Market Update: March 20, 2020

Market Update: March 20, 2020

Who would have imagined, three short months ago, that our day-to-day lives could change so dramatically? We’ve gone from a world where the economy was humming and we were freely travelling, going to watch our favourite hockey team, and enjoying the company of friends at restaurants... to today, with closed borders, empty office towers, shuttered cafes, restaurants, bars, theatres, and arenas. Supply chains are disrupted and people, in some cases, mandated to self-isolate. On top of the COVID-19 coronavirus impacts to the economy and markets, oil prices have also tumbled as OPEC and Russia’s failure to reach an agreement resulted in a glut of supply on world markets.

Aside from the massive human cost in lives and quality of life that this virus is causing, it also promises to have a large negative effect on economic activity as, amongst other things, consumers reduce spending, trade is interrupted, and layoffs are announced.


The stock market has responded and quickly entered bear market territory: at the time of writing, the S&P/TSX Composite Index is down approximately (-31%) year-to-date, and the S&P 500 Index is down (-25%) in USD (-17% in CAD).

Stocks have declined across the board including, interestingly, the Gold sector—which is driven by a commodity that typically goes up when the broad stock market falls. This anomaly likely reflects the broader trend we are seeing, that investors are selling everything liquid – either to get into the security of cash, or to redeploy into equities as they have declined. This trend has also appeared in fixed income markets, where first provincials, and now some investment grade bonds are seeing large selling pressure as investors shed risk. For their part, valuations for high yield bonds have fallen to prior recession levels (excluding the Great Financial Crisis), reflecting expected default rates of around 10%.  

We believe, with a high degree of certainty, that we are going into a global recession. It is not possible at this point, however, to forecast how long it will persist. Some experts say it will be over in a matter of months; others feel it will take longer.

The shape of the economic recovery will ultimately depend on two key factors: how well we are able to contain the coronavirus and develop an effective vaccine; and how governments and central banks respond to the economic impact of the crisis. So far, we have seen globally coordinated, aggressive interest rate cuts, in significantly less time than in 2008-2009. The next important lever that governments will pull is intelligent use of fiscal policy. We have seen several examples so far around the world, including suspension of student loan payments, deferral of tax deadlines, announced forgivable small business loans to cover staff salaries, mandated suspension of rent and mortgage collection, and even direct cash payments to consumers. These types of policies will likely make the difference between a “U” and a “V”-shaped recession, and the depth that it might reach.

Whatever shape the recession takes, however, it is important to remember that eventually, things will get back to normal. Keeping this front of mind will help dissuade you from de-risking your investment portfolio at the worst possible time.


Our equity portfolios have also declined, and clients should prepare for lower balances in their March quarterly reports. For balanced mandates, bonds have provided a welcome stabilizer to equity market declines, helped by rapid and significant interest rate cuts from central banks.

Not surprisingly, the more cyclical industry sectors and individual companies with above-average levels of debt are getting hit particularly hard. In Canada, the industry sectors hit the worst year-to-date include Energy, Materials, Consumer Discretionary, and Financials.

When considering the broader economic (and capital markets) slowdown, it is important to remember that we invest in a “market of stocks” rather than a stock market. Individual businesses will be impacted differently, so our equity teams are performing additional stress testing in conjunction with our fixed income team. Together, they are assessing all the stocks in the portfolio, looking at the balance sheet strength and downside risks to each business to ensure as much as possible that our companies will be able to navigate the weaker economic situation that they will inevitably face.

With that said, our Canadian equity team had been improving the quality of the portfolio in recent months, exiting Baytex Energy in December and cashing out of Cineplex before its takeover was completed (to avoid the risk the deal doesn’t close). We also trimmed Great West Life to buy Bank of Montreal, capitalizing on valuation disparities between the two. Strong companies will be able to take advantage of the current environment. An example in Canada is Brookfield Infrastructure Partners, which recently raised $20 billion to invest in infrastructure assets globally. They should be able to find attractive opportunities at distressed prices.

In our International portfolio, our sub-advisors, Sprucegrove Investment Management, entered the downturn with cash levels above historical norms, sitting at 3-4% versus 1-2%, and have been actively deploying the cash into a variety of new positions. In addition, we are taking profits on some out-performing stocks like grocers, trimming to add to names that have been weaker but have strong outlooks. Key holdings like Novartis, a pharmaceutical company, will be strong through the next cycle but the stock is down significantly, in line with the market. Sprucegrove has added several new positions in the last month, buying high-quality businesses they have been watching for years, but which have only now become affordable. Being a low-turnover manager like us, adding many new names is indicative of extreme market conditions.

In the US market, weakness in Consumer Discretionary stocks have disproportionately hurt portfolio returns over the last month. Prices for companies in the sector reflect a view that either: consumer spending will be severely depressed for a very long time; or the companies have a high likelihood of not surviving. As with our other portfolios, we are stress testing debt and cash flow characteristics for each of our US holdings. Extremes in sentiment can reward as well as punish. Typically, when catastrophe scenarios don’t materialize, our positions perform well. Good balance sheets have been undervalued for a long time and we’ve been patient in waiting for investors to reward them. For example, one name that has been particularly punished in the current weakness is Aramark, which provides food services to schools, events and hospitals, as well as uniforms. Earnings will be hit in the shorter term as schools close and public gatherings are postponed; however, over the longer term we view it as an inexpensive business which represents good value at current levels. 

Where to from here?

There are many uncertainties and we do not have all the answers. What we do know is that as hard as it is to believe some days, we will eventually get back to “normal” economic activity. As always, we are taking a long-term approach to investing, assessing the underlying value of our businesses against current stock prices. Stock valuations are depressed so we are investing opportunistically, adding individual names with enhanced risk-return profiles to our portfolios.

For balanced and other mandates, where we have discretion to vary the mix between asset classes, we have been carefully rebalancing our portfolios by buying equities at much lower prices. When we might hit the bottom of the market is impossible to predict; however, we believe that the long-term returns from the equities in our portfolios are extremely compelling despite the risk right now. We will continue to add carefully as opportunities present themselves.

As in the other bear markets we’ve lived through before, it is important to focus on the long term. The short term is unpredictable, but the economy and markets will recover. Stay the course. Stay invested. We’ll get through this.

If you have any questions, please reach out to us. While we might be working remotely, we are still conducting business as usual and can be reached at our usual email addresses and telephone numbers.