Chancellor of Queen’s University and former CEO of the Ontario Teachers’ Pension Plan
In any stock market crisis, the most important thing is to preserve liquidity. If you need money fast, the worst thing is to sell into a falling market. You can only sell your good stuff. Your weakest stuff, there’s no bid. It’s a time to be cautious. Unless you have cash on the side, this isn’t the time to be all in equities. Average investors shouldn’t be trying to hit the day of the market low. It’s a balanced portfolio.
President of A. Gary Shilling & Co.
Our client portfolios are pretty simple. We’re long U.S. treasuries, modestly short the stock market—the S&P 500—and long the U.S. dollar. In 1981, the yield on 30-year treasuries was 14.6 per cent and I said we’re entering the bond rally of a lifetime. People say we’re too close to zero now, but I think we’re going even lower on yields, so you still make money from price appreciation. For stocks, I compare the situation to 1929. You had the initial decline, then revival, then down again. We haven’t seen the other shoe drop yet.
Head, Alternative Investments, RBC Global Asset Management
When I started with Salomon Brothers in New York City 32 years ago, my boss would say, “Don’t fight the Fed.” Now that’s “Follow the Fed and the Bank of Canada.” The Bank of Canada is going to buy up to $10-billion worth of eligible corporate bonds over the next year. We believe a well-selected group of investment grade or near-investment grade bonds can generate a 12 per cent to 15 per cent total return over the next 18 months. I don’t know what stocks will do. But if you can make basically that owning debt of very good companies, that’s a very interesting proposition.
Jason Del Vicario
Portfolio manager and investment advisor with HollisWealth
My guess is that we at least re-visit the late March lows but the equity markets have been surprisingly strong of late. Either investors are seeing through this economic downturn or they believe the central banks of the world have saved us with their massive liquidity injections.
We caution that the economic downturn was in the cards before the virus hit. The yield curve inverted summer of 2019 and while many wrote this off as ‘this time is different’ it wasn’t and the inverted yield curve indicator maintains a perfect record of predicting recessions. Naturally, the depth and perhaps duration of this recession has been ‘aided’ by the virus but we contend we were headed this way regardless.
On the central bank fronts, they have been able to relieve the pressure of the liquidity crisis that much is clear. It however remains to be seen how the solvency crisis is dealt with. Liquidity crisis speaks to the imbalances we saw in late February and March as a result of large selling pressure of equities and bonds and a shortage of U.S. dollars.
We contend that we are now moving to the more serious and challenging issue of corporate solvencies. We are likely to see a spike in corporate bankruptcies as the corporate sector went into this crisis the most indebted ever. The macro view is therefore very challenged and the market is by no means cheap. The only factor we can point to supportive of risk asset valuations and higher valuations are interest rates. We have been of the view since 2008 we were in a lower for longer interest rate environment. We’ve witnessed a new leg down in rates through this crisis further supporting the very long and established bond bull run that began in the early 80s. Futures are pointing to negative rates in the US despite the Fed to date saying they won’t consider negative rates. We believe they will capitulate as a result of not wanting the U.S. dollar to be too strong. As rates drop the discount rate used to value future cash flows also drops which buoys risk asset prices. So if (BIG if’s here) we avoid domino effects of corporate failures, and the economy can regain its pre-crisis footing and the virus becomes contained we may see equities rocket from here. Please understand this is not what I’m expecting but it is possible.
We added a few international names in March that had dropped more than 40 per cent: Rightmove (UK) Kakaku.com (Japan) and Rational AG (Germany). While we don’t focus on sectors per se (but rather business models) we note that travel, tourism and the hospitality stocks we follow are still well off their highs. We don’t believe we have enough visibility yet to wade in but likely will. Names in these sectors we like are Booking (BKNG), CTS Eventim (Germany) and the publicly traded Mexican airport operators (OMAB, PAC & ASR).
CEO and managing director of GlobeInvest Capital Management Inc.
The unprecedented monetary and fiscal policy responses suggest March 23 marked the low in stock markets.
With countries starting to reopen their economies, economic activity should start to improve going forward. Concerns regarding a second wave of the virus outbreaks are valid but if it were to occur, swift policy responses are expected. In addition, a more complete tool kit is now in place to contain the virus. Nonetheless, the path back to economic and social normalcy will be slow and uneven which suggest continued choppiness in equity markets.
The COVID-19 health crisis has accelerated a few trends: (1) remote working (from home) with many companies announcing a more permanent shift to this trend even after containment measures are lifted and (2) E-commerce leading to the financial demise of brick & mortar oriented retailers, e.g. J. Crew, J.C. Penny, Neiman Marcus, Aldo, Reitmans, Forever 21, Pier 1 Imports. We believe these trends will be ongoing headwinds to the sector and sold H.R REIT from our client portfolios in late March.
We used the proceeds from the H.R. REIT sale and purchased Brookfield Renewable Power which owns and operates a portfolio of international assets that generate electricity from hydro, wind and solar. Clean energy was an area we wanted to increase exposure and valuations became much more attractive after the sell-off in March.
Other recent buys include Otis Elevators which was recently spun-off from United Technologies. Otis is the world’s largest elevator & escalator manufacturing, installation and service company. We like the recurring nature of its high margin services business which will hold up relatively well in an economic downturn. Otis shares are attractively valued, trading at a discount to its global peers.
