March 20, 2020
Over the almost 65 years of Jarislowsky Fraser’s history there have been many market corrections and extended bear markets. Each one seems different when it happens because the causes are never the same, the speed of the market reaction varies, and the time to recover is almost impossible for anyone to predict. In that sense, the market correction caused by the combined impact of the COVID-19 pandemic and the oil shock is similar. The speed and magnitude of the market’s fall is certainly unprecedented – it usually takes much longer for markets to fall this deeply – but the result is the same: an erosion of asset value, heightened fear, and above all, a feeling of uncertainty as to what the future holds. Markets loathe uncertainty, and they react quickly with a “shoot first, ask later” attitude, but they invariably bounce back.
Governments and central banks are going to extraordinary lengths to prop up their economies and markets. Borders are closing and many economies are now essentially on lockdown. The U.S. Federal Reserve and the Bank of Canada have cut rates outside of regularly scheduled meetings in order to provide liquidity. Many countries have promised billions of dollars to mitigate the negative impact on businesses and citizens. However, even these substantial measures were not enough for investors who are looking for a stronger fiscal policy response, which they feel will be more impactful on growth. Having sunk to all-time lows on March 17, the 10-year U.S. Treasury yield shot up the next day as traders worried that things may be worse than they appear and that there may be excess bond supply.
During this volatile period, our investment team remains focused on the long-term fundamentals, seeking opportunities to garner longer-term excess returns for our portfolios and reinforcing their defensive characteristics. What we are seeing now is investors are selling their most liquid assets, and, as a result, market valuations are massively disconnected from the fundamentals. For patient, long-term investors such as our firm, this provides the opportunity to buy great assets at steep discounts. Throughout the crisis so far, our analysts have been performing stress tests and using our deep access to management teams to assess the capacity of each and every one of our holdings to ride out the downturn and, where relevant, to maintain their dividends. In general, the vast majority of our names have low leverage and low payout ratios, and we are confident that they have solid balance sheets that can withstand the impact of an extended downturn.
We believe that difficult times call for thoughtful consideration rather than short-term thinking. History shows that the global economy and stock markets will tend to swing too far in both directions, and therefore we expect that when there are signs that the outbreak is under control, markets will respond with enthusiasm. For instance, if we look at the returns of the S&P/TSX Composite Index between 1960 and 2017, there was only a single rolling five-year period where the return of the composite was negative. As such, remaining disciplined and invested through a well-thought-out long-term strategy is key to achieving portfolio growth over the long run.
Finally, we would encourage everyone to spare a thought for people whose health and livelihoods are being put directly at risk by this crisis. Anyone in the travel, restaurant, oil & gas and many other businesses is hurting. And of course, thank you to our front-line health care workers for their tireless dedication.
We value your trust, and will continue to provide our perspectives and thoughts on the evolving markets during this unprecedented crisis.
¹ Source: Morningstar - Based on 5-year annualized returns of the S&P/TSX Composite Total Return Index from December 31, 1960 to 2017.