March 12, 2020
Over the past few days, we have witnessed a significant market pullback as a result of the escalation in the severity of the COVID-19 outbreak — now officially declared a pandemic — combined with the unexpected collapse of oil prices. It is virtually impossible for anybody to predict what will happen over the coming days or weeks, as the COVID-19 health situation remains very fluid. Countries are following China’s example by taking unprecedented measures to contain the virus as rapidly as possible. While the risk of becoming infected remains currently low for the population in the Americas, our governments and major corporations appear to be implementing measures that will be required to ensure worst case scenarios will not become reality.
Our primary objective is to be responsible stewards of our clients’ capital. Understanding that short-term shocks and market volatility will inevitably occur, we have confidence that adherence to our time-tested investment philosophy, which has shown our portfolio’s resilience through many market storms, will continue to produce excellent long-term outcomes.
As we have said before, until the Holiday season, the global economy appeared to be in relatively good shape. Obviously 2019 turned out to be a strong market and provided excellent returns in most client portfolios, especially those with a bias towards stocks. Unfortunately, the spread of the coronavirus has led to a number of issues that will likely cause a slowdown in economic growth, and have a direct or trickle-down effect into a variety of other areas. The coronavirus is undoubtedly affecting global supply chains, as well as the demand for oil. As a result, oil prices started to slide earlier in the year. The latest, and most significant development, is the breakdown of OPEC and the resulting collapse in the price of oil to under US$35 per barrel. Saudi Arabia is tired of bearing the brunt of production cuts and by offering price cuts and increasing production is trying to encourage other producers (e.g. Russia and even the U.S.) to reduce production. As of now, the price of oil is down by close to 50% from its 2020 high and most global stock markets have fallen by almost 20%. Unsurprisingly, Energy and travel-related stocks have been hit the worst, but very few industry sectors have been spared. Volatility has been extreme.
Our portfolios are holding up relatively well. There has been no knee-jerk reaction amongst our portfolio managers and research analysts – most have seen this sort of dislocation before. There is no panic selling and none of the team are advocating a wholesale exit from stocks (or even a meaningful reduction). We are taking a more considered approach, assessing the long-term potential of the coronavirus outbreak to affect the economy and the likelihood of a medium term rebound in the demand for, and the price of, oil. Indeed we will look at everything with an opportunistic lens and perhaps make some marginal changes where merited.
From an asset mix perspective, our long-term bias towards quality equities has consistently produced value-added returns over long periods at relatively lower risk; however, this also means that significant market shocks will hurt in the short term. The overweight position in U.S. dollar denominated assets has somewhat offset the decline as money has flowed into safe haven currencies. Our non-Canadian portfolios hold many global players than are less exposed to the global economic cycle, operating in areas such as household products and health care. Our equity portfolios are generally underweight the Energy sector, and we have previously exited some less resilient producers.
It is impossible for anyone to judge how this situation will play out. Markets are likely to remain highly volatile, especially since the portion of assets in passive funds or controlled by computer algorithms is higher than ever. We will continue to provide commentaries and updates as the global situation and markets evolve.
We are closely monitoring the situation, and remain very thoughtful with regards to the investment implications; however our investment decisions remain underpinned by long-term fundamentals and value creation. While market pullbacks are very emotional, we believe a disciplined approach will prevail when markets rebound as they have done in the past.