Minutes from April 6th conference call with Manulife's Chief Investment Strategist Philip Petursson
In over 25 years in the business Phil has never seen anything like this before. We are in unprecedented times and there is not one specific reference point or benchmark that we can rely on for comparison. This is not to be interpreted as the worst it has ever been. This WILL come to an end.
The major difference from previous recessions is that this one is 'engineered' - we are referring to it as 'The Great Pause'. It is not like 2008 or 2001. In 2008 there was massive financial excess which had to be released from the system. The sub-prime housing market and over-levered consumers were two such examples. In 2001 it was the dot com bubble. In the case of the great depression it followed the 'roaring 20's' where there was also excess leverage and in addition governments and central banks may have exacerbated that crisis instead of helping. Today these excesses are not present, economies have simply been put on hold and governments should be able to 'hit the play button' and get going again quickly.
Outlook for economy:
Unprecedented fiscal stimulus by central banks globally. There are programs to support businesses, small business, consumers and individuals. They are throwing everything but the kitchen sink at this problem. In Canada, there have been various forms of relief/deferral for bill payments and expedited access to EI. With that said we do believe we are in a recession in Canada.
Equity Markets:
Top to bottom we saw about a 35% decline from peak to trough in this bear market and it happened fast. That is the average bear market selloff. Fear is a normal response to an unknown situation, but we must avoid panic. Panic leads to mistakes such as selling and buying at the wrong time. Fear of missing out leads to buying at the wrong time.
Hope is not an investment philosophy, but neither is panic. We are advocates of discipline. For the past several months we have been advocating a balanced approach to fixed income and equities, helping to provide stability in the face of volatile markets.
What are our PMs doing?
• Re-balancing
• Taking advantage of price dislocations to buy good companies at attractive pricing and 'quality up' the portfolios
Playbook for investors:
1. Re-balance to your base asset allocation level
2. For those clients that are inclined beginning to 'buy the dip' could be attractive at these levels
3. This is not the time to sell. Bear markets end well before the end of a recession.
The 12- and 24-month equity returns from these levels have been very attractively historically.
Speaking with your advisor during these volatile times is more important than ever. Leverage them as financial coaches and how to best implement the plan which is best for you.
Q&A
Q. How long for investments to recover?
A. From an economic perspective the recovery will be faster than previous recessions. When stores/restaurants are open again they will have to re-hire. Markets have historically taken longer to recover to their highs - we anticipate it could be a couple years as we were at frothy valuations in February. However, a dollar invested today should be higher in a year's time.
Q. What do we need to see for the recovery to start and what shape does the recovery look like?
A. We are looking for growth rate of Covid infections to slow globally. Historically bear markets bottom before the end of the recession. As far as the shape of the recovery a 'lazy V'
Q. Unprecedented on government spending?
A. There could be massive deficits globally. This is likely to mean higher interest rates eventually as issuers of debt must compete.
Q. Bonds have been a haven for clients - what happened this time?
A. Returns in High Yield are about half of equities which is what you would historically expect. The Investment Grade space was more of a surprise. Leveraged investors have faced margin calls due to the sharp declines and they must raise their cash. Bonds and gold are easier to raise cash in than equities, so this has been seeing selling from these investors. Not a function of the underlying holdings it was a function of margin calls/forced selling. In addition, passive bond ETFs have been trading at a significant discount to market value due to the volatility - they are forced sellers in an environment with large bid-ask spreads. Also, an element of being marked to market.
Q. What impact do algorithms/electronic trading and passive investments have on volatility?
A. Tough to say for electronic trading. It appears that passive selling has exacerbated volatility. They are non-discriminate buyers and sellers. This presents opportunities for active managers though.
Q. US Administration action?
A. The longer you delay action, the longer you delay the recovery.
Q. What are you doing in your portfolio?
A. Slowly increasing equities.
Q. Expectation around oil and impact to CAD.
A. $25-$26 for WTI - no one is making money at these levels. It has negatively impacted the CAD. We think there is limited downside oil and therefore the CAD at these levels.