We wanted to share our key thoughts on the current situation and how we intend to approach the days, weeks and months to come.

 

Volatility

We are currently experiencing some of the sharpest moves – both up and down – in stock prices that we have witnessed in some time. It feels particularly extreme because of where we just came from. It has only been a year or so since we left behind a decade of unusual calm in the markets. The emergence of a pandemic has been the unforeseen catalyst that has driven this bout of heightened volatility.

 

Coronavirus

The spread of the coronavirus is the key issue. What has become apparent is that the only proven way to slow infection rates is through social isolation and quarantine. It’s been successful in China & South Korea- today China reported no new domestic originated cases. For what it’s worth, Starbucks has recently re-opened stores in Wuhan & Apple is rapidly bringing production back on line. Elsewhere, more needs to be done. Ultimately, governments will have to sacrifice their economies in the short-term, to some extent, for the sake of society’s welfare.

 

Energy

Another factor has been the rapid decline in oil prices as a result of a standoff between two of the world’s largest oil producers: Saudi Arabia and Russia. While it’s hard to predict an outcome given its political nature, we expect this could last for a period of months, if not longer. But low oil prices hurt both countries and there is likely some pain threshold, measured in months, at which point negotiations may renew. The implications are important for Canada as any extended period of low oil prices will hurt our economy and our market, both of which depend on the industry. Furthermore, the bond market is watching this closely as investors have justifiably grown concerned about the ability of some companies to repay their loans should prices remain depressed for an extended period.

 

Governments and central banks

Governments have taken action around the world, attempting to contain the virus and slow its spread, largely via social isolation and mandated closure of events and even businesses. They are also taking steps to help businesses and consumers through this period where they will face lost revenue and cash flow. These were similar tactics used in China. Meanwhile, central banks have aggressively lowered interest rates and, more importantly, taken various measures to ensure that businesses have proper access to credit should they need to borrow money.

 

Implications

The implications for economic growth over the next few months are negative. But the degree of the rapid decline in stock and corporate bond markets likely reflects an already-heightened probability of economic recession. The important question now is whether the coming measures taken by governments and central banks are meaningful enough to convince investors that the impact will be a matter of a few months and a mild recession versus something that extends well into the second half of the year and is deeper in nature.

 

In our experience, basing investment decisions on extreme scenarios and trying to make large portfolio shifts is very challenging. It may be too short-term focused and may do more harm than good given the magnitude of government intervention. Past experience reminds us that market declines often end in a climactic fashion. But no one has the ability to accurately predict exactly when that will be.

 

We remain disciplined in our investment approach. This means focusing on your long-term objectives and ensuring your portfolio is diversified. We may undertake a few measures in the near-term, which includes:

 

- Harvesting tax losses where appropriate

- Opportunistically adding to existing or new positions that meet our criteria should the prices become excessively cheap

 

Should you have any questions or concerns, please feel free to reach out.