Stock markets were lower this week, though the decline was relatively tame. In this week’s note, I will:

·       provide an update on the progress being made with COVID-19,

·       discuss the implications of some comments made by the World Health Organization,

·       and share some thoughts on how we are staying disciplined through this unusual period.  

COVID-19 update

We continue to see a mostly positive—or at least declining—trend in new global case counts this week. In Europe, trends are lower with the exception of Germany and northern Italy, where there have been recent increases. In Canada, most provinces continue to move in the right direction, with the exception being Quebec, and Montreal in particular, whose levels have not seen as much of a decline. In the U.S., the state of New York continues to improve. Nevertheless, there have been other states – Illinois, Massachusetts, Michigan, and Louisiana for example - whose numbers have increased and driven the country’s daily new case count higher. Lastly, in the emerging world, new cases continue to be elevated in countries such as Russia and Brazil, though they have not necessarily accelerated. Overall, the gradual reopening of the global economy – Europe, Canada, and the United States – has progressed with more districts, including parts of the state of New York, easing some restrictions. Don’t expect this to go smoothly in all places and at all times. Hopefully, leaders will appreciate that staged reopening is important, that missteps will happen, and that staged closing if preferable to complete retrenchment when needed. The markets still seem more primed for bad news than good, so we could see pronounced drops when / if there are signs some areas are having to backtrack reopening plans. 

Will it go away?

This week, officials at the World Health Organization warned that COVID-19 may never go away. While alarming, the organization did go on to say the virus may continue to exist in our communities for years just as other viruses do while the global population builds natural immunity to it over time. Moreover, they indicated that treatments might also be developed in the future to allow people to more effectively manage the disease. A vaccine too, while more challenging, cannot be ruled out, particularly given the many efforts underway globally. Indeed, Canada this week is starting accelerated Phase I trials for its own vaccine, with each successive phase being started before the last phase is fully complete.

Implications for investing

Government restrictions are being lifted around the world and the healing of economies has begun. That said, it is hard to imagine life completely returning to normal any time soon, particularly if society has to accept the scenario described above. And so, while we expect economic activity, personal income, and company earnings to experience a rebound in the near-term as more restrictions get eased and people finally leave their homes, it may still be some time before economies are running at full capacity. In fact, RBC’s own economists expect the output gap—measuring the potential and actual output of an economy—to last well more than a year.

 It can be challenging to remain disciplined throughout this period. This is particularly true because of the circumstances which feel unique. But, two considerations keep me grounded in our long-term approach. As I have spoken of before in these letters, the resiliency and ability of humankind to adapt and innovate over time should never be underestimated. This has been proven through history with other devastating episodes such as wars, financial crises, natural disasters, and pandemics, among other things. Second, the earnings of most well-run companies have a tendency of gravitating back to their long-term trajectories after periods of crisis, even if it takes a few years to do so. I believe these longer-term perspectives will continue to help guide us through the near-term, which remains undeniably uncertain.

One final note on the future

I have been working on what is quickly turning into a bit of an opus on my thoughts on the medium- and long- term future for the economy coming out of this crisis. I firmly believe that what COVID-19 is bringing today is a rapid acceleration of trends that we had started to talk about and invest in earnest in prior to this year: the coming Industrial Revolution that was slowly beginning to show up in our daily lives and will now take a leap forward. In fact, it was a number of thematically-related investments that have formed the base of our strong investment performance in portfolios for clients (among other things).

 In the immediate recovery, we will see several companies quickly gain prominence by either being better able to employ these new tools, or be the ones supplying industry with them. What this will first show up as-is:

·       A dispersion of returns between industries, as well as between individual companies within industries. There will be winners and losers.

·       Stronger companies will continue to outperform as their balance sheets allow them to outcompete, out-innovate, and outbid their weaker competitors.

·       A further acceleration of the move in a lot of the economy to more automation and more virtualization (work from home, e.g.).

·       More bankruptcies, especially in highly leveraged companies, as well as some “opportunistic” restructuring where companies use it as an excuse to lay off workers, renege on debts, and remerge with clean balance sheets.

 Be sure that we are watching both the short-term opportunities and risks, and the longer-term trends for investment opportunities.

 As always, please feel free to reach out! Now that we’re all in our home offices all of the time, even just a quick question is always a pleasant addition to my day.

 All the very best for the coming week!

 

Sam