This has not been a “normal” selloff in equity markets. The nature of this drawdown has created one of the most unique and difficult investing environments of the last 30 years. Investors will often hear the terms “tail risk” or “black swan”. These are rare events that are difficult to predict in their occurrence and/or timing but one that can have severe consequences. Nothing compares to Covid-19 and the economic impact that it is having globally. Although we did have a scare with the H1N1 outbreak in 2009 during the financial crisis - mercifully, that outbreak was reasonably contained at a time the economy did not have the wherewithal to battle a massive pandemic. Thankfully, this time around, global economies are in a much better position to provide the massive fiscal and monetary responses required to help those most affected.
Policymakers have been quick to respond to support the economy - although the ability to respond from a healthcare perspective has been slower, resulting in heartbreaking images, particularly in Europe. From a financial perspective, central banks are printing money at a rate not seen since 2008. In the last month alone, the US Federal Reserve purchased over $1 trillion in securities through its “QE” program to provide liquidity to markets; as much as it did during the 2008 financial crisis. Back then, it took the central banks 12 months into the recession before acting at this scale. This time around there has been no hesitation and the moves have been globally co-ordinated.
To exacerbate the difficulties presented by effectively shutting down economies in the short term to mitigate the human cost of the virus, an oil supply/demand shock has emerged. Facing enormous demand destruction globally, the coalition of OPEC plus Russia has broken down. Both Saudi Arabia and Russia have increased production putting the global oil industry on an unsustainable footing. The coalition now clearly wants other oil producers (particularly US shale) to share in cutting production. There is no saying how long this oversupply could last, but combined with tumbling demand, only the highest quality energy producers will prevail. For our part, we have reduced our energy exposure over the last few years and thus have fared better than the market overall in this regard.
Canadian equities were amongst the hardest hit globally due to these aforementioned factors. While energy stocks were the most impacted, Canadian financials did not escape some of this pain. Banks will have to deal with the fallout of an economy that has ground to a halt, but trade at valuations not seen since 2008. Canadian banks are better capitalized and diversified today than they were 12 years ago, in large part due to stricter regulations on the sector.
The wave of Covid-19 has moved through international markets in a domino-like fashion. Asia, the first region affected, has since shown signs of recovery and it appears that manufacturing in China has begun to expand after effectively shutting down in the first two months of the year. Europe has been reeling from the impact of the virus with devastating consequences for countries such as Italy and Spain. This will hurt an already fragile economy, although normally frugal Germany is stepping up and providing significant fiscal stimulus. Finally, in the US, denial from the highest office exacerbated the problem and only further exposed a system unprepared for the scope of the pandemic. Equities have reacted accordingly, although the pace and scope of fiscal stimulus has been incredible, and will go a long way toward easing the worst impacts to the economy.
As we consider “tail risk”, it is important to remember that it exists at both ends of the spectrum. From a negative perspective, the virus could prove immune to therapies, or found to be transmitted through the air. Alternatively, an effective therapy could be discovered, or simply a dramatic slowdown in new cases as social distancing and warmer weather combine to mitigate the virus. The truth is, it is impossible to know, and while interesting to discuss potential outcomes, investors need to prepare to manage through what is going to be a volatile time.
From that perspective, lessons have been learned from 2008. Central banks are moving quickly to provide liquidity to financial markets. Governments are not delaying, ensuring the hardest hit individuals receive the financial help they need. Investors should remember the lessons as well. We must avoid the temptation to try to “pick the bottom”. If you had purchased stocks in December 2008, they would have fallen 15-20% over the next 3 months. However, over the next 3 years those same investments would have grown over 40%. The best course to manage this volatility is to gradually and systematically take advantage of opportunities as they present, effectively dollar cost averaging through the volatility. Given the uncertainty, it is more important than ever to focus on quality companies in strong financial shape. There is no doubt that resiliency will prevail, and this will have been an opportunity in the long run for rational investors. Always consider the short-term risks without losing sight of the long-term opportunities.
