It has been another eventful week with meaningful global developments in terms of the health care crisis and the implications for both the economy and the financial markets. The playbook for battling this pandemic and avoiding financial ruin continues to be drafted, edited and rewritten, but there are signs that many of the strategies put in place are proving to be successful. We’ve seen a slowing rate of infections in many regions. There is planning and discussion around the when and how a re-opening of economies with take place. And it appears the market is beginning to focus beyond the historically negative data that has been and will be reported for the first two quarters of 2020 and is signaling to investors which industries and companies will lead a recovery later this year.

Coronavirus

The recent data emerging from Europe has provided some degree of optimism. Specifically, we’ve seen a slowing rate of new infections across the most affected countries such as Italy, Spain and Germany. There are still new infections being reported daily, and unfortunately, many people are still losing their lives daily, but the rate of change is improving and this potentially bodes well for the weeks to come. The hope is that North America will also experience this important ‘peak infection rate’ relatively soon. There have been early signs in the state of New York, the epicenter of the crisis in the U.S., that suggest new cases may no longer be accelerating at the pace of a week ago. I continue to believe the leadership, as well as the compliance with guidelines, have spared us a worst fate here in Canada and close to home.

Government Interventions

I had highlighted in an earlier note that government had three roles to play related to providing leadership and certainty. The obvious first role was related to the restrictions and measures to be enforced to limit the spread of the virus. The other two are related to economic policy and interventions that are not so much intended to stimulate economic activity as they are to ensuring the economy would be in a position to recover on the other side of this. Most jurisdictions affected by the coronavirus have taken a ‘whatever is necessary’ approach to both monetary and fiscal policy, including the Bank of Canada and the U.S. Federal Reserve. Interest rates are at or near 0%, lending to small business is being deployed, emergency funding measures are being extended to a growing list of individuals, special credit facilities are being provided to corporations and entire industries, and payment deferrals are being offered to all kinds of personal and consumer loans. Every action is done with the intention to bridge this temporary period of time while the economy is shut-down via social distancing measures and work stoppage of non-essential business in order to contain and end the spread of COVID-19. The sooner this happens, the sooner we can re-open our businesses and our economies and the policies of government intervention can then be revised according to a new ‘whatever is necessary’, hopefully later in 2020.

Looking Forward

A few weeks ago, volatility was extreme and markets were declining sharply. More recently, while still elevated, volatility has moderated and the stock market has recovered some of its’ earlier losses. This has happened despite terrible economic data that has, and continues to illustrate the extent of the global shutdown. It has served as another good reminder that markets are forward looking in nature, and suggests that the markets are reacting more to stimulus measures and changes in coronavirus data than to economic date. While company and economic figures are likely to remain poor and may even worsen in the weeks to come, investors have grown optimistic that a peak in the healthcare crisis is near and some sense of normal economic activity may be on the horizon. As companies report results from the first quarter of 2020, the guidance they provide for the second half of the year will be critical, and will set expectations for future results to be measured against. There will be less importance paid to what has happened and more importance paid to what is in store down the road.

There are four industries, or four types of companies for investors to consider going forward. The first group are those that are expected to benefit in a process of economic recovery and those that will likely thrive from a new way of doing business. This group includes companies in the field of data centers, cloud and remote technology, 5G, data security and ecommerce. It also includes companies leading innovation in healthcare research and technology relating to healthcare delivery. The second group are those that have been least impacted by recent market volatility, such as utilities, highly regulated, essential infrastructure companies and retail businesses providing the staples that we continue to consume. The third group are those companies that will be challenged for some time due to a longer decline in revenue and profit, and reduced margins, among other things. This includes banks, insurance companies, and consumer discretionary businesses that sell ‘want-to-have’ items, not ‘need-to-have’ items. The last group are those that have experienced the sharpest decline in value since early March, and will most likely remain un-investable for some time. There will be opportunities to buy these cruise ship companies, hotel and resort companies, and travel companies sometime in the future, but they should be avoided for now due to the degree of company and industry uncertainty.

Take care of yourselves and each other, and we can all do our part to limit the spread of COVID-19. Feel free to contact me with any questions or concerns. Stay safe.