Unprecedented Policy Had the Intended Effect!
Global equity and fixed income markets staged an impressive recovery during the second quarter. This recovery was entirely attributable to the unprecedented fiscal and monetary policy intervention undertaken and coordinated globally. The effect of this extraordinary stimulus was to more than completely offset much of the economic damage caused by the COVID-19 shutdown.
While many market observers have tried to pattern the current behaviour of capital markets after various other periods of economic dislocation (i.e. 2008 Great Financial Crisis and the 1930’s Depression Era), there is nothing in recent financial history that would qualify as a reasonable guide to what the future holds. In fact, the only thing that we know for certain is that central bank manipulation of fixed income markets and the yield curve is to such an extent, any near-term fundamental analysis of inflationary trends or budget deficits is pointless. In our opinion, massive fiscal and monetary intervention will remain the key driving force behind capital markets until the COVID-19 threat has been eliminated. As such, we believe that short term interest rates will remain at or near zero and 10-year government bond yields will be range-bound in and around 0.5%. Under these circumstances, our current strategic asset allocation of minimum fixed income and maximum equities will continue.
During the second half of 2020, we look for non-North American equity markets to move to the top of the performance list as investors seek to spread risk among regional markets. Consequently, we will be moving to a more balanced allocation between North American and non-North American equities as we rebalance in mid-July.
The S&P TSX Composite turned in an impressive recovery during the second quarter, however, that recovery can be attributed to a single stock – Shopify. Remarkably, Shopify contributed more than ALL of the TSX Composite’s total return for the first six months of 2020! Historically, outsized single stock influence (Nortel, Bre-X Minerals, Valeant Pharmaceuticals etc.), both positively and negatively, has been a recurring trait of the Canadian equity market. A trait that makes us very nervous today. Consequently, during the second half of 2020, we will remain either underweight or zero weight Canadian equities depending on individual mandate constraints.