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Yann Furic
B.B.A., M. Sc., CFA

Senior Portfolio Manager, Asset Allocation and Alternative Strategies

Pandemic fears trigger market turbulence

The outbreak of the newcoronavirus (COVID-19) in many countries and its negative impact on global growth were the focus of the markets in February, overshadowing all the economic data released. Investor fears of a possible worsening of the situation spread quickly and stock markets were hard hit.

Focus on the past month

Overview of global equity markets*
  • The benchmark index of the Canadian stock market, the S&P/TSX, lost 6.1% in February.
  • U.S. equity markets also fell, with the S&P 500 dropping 8.1% and the Nasdaq, 6.4%.
  • International stock markets were the hardest hit, with the EAFE index ending the month down 9.2%.
  • Emerging market equities retreated 3.9%, while Chinese stock markets were the only ones to end the month in positive territory, rebounding 3.4% after January’s sharp declines.

* All the percentages in this section are in Canadian dollars. Bloomberg unless otherwise indicated.

Key events

  • After having set new records in the first two weeks of February, the markets plunged following the identification of many new cases of COVID-19 in South Korea, Iran and Italy.
  • Growing apprehension about a possible pandemic pushed bond yields down to historic lows, prompting several central banks to put in place emergency measures.
  • To allay investor fears, the Fed cut its benchmark rate by 0.5 point in early March, followed by the Bank of Canada, which lowered its policy rate by 0.25 point. Although viewed positively, such a strategy can, however, have counterproductive effects.
  • Job creation in Canada was stronger than anticipated, with 30,000 jobs filled while expectations were for 11,000. Year-over-year wage growth reached 4.3%, versus a forecast of 3.9%.
  • In the United States, 273,000 new jobs were added, far exceeding the 175,000 target. The annual wage growth rate remained at 3%, in line with forecasts.
  • Government of Canada bonds across maturities posted a return of 1.2% during the month. (Source: Canaccord Genuity)

Our strategic monitoring

Main risks

  • The possibility that the United States and China will fail to reach a more comprehensive trade deal could have negative consequences for the markets and for economic growth. In the current environment, however, the new coronavirus is the overriding issue and escalating fears about the virus are the main risk to consider.
  • For the economy to grow, consumer confidence is essential. It would crumble if a pandemic were declared, which would lead to a sharp drop in spending and could even result in a recession.

Fundamental indicators

Concerns over the proliferation of COVID-19 cases have had a short-term impact on various economic indicators.

Global Purchasing Managers’ Index
In China, the temporary closure of factories to curb the spread of COVID-19 has led to a production slowdown in the country, which has had devastating effects on manufacturing indexes in China and elsewhere in the world. In the United States, the Purchasing Managers’ Index has weakened and import volumes have plummeted due to consumer concerns.

Corporate bond risk premium
Investor enthusiasm for riskier investments has waned in the current environment. However, credit spreads are not at alarming levels for the moment.

François Landry
CFA

Vice-President and Chief Investment Officer

Vice-Chairman of the Board of Directors of Professionals' Financial - Private Management

Our strategies

Pending more details on the evolution of the coronavirus around the world, we exercised caution by reducing the equity weighting in the FDP Tactical Asset Allocation Private Portfolio from 60% to 55%.

We also underweighted EAFE region stocks, since Europe and Japan have few means to revive their economies. On the other hand, the weighting of U.S., Canadian and emerging economy equities was increased. The central banks and governments of the United States, Canada and emerging economies, particularly China, have more economic stimulustools at their disposal.

To learn more about the latest market developments and our comments on the situation, read our article and view our webinar on the COVID-19 crisis.

François Landry, CFA
Vice-President and Chief Investment Officer

Yann Furic, B.B.A., M. Sc., CFA
Senior Portfolio Manager, Asset Allocation and Alternative Strategies

Sources: Bloomberg

The opinions expressed here and on the next page do not necessarily represent the views of Professionals’ Financial. The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. Please consult your Wealth Management Advisor.

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