Yann Furic
B.B.A., M. Sc., CFA®
Senior Portfolio Manager, Asset Allocation and Alternative Strategies
A matter of time!
The overall impact of the coronavirus on the global economy has yet to be determined, but the longer the epidemic lasts, the greater it will be. The duration remains the key variable. Meanwhile, the markets are seesawing in a climate of volatility that we have not seen for a long time.
Reaction from central banks and governments
Faced with this situation, central banks and governments said they intend to support global economic growth through both monetary policy and fiscal policy.
Both the U.S. and Canadian governments are preparing to announce tax measures for companies to give these trading partners the boost they need to maintain their operations and avoid layoffs.
Period of volatility: risks, but above all opportunities
Falling policy rates
The U.S. Federal Reserve and the Bank of Canada have already cut their key rates. In Canada, the drop of 0.50% should have a positive effect on the financial sector and the banks, and it should also stimulate other sectors of the economy that are not affected by the current economic situation, notably the real estate sector. Although mortgage rates have not been lowered yet, we can expect such a scenario in the near future.
Economic repercussions
Despite the negative impact felt by certain sectors of the world economy such as tourism, air transport and the service sector, it should be remembered that this effect is only temporary. The manufacturing and industrial sectors have also seen a slowdown due to supply delays. However, what we are witnessing is a postponement of demand: once the Chinese economy rebounds, demand for goods and services (cell phones, vehicles, consumer goods) will quickly pick up again.
Oil situation
In this uncertain environment, Saudi Arabia launched a price war by maximizing its production and by offering significant discounts to buyers. These actions are aimed at bringing Russia and other OPEC members to the negotiating table to reach an agreement on new production quotas. It also hopes to destroy shale oil production in the United States.
Oil prices fell sharply and the U.S. and Canadian oil sectors were seriously impacted. However, this oil price war cannot go on forever because of the high cost of social programs that Saudi Arabia supports.
Impact on the stock markets
This is not the first stock market shock, as we have experienced several in the past two decades. Since no one can predict the future, the markets could experience more swings and volatility could remain high. However, considering the stability of corporate profits, the stock markets are now lower than they were just a few weeks ago. The economic recovery which should follow a return to normal will accelerate demand for oil and raw materials, which will benefit the industrial and financial sectors. With the economic stimulus measures announced by governments and the monetary policies of central banks, the current economic cycle could continue, with very low rates
What we have done to protect the portfolios
In our Private Banking approaches, we reduced the weighting of equities from 60% to 55%, then raised it to 60% following the March 9 correction.
- As the stock markets have fallen sharply and interest rates are reaching historic lows, we believe it is preferable to be overweight stocks right now.
- We have underweighted EAFE equities because Europe and Japan have little ammunition to stimulate the economy, while emerging economies and especially China have this capacity and seem to have seen the worst of the epidemic.
- Considering the anticipated room for economic stimulus in Canada and the United States, we are neutral on Canada and overweight the United States and emerging markets, at the expense of EAFE markets.
In our mutual funds, we have adjusted the weighting of our FDP Balanced Portfolios.
As an investor, how do you navigate this volatility?
Our main recommendations remain the same: stick to your investment policy and stay invested.
- Market events can be destabilizing in the short term. However, over a period of ten years or more, return deviations even out. Make sure your investment portfolio is well diversified and that it matches your investor profile, which should be updated periodically.
- By holding less volatile stocks, which respond well to interest rate cuts, you can limit the losses in your portfolio. Note that the sharp drop in interest rates is also positive for the price of bonds, which continue to play their role as shock absorbers in a weak stock market.
- Place your trust in managers who invest in quality securities.
- Stay invested. If you sell your investments in a moment of panic, there is little chance that you will return to the market, in which case you will miss the recovery and the profits that come with it. Over the past 20 years, investors who sold their investments and subsequently re-entered the market made only half the return they could have if they missed the 10 best trading days.
- Bear in mind that, like previous market corrections, this one will have temporary impacts and may even create opportunities.
We remain vigilant and ready to react quickly. Check the home page of our website regularly for our updates on the situation.
Yann Furic, B.B.A., M. Sc., CFA
Senior Portfolio Manager, Asset Allocation and Alternative Strategies
