrill (SDRL): The owner of the most modern offshore-drilling fleet, SeaDrill is exposed to the (currently declining) price of crude, and there’s little doubt that a recessionary plunge back to $70 a barrel would hurt results as well as the share price.
But if you believe as I do that crude’s unlikely to drop below $80, the current yield of 9.5% (after yesterday’s 6% intraday drop in the share price) starts to look awfully attractive. Even in the unlikely event that global energy demand does not increase from current levels, the exhausting of aging off-shore reservoirs in the North Sea and the Gulf of Mexico should stimulate off-shore exploration elsewhere.
Sea Drill earns only an honorable mention because it’s more sensitive to the economic cycle than the other picks. On the other hand, it could also bounce higher than the others once the bears take an overdue break.