We hope everyone is staying safe during these uncertain times. We continue to monitor economic developments and the implications for our clients’ investment portfolios. We have stayed true to our investment strategy by rebalancing your portfolios as stocks declined to put our clients in the best position to participate in the recovery. We took advantage of tax-loss selling for non-registered accounts where it was appropriate. However, we must acknowledge that the world is a significantly different place than what it was five weeks ago. Society will continue to change as we adjust to our new daily routines. We don’t know whether the pandemic will takes weeks or months to play out. But when it comes to your investments, it is important to be mindful of what the world will look like on the other side of this valley that we find ourselves in. Outlined below are a few of the changes we made to your portfolios, along with the rationale.
New social norms
The changing trends and social patterns that were in motion before this pandemic are going to accelerate during social distancing practices. As we become more comfortable working from home, companies are going to seriously question whether spending money on office space is the best use of their resources. With each passing day, we become more comfortable connecting with friends and family through internet applications such as Skype or Facetime. This is also true for organizations of all sizes, which now conduct meetings with staff and clients using similar tools. Universities have been experimenting with online education for years. Currently, 1.1 million students in New York City will be using Google Classroom to continue their education from home while the city is under quarantine. The restaurant industry was already seeing reduced foot traffic as people began the shift to food delivery. This disruption to our daily routines will only accelerate that shift. IT departments will focus on updating cloud technology as opposed to their local servers. Every organization will now have a pandemic plan built into their corporate policy.
Safety equipment such as hand sanitizer, face masks and other protective gear will be updated and available on a broader basis. Hand sanitizers and disinfectants are going to become more prominent in day to day lives. During the SARS outbreak in 2003, hospitals and other medical facilities added hand sanitizer stations throughout their facilities. These stations remain to this day. My local grocery store has added those same stations to their front door.
Investment Changes
Understandably, it may seem strange to be selling investments while they are down in value. But this is not a regular stock market correction. This is a fundamental shift in how we will function as a society and we must respond by positioning your investments to take advantage of the disruption. Standing firm and waiting for everything to go back to the way things were is not a strategy; it’s a prayer. There will be companies that do not make it out of this crisis. Others may survive but be severely wounded. We must be mindful of where the world is going when we select investments.
We have reduced the amount of our investment exposure to the Canadian stock market. Financials and Energy are the two most significant components of our stock market and both have a challenging road ahead of them. When they struggle, it has a trickle-down effect on everyone else.
The energy sector is under immense pressure from not only COVID-19 but the falling price of oil—unfortunately, we are an innocent bystander in a geopolitical dispute between the U.S., Russia and Saudi Arabia. Even if all three decide to cut production. We are in the midst of a massive drop in demand drop with most methods of transportation sitting parked during this quarantine.
The Canadian banks are under pressure from three key areas:
- Oil & Gas industry – Companies could start to default on debt payments depending on how long the price of oil stays below $45 a barrel.
- COVID-19 – Banks have begun closing branches and limiting the amount of staff available at the ones that remain open. With social distancing in place, fewer people will be signing up for new products. Also, mortgage and loan deferral payments for six-months will impact their earnings ability in the short-term.
- Lower interest rates – When interest rates are lower, banks make less money.
We will be reinvesting your money into technology, healthcare, utilities and the consumer staple sectors. The reasons for technology and healthcare are highlighted earlier. Utilities and Consumer Staples area defensive investments that produce stable cash flows during times of uncertainty. The Consumer Staples sector is comprised of industries that produce and sell essential products. Examples would be grocers, household goods, hygiene products, food and beverage producers. These industries are vital to our society even while we are practicing social distancing.
We have also increased our defensive exposure via gold. Gold will serve as a multi-purpose hedge against:
- More prolonged and worse than expected global growth slowdown accompanied during a recession.
- Undesirable types of inflation
- Geopolitics (U.S. primaries, Iran) and other unpredictable tail risks that can pop up with higher frequency in this type of environment (see oil & gas concerns mentioned earlier)
We appreciate the trust and faith that you have placed in us. We believe these measures will help us ensure we continue to have the most conviction in our strategy and its ability to achieve your objectives over time.
Should you have any questions or concerns, please feel free to reach out.
Best regards,
Connor