Finally, our thoughts go out to those directly impacted by COVID-19, and warmest appreciation to all the healthcare workers putting themselves in harm’s way so we can all be safe. It is impressive what we can do as a society and we have no doubt everyone will work together to see our way through this. We would like to wish you all the best in these difficult times and hope that you and your families are keeping well and safe.
Policymakers have been quick to respond to support the economy - although the ability to respond from a healthcare perspective has been slower, resulting in heartbreaking images, particularly in Europe. From a financial perspective, central banks are printing money at a rate not seen since 2008. In the last month alone, the US Federal Reserve purchased over $1 trillion in securities through its “QE” program to provide liquidity to markets; as much as it did during the 2008 financial crisis. Back then, it took the central banks 12 months into the recession before acting at this scale. This time around there has been no hesitation and the moves have been globally co-ordinated.
To exacerbate the difficulties presented by effectively shutting down economies in the short term to mitigate the human cost of the virus, an oil supply/demand shock has emerged. Facing enormous demand destruction globally, the coalition of OPEC plus Russia has broken down. Both Saudi Arabia and Russia have increased production putting the global oil industry on an unsustainable footing. The coalition now clearly wants other oil producers (particularly US shale) to share in cutting production. There is no saying how long this oversupply could last, but combined with tumbling demand, only the highest quality energy producers will prevail. For our part, we have reduced our energy exposure over the last few years and thus have fared better than the market overall in this regard.
Canadian equities were amongst the hardest hit globally due to these aforementioned factors. While energy stocks were the most impacted, Canadian financials did not escape some of this pain. Banks will have to deal with the fallout of an economy that has ground to a halt, but trade at valuations not seen since 2008. Canadian banks are better capitalized and diversified today than they were 12 years ago, in large part due to stricter regulations on the sector.
The wave of Covid-19 has moved through international markets in a domino-like fashion. Asia, the first region affected, has since shown signs of recovery and it appears that manufacturing in China has begun to expand after effectively shutting down in the first two months of the year. Europe has been reeling from the impact of the virus with devastating consequences for countries such as Italy and Spain. This will hurt an already fragile economy, although normally frugal Germany is stepping up and providing significant fiscal stimulus. Finally, in the US, denial from the highest office exacerbated the problem and only further exposed a system unprepared for the scope of the pandemic. Equities have reacted accordingly, although the pace and scope of fiscal stimulus has been incredible, and will go a long way toward easing the worst impacts to the economy.
As we consider “tail risk”, it is important to remember that it exists at both ends of the spectrum. From a negative perspective, the virus could prove immune to therapies, or found to be transmitted through the air. Alternatively, an effective therapy could be discovered, or simply a dramatic slowdown in new cases as social distancing and warmer weather combine to mitigate the virus. The truth is, it is impossible to know, and while interesting to discuss potential outcomes, investors need to prepare to manage through what is going to be a volatile time.
From that perspective, lessons have been learned from 2008. Central banks are moving quickly to provide liquidity to financial markets. Governments are not delaying, ensuring the hardest hit individuals receive the financial help they need. Investors should remember the lessons as well. We must avoid the temptation to try to “pick the bottom”. If you had purchased stocks in December 2008, they would have fallen 15-20% over the next 3 months. However, over the next 3 years those same investments would have grown over 40%. The best course to manage this volatility is to gradually and systematically take advantage of opportunities as they present, effectively dollar cost averaging through the volatility. Given the uncertainty, it is more important than ever to focus on quality companies in strong financial shape. There is no doubt that resiliency will prevail, and this will have been an opportunity in the long run for rational investors. Always consider the short-term risks without losing sight of the long-term opportunities.
Finally, our thoughts go out to those directly impacted by COVID-19, and warmest appreciation to all the healthcare workers putting themselves in harm’s way so we can all be safe. It is impressive what we can do as a society and we have no doubt everyone will work together to see our way through this. We would like to wish you all the best in these difficult times and hope that you and your families are keeping well and safe.