Yann Furic
B.B.A., M. Sc., CFA®
Senior Portfolio Manager, Asset Allocation and Alternative Strategies
We'll be okay
We’re now in early April, and each week is different from the next. The stock markets have bounced back strongly lately, but volatility remains high and market movements are still unpredictable.
The duration of the epidemic remains the most important factor. The strict isolation ordered by governments aims to dampen the pandemic as quickly as possible, but it results in a marked slowdown in almost all economic sectors.
Positive effects of government and monetary measures
The massive injection of liquidity into the system by governments is starting to have positive repercussions. Some bond markets are functioning better, and several big companies have raised capital on this market recently.
After the third reduction in its policy rate, which now stands at 0.25%, the Bank of Canada began a quantitative easing program to stimulate the money market and bond market, like the United States.
The rollout of fiscal policies by Canada and many other countries is underway. The primary goal is to stabilize personal income to avoid further slowing of the economy and to help businesses weather the crisis.
The dividend situation
Although the assistance measures are a step in the right direction, some countries like Germany are asking companies that benefit from them to suspend the payment of dividends during the loan repayment period.
Canada has yet to issue such a directive, but some industries could follow suit, such as the energy sector, where some companies have already reduced or canceled payouts. As for the big Canadian banks, BMO’s CEO said there are no plans yet to move in that direction.
Dividend income is expected to drop in the coming months, but holding less cyclical quality stocks should help cushion the shock.
Uncertain oil prices
The price of a barrel of WTI oil has reached its lowest level in the past 18 years and is hovering around US$20, which is negatively impacting all producers and hitting Canada hard. The oil sector is dealing with two simultaneous crises.
Saudi Arabia and Russia are still engaged in a price war. Russia wants to force a reduction in U.S. production by lowering the price of a barrel below its production cost. To reach a fair deal on a general reduction in output and an increase in prices, the Saudis wants to bring all OPEC countries and Russia back to the negotiating table. Such a meeting, also involving several other producer countries, should take place this Thursday, April 9.
In fact, Presidents Trump and Putin discussed the situation on the phone last week and agreed that it’s bad for everyone.
Oil market in freefall
What complicates matters is that the current restrictions and isolation of people have led to a significant drop in the need for oil. The sharp decline in air travel, combined with the low gasoline consumption of private vehicle owners, translates into a 10% to 25% reduction in global demand.
Canadian producers are seriously affected: some have started to reduce spending and cut their dividends. This double crisis could continue beyond the pandemic, with reluctance to travel and telework habits adding to the economic slowdown and delaying a recovery.
update on our strategies
We remain underweight equities and continue to favour shares of big companies that have little debt and are less cyclical. Because of persistent market volatility, we are taking a more cautious approach which, in the long term, should allow us to take advantage of new opportunities.
Managing in a time of crisis
To help you better understand the complexity of portfolio management in a period like the current one, we offer you an insight into the strategies used by some of our portfolio managers since the beginning of this market decline.
We can’t repeat it enough: the best strategy will always be to have a portfolio that is well positioned to weather any situation. In addition, the recent bear markets we’ve experienced have been quicker.
Managers can no longer simply have a prepared plan in place and react: they have to anticipate and adapt their actions to the situation.
Agility and responsiveness
In times of crisis, a plan to manage the market decline must be put in place quickly.
Take the example of our FDP Global Equity Portfolio which is managed by the external manager MFS Investment Management Canada Ltd. This manager has implemented a three-phase strategy.
Phase 1
- The first phase was rolled out in late February and early March. MFS then made several trades aimed at increasing exposure to more defensive sectors, such as consumer staples. So shares of L’Oréal were replaced with shares of Colgate-Palmolive. The objective was to further secure the portfolio
Phase 2
- Around mid-March, MFS then set out to take advantage of market dislocations. Many stocks then had very attractive valuations. MFS selected issues which are well positioned in their industry and which will survive the crisis, such as Adidas and Starbucks, which were added or whose weighting in the fund was increased.
This manager is not basing its investment decisions on 2020 revenues, which will not be a good indicator for valuing a company, but rather on expected revenues in 2021. This phase aimed to take advantage of the many bargains available on the markets.
Phase 3
- The third and most recent step was to sell stocks that now had less attractive income potential, while making it a point to hold on to issues like Visa and Microsoft because they benefit from the current confinement restrictions and will remain leaders after the health crisis.
MFS’s strategy has supported the value of the global equity portfolio while optimally positioning it for the post-crisis period. It should also be noted that all these moves have led to an increase in the portfolio turnover rate, which has risen from around 25% to 70% on an annualized basis.
We will not reap the benefits of this positioning next week. However, our investors who hold this fund in their portfolio can be both reassured and confident about the next few years.
Opportunities and effective management
This is just one example among all our managers. We can, however, identify some points in common in their portfolio management
- They all follow a rigorous and orderly process.
- They react quickly with targeted actions to limit the decline in the portfolio.
- They identify opportunities created by the market turbulence and position themselves for the future.
With managers of this calibre, selected for their expertise and their experience, even if the news isn’t always very good, we’re always one step ahead.
If you have any questions about your investment portfolio, feel free to contact your advisor. We’re working hard to protect your assets during this difficult time. You can count on us.
Yann Furic, B.B.A., M. Sc., CFA
Senior Portfolio Manager, Asset Allocation and Alternatives Strategies
Stéphane Girard, MBA, CIMTM, Fin.Pl.
Product Manager, Professional Practice
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. For any questions, don’t hesitate to contact your wealth management advisor or your tax specialist, accountant or legal advisor.
