I’m worried that optimistic views about a quick market and economic recovery represent a harmful behavioural tendency called confirmation bias.
The always-helpful Psy-Fi website – dedicated to the study of psychological preferences that reduce investor returns – described confirmation bias as “our dedicated and sometimes demented preference for information that supports our pre-existing beliefs or decisions, and our equally fervent attempts to avoid finding disconfirming evidence.”
Applied to the current situation, confirmation bias may be taking a form whereby we hope fervently that the dislocations arising from the pandemic will be short-lived, and then using the strong equity rally from the March 23 lows to confirm that our hopes are justified.
There are certainly credible and far less optimistic forecasts that were ignored while stocks bounced.
Morgan Stanley biotechnology analyst Matthew Harrison warned investors that a U.S. recovery would be a long slow slog in a research report released Sunday. “We believe the path to re-opening the economy is going to be long … we expect the coastal regions, led by New York, to peak … over the next 3-5 days. However, we expect the rest of the country to follow slowly, trailing the coasts by around three weeks."
Mr. Harrison expects a “second peak” in U.S. COVID-19 infections. The end result in his estimation will be a U.S. economic recovery that will take four times as long as China’s and twice as long as Italy’s. Canadian growth, in many ways dependent on our southern neighbours, will likely follow suit.
B of A Securities (formerly Bank of America Merrill Lynch) global strategist Ethan Harris was even more strident, specifically calling out economists who expect a V-shaped recovery. These economists, he wrote, “have forgotten a basic lesson of the business cycle. Recessions can be triggered by a variety of shocks … but the recession continues well after the initial shock fades. This is because the drop in activity triggers a nasty feedback loop in the economy that overwhelms the policy easing. A two- or three-month shutdown will leave lasting scars on confidence.”
Not all of the experts are bearish, of course. Goldman Sachs U.S. equity strategist David Kostin informed clients that, thanks to central bank support, he believes the market bottom is already in.
Bearish or bullish, investors must avoid confirmation bias by consistently reading both sides of any argument with as much objective, cold, emotional detachment as they can muster.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Keep calm and go long: Advice from those who lived through the 2008 market meltdown
In 2008, as now – and many times in financial history – a massive crisis was about to cause widespread pain and dislocation. But it would also create huge opportunities. John Daly looks at some of the lessons learned and what some fund managers are up to this time around.
A 60-cent loonie and painful days for banks and homeowners: predictions for what comes next
We are about a month into the market turmoil from the pandemic. From week to week, the markets seem to go back and forth between panic and blind optimism. Anthony Scilipoti and Sam La of Veritas Investment Research share their thoughts for investors on what comes next.
In a market gone bonkers, here are three simple steps to maintain your sanity
The biggest challenge an investor faces is managing his or her own emotions. That is particularly true right now, when share prices are bouncing up and down based on a rapidly shifting mix of fear and hope. Odds are that volatility will remain with us for months to come as the world deals with the consequences of the pandemic. Ian McGugan offers three tips that can help you navigate this turbulent period in relative peace.
Analysts’ earnings forecasts lag harsh reality as pandemic clobbers economy
Equity analysts have been slow to adjust to the realities of the COVID-19 era, with current earnings forecasts largely out of sync with the ugly economic backdrop that is just starting to take shape. In the United States and Canada, consensus estimates still call for a relatively shallow decline in corporate profits, a rebound starting by the end of the year and a full recovery to record levels by next fall. The extreme curtailment of manufacturing and industrial activity, however, has the potential to cause - in the words of one - "crushing earnings declines.” Tim Shufelt reports.
Move over stocks: Perhaps the bigger opportunity is in investment-grade bonds
Market volatility over the past six weeks has created some head-spinning ups and downs for stocks. But corporate bonds are having their moments, too, as investors fret over the extent of the economic downturn. This uncertainty has hammered even investment-grade bonds, an area where one of Canada’s biggest fixed income investors sees a compelling opportunity to grab equity-like returns without assuming huge risks. David Berman reports.
