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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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.
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What’s up in the days ahead
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