March 27, 2020
The COVID-19 pandemic continues to evolve incredibly quickly, with developments occurring every day. The world is essentially “in lockdown” with many leaders facing the monumental task of implementing necessary measures to protect their countries’ citizens while providing support for the economic impacts. The past few days have been especially volatile. There have been market moves of over 10% in both directions, driven by news of rapidly growing infection rates and unprecedented government stimulus. This provides yet further indications that staying the course and not making any rash moves continues to be a sensible strategy.
While there is still a great deal of uncertainty, it is clear that the majority of governments are being decisive in their actions, and are going to unprecedented lengths to provide stimulus and support for their citizens. In the U.S., the House and Senate agreed to a $2 trillion fiscal stimulus package. In Canada, an aid package of $107 billion was approved that includes direct funding and tax deferrals, providing immediate relief to individuals and businesses affected by the lockdown closures. Interest rates have been cut, and central banks are trying to maintain liquidity in all areas. Markets have reacted favourably, but they are still about 20% below the highs reached in February. We would expect volatility to continue — although central bank actions may reduce the intensity of the swings — until the exponential growth in new cases and deaths begins to flatten out. The statistics in the U.S. will be especially important.
The effect on the global economy is yet to be determined. A record number of people are registering for unemployment assistance and, combined with the halt in many consumer-related commerce, will likely lead to a meaningful contraction of GDP in the first quarter; however, these jobs could, in theory, come back gradually as the crisis abates. For Canada, the situation is exacerbated by the oil price war due to the current dispute between OPEC+ members Russia and Saudi Arabia. On the other hand, China is showing signs of recovery and we are seeing a pickup in economic activity. Once the virus is under control and restrictions are removed, the global economy should rebound vigorously.
On the equity market side, traditionally defensive sectors, with the exception of Real Estate, have generally outperformed, while commodity-related and more cyclical sectors have suffered. P/E multiples for the S&P 500 have fallen with unprecedented velocity, falling from a peak of 19x forward earnings to around 13x in the space of two weeks. As a result, from a statistical standpoint, market barometers are solidly in “buy” territory. That said, we are prudently looking to take advantage of the divergence in valuations and long-term fundamentals of quality companies.
Through all of this, our analysts and portfolio managers remain in regular contact with the companies they follow. They are asking management hard questions about balance sheet strength, the ability to maintain dividends, and how customers are being affected. They are assessing the companies’ defensive characteristics and potential short-term and longer-term headwinds, and which companies will rebound most strongly when the crisis comes to an end. The common resulting theme from all of their reviews is that if we are patient, we will find that our portfolios, which hold resilient, quality companies, should recover well when this pandemic crisis is all said and done.