Others (for subscribers)
RBC adds two more Canadian stocks to its top 30 list of best global investment ideas
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Executive invests over $2-million in this dividend stock
Thursday’s Insider Report: CEO invests over $1-million in this large-cap dividend stock
Telus insiders were buying in March
There’s only one TSX stock now trading at a technically attractive level
Base metals poll: Copper price to grind lower as coronavirus hits industrial demand
Number Cruncher: Nine quality names in a strongly rebounding U.S. tech sector
Number Cruncher: These 10 TSX dividend stocks offer very attractive yields amid the bear market
Others (for everyone)
Health, tech, staples could shine through U.S. earnings gloom
Working from home feeds market’s woes in little ways that add up
Virus outbreak delivers tech darlings a harsh reality check
Globe Advisor
Six cyclical dividend stocks for long-term investors’ portfolios
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Ask Globe Investor
Question: I have held Brookfield Infrastructure Partners LP (BIP.UN) for years. Recently, a small number of Brookfield Infrastructure Corp. (BIPC) shares appeared in my account. Where did they come from and what should I do with them?
Answer: Back in September, Brookfield Infrastructure Partners LP (which I’ll refer to by its stock symbol, BIP.UN) announced plans to create a publicly traded Canadian corporation called Brookfield Infrastructure Corp. (which I’ll refer to as BIPC).
Like BIP.UN, BIPC gives investors access to the company’s extensive global portfolio of infrastructure assets including utilities, pipelines, railways, ports, toll roads and communications towers. But BIPC is specifically aimed at certain institutions and U.S. retail investors who are unwilling or unable to hold limited partnership units. The move was also designed to broaden the company’s eligibility for certain indexes and exchange-traded funds.
But the split has also confused some investors, based on the e-mails I received. So let’s review the mechanics of what happened, and then we’ll discuss the implications for investors.
Under the split, which was completed on March 31, BIP.UN unitholders received one share of BIPC for every nine BIP.UN units held. The new shares didn’t replace BIP.UN units; if you held 100 BIP.UN units before the split, you still had 100 BIP.UN units after the split, plus 11 new BIPC shares and a small amount of cash to reflect the fact that no fractional shares were issued.
But you may have noticed that, on the day the split became effective, BIP.UN’s market price plunged by 8.6 per cent. This was no cause for alarm. All that happened was that – continuing with the example – the total value of your BIP.UN holdings was now spread across 100 BIP.UN units and 11 new BIPC shares.
What should you do with your BIPC shares? Well, BIP.UN and BIPC will pay the same distribution of 48.5 US cents per quarter and their prices are expected to track each other closely. The only difference is taxation. As a Bermuda-based limited partnership, BIP.UN’s distributions have historically included foreign dividend and interest income, Canadian source interest, other investment income, capital gains and return of capital. As a corporation, BIPC will pay eligible dividends that qualify for the dividend tax credit (DTC).
If you hold BIP.UN and BIPC in a registered account, the tax treatment is moot and there is no advantage to owning one over the other. However, in a non-registered account, BIPC might be the better choice because of the DTC, and because BIPC’s tax reporting will be more straightforward than BIP.UN.
Another thing to consider: According to the company, investors can exchange their new BIPC shares on a one-for-one basis for BIP.UN units by contacting their broker. One advantage of consolidating your holdings under BIP.UN is that, if you decide to sell your units, you’ll only pay one commission instead of two.
Brokers are supposed to have the ability to do such exchanges now, but when I contacted my own broker the rep was not aware of this option and said she would have to look into it. That was several days ago and I’m still waiting for a response.
“All brokers can facilitate this exchange and if they are unsure how to do this, we would suggest they contact us,” Melissa Low, Brookfield Infrastructure’s vice-president of investor relations, said in an e-mail. Investors who hold BIPC shares directly in registered form can contact the company’s transfer agent, Computershare, to request an exchange, she said.
The company is also exploring whether it could facilitate exchanges of BIP.UN units into BIPC shares, Ms. Low said. But there are no specifics at this time.
As a Brookfield Infrastructure investor (I own BIP.UN and BIPC personally and in my model Yield Hog Dividend Growth Portfolio – tgam.ca/dividendportfolio), I believe the company has a bright future. With the new corporate structure attracting a broader base of investors, the outlook just got even better.
--John Heinzl
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Compiled by Globe Investor Staff