Mondelez, a global snacking company with top category market shares in biscuits, chocolate and candy, is another company we have been buying. Consumers have gravitated to established, recognized brands in this health crisis which has benefitted Mondelez. In Q1/20, Mondelez reported market share gains in 80 per cent of its category sales and that 15-20 per cent of Oreo and Ritz consumers are new users to these brands. The company plans to maintain investment spending to expand market share further.
Managing director at Guardian Capital LP
We remain cautious on the equity market outlook after the very strong rebound we have seen. Equity markets appear to be looking through 2020 earnings and towards a strong economic recovery in 2021. However, there is still significant uncertainty about the shape and strength of the economic recovery, much of it depending on how the economy functions with social distancing rules still in place, whether or not we get a second COVID wave, and if and when the world develops an effective treatment or vaccine. As such, there is a very real risk that markets are pricing in a much stronger recovery than will actually materialize.
In terms of portfolio positioning, we continue to tilt towards defensive attributes including a strong focus on survivability underpinned by strong balance sheet and liquidity positions and businesses less directly impacted by COVID-19. However, we have also been layering in exposure to companies that are well positioned to prosper from the economic expansion when it arrives. We were quite active during the initial market downturn in March and through the rebound in April but have slowed a bit as compelling valuation opportunities become harder to find.
We added Element Fleet Management based on the combination of an attractive, capital light, business outlook and attributes, strong liquidity position and proven and focused management team. We added Canadian National Railway following the initial market downturn to take advantage of attractive valuation for a very high quality name. Although we expect that CNR could be impacted as the North American economy slows down, it is a core part of the supply chain and integral to the effective management of the pandemic. CNR should also benefit from its focus on long haul routes.
We added to Brookfield Infrastructure Partners based on its resilient business outlook, strong liquidity position and ability to find compelling growth opportunities in this environment. We increased our Telecom exposure including positions in Shaw, Telus and Rogers post the market rebound to take advantage of good relative valuation for businesses that should be defensive during a slow economic recovery.
We sold out position in Fairfax Holdings – we had added Fairfax based on the strength of its P&C insurance platform and our view that hard insurance markets would result in attractive growth. Through the downturn, it became apparent that the defensive characteristics of its insurance operations were being largely ignored with the focus almost solely on its investment portfolio. We also trimmed our Utilities holdings including Algonquin Power and Northland Power following very strong performance.
Senior portfolio manager Canadian equities, CIBC Asset Management Inc.
Investors continue to have greater confidence in medical innovation exceeding expectations, renewed confidence in supply chains and a flattened COVID curve, and assurances that central banks are willing and able to continue to stimulate and provide ample liquidity. As a result, we likely won’t test those late March lows again this cycle. However, a big hurdle still remaining for equity markets is that we have yet to go through a full quarter impacted by COVID and as a result we haven’t seen the impact it will have on profitability.
Looking forward, I’m expecting greater disparities amongst stocks; companies with stronger strategic positions, ample liquidity, recurring revenues and higher margins should be able to separate themselves from peers. The past 10 weeks provided a great reminder why market timing does not work, and instead I continue to keep cash levels lows, benefit from the long term trend of rising markets.
I’m a long term equity optimist, especially with interest rates likely in lower for longer territory. The strategy I see best suited for the next period is a barbell strategy that combines growth with growth oriented yield. The growth will be coming from overweighting sectors such as technology, industrials and base metals, and the yield will be coming from sectors that are best positioned to grow their distributions in the current environment: communications, renewables, infrastructure/waste and midstream/pipelines. Given high relative valuations and limited growth potential, I am de-emphasizing pure defensive sectors such as utilities, REITs, and staples but I have increased the gold weight for inflation protection. At current bullion prices, many of the best gold producers are generating attractive levels of excess free cash. Unlike prior cycles, that excess cash is not needed this time around by the large producers for significant acquisitions or major greenfield project developments, but will likely be returned to shareholders through dividends and buybacks.
Within energy, we are taking the view that the commodity is likely to go higher. There are not too many global producers making a profit at spot commodity prices and supply/demand fundamentals are quickly improving. However, we are sticking to a neutral weight in energy, largely through higher exposure to the midstream/pipeline companies, at least until there is more evidence of enduring profitability. Banks and life insurance companies have historically made up a large part of our dividend funds, however the optimism for these two subsectors has waned due to the prospects for rising loan losses, compressed net interest margins and the lower for longer interest rate environment. Within Financials there are still lots of opportunities in diversified financials such as Brookfield Asset Management and Element Fleet, that will likely exit this crises period well positioned for extended periods of growth.
Vice President & Senior Portfolio Manager, Caldwell Investment Management Ltd.
There are currently two counter-currents driving markets: the severe recessionary conditions caused by shelter-in-place mandates and government actions to counter-act those conditions. Both are very powerful and will likely cause volatility in the markets to remain heightened. Our view is that there are two ways to navigate this type of a market. The first is to own companies whose management teams excel at adapting to change. These are companies that navigate tough environments better than peers but also exit such periods relatively stronger such that market share, profitability and growth prospects become even stronger. This is our strategy in the Caldwell U.S. Dividend Advantage fund, where we are positioned in stocks like UnitedHealth, S&P Global and Visa. The second strategy involves adjusting the actual portfolio holdings to businesses that are likely to do well in a post-COVID-19 world. This requires a highly nimble strategy; one that can adjust quickly. This is what the Caldwell Canadian Value Momentum Fund is designed to do and where companies like Real Matters, Kinaxis, and Cargojet have generated meaningful outperformance versus broad-based indices. In both cases, Darwin’s saying rings true: It’s not the strongest that survive, but the most adaptable to change.
Compiled by John Daly and Brenda Bouw