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How investors can thrive in a three-tier economy

Parts of the economy are moving in different directions with depression in some and boom time in others.

It is looking very much like a three-tier economy as we muddle through in this pandemic year.

Each tier is behaving differently and so it depends where your investments lie whether the impact is short and sharp or long and drawn out.

A Globe and Mail report noted that consumers are buying goods again, but services are slow to recover. Since 70% of the economy is service based, that’s a challenge.

Some parts of this tier are in depression and have been well documented, including airlines, aerospace, travel and tourism and some resources. Other areas are facing a slow and uneven recovery, including banks, bricks and mortar retail and restaurants. But another chunk is doing just fine, thank you, including internet and telecom services, things to do with working at home and home improvements, online shopping and things that deliver the goods.

Each sector offers opportunities, though the prospects for each, the timing and the risks differ.

Here’s how the tiers look:

Tier 1: Hanging on:
Expect bankruptcies and consolidation this fall. Many survivors of the first wave are just hanging on. The second pandemic wave has started and may disrupt the economy. If so, there’s more to come.

The survivors will bigger, stronger, leaner and better financed. Among the bankruptcies to date are such names as Hertz, Latam Airlines which is South America’s largest, Neiman Marcus, owned by the Canada Pension Plan, Brooks Brothers and J Crew. In merger news, French hotel company Accor (Raffles, Sofitel and Ibis) is considering combining with Britain’s InterContinental Hotels (Holiday Inn and Crowne Plaza). It would create the largest hotel group in the world.

Tier 2: Slow recovery
This is a muddle through group, with some parts of the business doing well and others struggling.

Revenue and profits are soft, but still support dividends. This includes banks whose margins are squeezed by low rates. Telecoms and some utilities face reduced demand, higher loan losses and pricing pressure. Mass merchandisers like Canadian Tire were closed for part of the spring. They face inventory and supply problems now as well as higher costs associated with online sales.

Tier 3: Doing Just fine
Building and home improvement centres have benefitted from the stay-at-home and nesting trends. As many firms extend work from home, office supplies and furniture are in big demand. Office Depot beat revenues and profit estimates in its latest quarter. Drug companies, grocers and food delivery services are also busy. Home and garden, couriers and delivery are all beneficiaries of online shopping trends.

Grocery stores have seen a sales boom during the pandemic as stay at home trends favour home cooking. Credit: Pexels

For investment choices, the place to start is with your strategic plan, which is your decision-making anchor. The goals set out there, developed with your advisor, will determine your asset mix, the need for growth versus income and tolerance for risk.

Thereafter it becomes easier to make investment choices. The economy is likely to move in fits and starts, so patience is key. But in the end, good companies rebound from challenging conditions and emerge stronger. Bad ones disappear.

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This is an edited version of article that appeared in the Internet Wealth Builder on September 28, 2020.

Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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