Summary – March 18, 2020


1. We shouldn’t judge the success of the economic policies being put in place right now by the stock market

  • The volatility in the stock market is being driven by uncertainty, and there are a lot of forced sellers.
  • Correlations are going to one and in the case of quantitative trading, they don’t have much historical data to judge the responses of governments, because this is all new. All the algorithms see right now is “sell” based on the headlines and general market panic.
  • The priority of governments is no longer the deficit, but to limit increases in unemployment rates; they are clearly willing to do whatever it takes, including:
    • Individuals under financial duress due to the pandemic will receive cheques directly from the government and extensions to meet certain financial obligations.
    • Companies under financial duress will be granted extensions to meet certain financial obligations and/or be provided with temporary credit to remain solvent..
  • This is not a liquidity crisis similar to 2008, when the banking system was broken and we had to restore it.
  • Governments are allowing banks to lend more and have indicated that banks are resilient, well capitalized and prepared for a recession.
  • We do expect the global economy to experience a recession, but we anticipate that it will be short-lived. We expect negative growth in Q1 and Q2 in the U.S. and Canada, with an estimate of approximately -3% in Q1 and -6% in Q2 (annualized) for Canada.


2. We have been active in these markets

  • We no longer own gold or gold-related companies because they aren’t proving to be an adequate diversifier with correlations going to one.
  • We are overweight emerging market equities. Since emerging markets had to deal with the virus first, they will likely be the first to recover. There are minor, but encouraging, signs that economic growth is bouncing back in China; and while China’s stock market is still down, it has been performing more strongly than the rest of the world.
  • There are currently more coronavirus cases outside of China.
  • China is starting to ramp up production and it shows in their export data; however, demand around the world is starting to shrink, which will cause a delay in global economic recovery.
  • We have also been adding to financials because we are confident that the programs being put in place by the Federal Reserve have gotten ahead of any wider credit market risks. Remember, the Fed has a playbook from 2008.
  • This isn’t the time to go “all in” on certain asset classes, but it is prudent to make purchases over time in asset classes we feel have been unfairly punished or those we expect to rebound quickly.
  • Currently, we are overweight emerging markets, EAFE and the banking sector.
  • We are underweight the U.S.
    • The U.S. could be affected much more in the days and weeks to come because the country has a private healthcare system and people had to pay to be tested until March 18, when the U.S. government stepped in and provided financial help for coronavirus testing. As a result, the number of coronavirus cases could be underestimated for now.
    • There are many illegal immigrants as well, and they are not eager to be tested for fear of deportation, which compounds the situation.


3. The game changer: government bond yields

  • Over the last few days, we’ve seen some increases in government bond yields in the U.S. and Europe. The yield curve has begun to steepen.
  • Some view this as a reason to be nervous, seeing it as an early rejection of adding more debt on top of already historic debt levels. The massive spending programs will need be to be financed and it’s rational for investors to demand a higher yield to finance them.
  • This could finally be the trigger that reverses the long-term decline in bond yields. We are not calling for a bond bear market, as it’s too soon to judge the success of the economic stimulus being put in place. However, this is a very important indicator to watch in the coming months.
  • For the last year, even before the coronavirus outbreak, many believed fiscal stimulus is the appropriate response to get the global economy back on track. Often, a crisis produces the results that can't be achieved in ordinary times, as political issues among various government parties are removed from the equation.
  • Over the long term, apart from an anticipated uptick in economic recovery, fiscal stimulus packages may finally result in inflation moving higher, removing the fear of deflation from the markets.
  • We remain positive on the market’s ability to overcome the impact of the coronavirus. There will be short-term economic pain on a global scale, but history has shown that taking an optimistic viewpoint is the best approach.


Learn more about Clément Gignac and the Funds he manages.


Definition of terms: Correlation – A measure of how two investments perform in relation to each another. A high positive correlation means the two investments perform very similar to each other (when one goes up, the other goes up to a similar degree, and vice versa), while a high negative correlation means they perform very differently (when one goes up, the other goes down to a similar degree, and vice versa). EAFE – The acronym for countries in Europe, Australasia and the Far East. Fiscal policy – Measures a government takes to influence the direction of the economy (e.g., tax rate increases or decreases, government spending increases or decreases). Forced selling – The selling of securities to adhere to an investment mandate or satisfy investor redemptions. Liquidity (central bank) – Refers to economic conditions, resulting from central bank policy, in which credit is plentiful and easily accessible. Overweight – An overweight position means an investor or investment fund manager is allocating more to an asset class, sector, geographic region or other category than the benchmark weighting. Quantitative investing – An approach to investing that incorporates sophisticated algorithms and computer modelling to help identify investments that meet a predefined set of criteria. Underweight – Allocating less to an asset class, sector, geographic region or other category than the benchmark weighting. Yield – The income earned from a security. Yield curve – Graphically illustrates the yields and maturities of bonds of similar credit quality. A normal yield curve slopes upwards (i.e. bond yields rise as maturities lengthen). A flat yield curve indicates that yields on long- and short-maturity debt instruments are roughly the same. An inverted yield curve represents market conditions in which long-term debt instruments have lower yields than short-term debt instruments. An inverted yield curve has historically been a leading indicator of recession. The long or back end of the yield curve is the part of the curve that plots longer-dated bonds. The short or front end of the yield curve is the part of the curve that plots shorter-dated maturities.