Today (April 8th, 2020) saw the opening of Wuhan China after 76 days of lock down. Apparently it was greeted with cheers and throngs of mask wearing residents taking to the streets. We are guessing, but we suppose it’s only a matter of time before we get a second wave of COVID-19 in Wuhan. That said, the government is taking steps to mitigate this risks including quarantine, testing and mask requirements. This may create a path to follow for the rest of the world.
Many statistics are starting to roll in about unemployment claims and mortgage deferral applications. The TSX was down 37.4% from peak to trough and has since rebounded 19%. This has still left markets down around 22% in the first quarter of 2020. At one point the TSX had reverted back to its 2006 level. We think this is a strong case for diversification. Fixed income (the bond market) was not spared with investment grade debt falling 12% from peak to trough. We also saw the Canadian dollar fall by 12%. These calculations are our own based on price changes in ETFs that track these indices.
We continue to get a lot of question on what happens next. We think the playbook is still being written. Many European economies are beginning to plan their way back to work. The US which
has seemed to lag the rest of the world in this crisis may lag again. The problem is that we (the world) take much of our market direction from the US.
Many experts are calling for a “V” shaped or sharp recovery. Frankly we don’t see it because there is no precedent for the pandemic scenario. We do see a recovery going into the second half of the year and a tapering off. We think any recover will be more “U” shaped, uneven and muted with bouts of volatility. Why? Because too much of the economy has been shuttered and the virus has not been eradicated. It will take time to get the gears in full motion. There are also many pundits calling for a long protracted “L” shaped recovery. Is this possible? Yes it is. Will it happen? Again, no one really knows. It’s likely the truth lies somewhere among the three scenarios. Some areas of the economy will ramp up very rapidly and others such as hospitality and restaurants (dine in) for example will take some time to build back up to pre-pandemic levels (if ever). Some parts of the economy may be permanently shut down.
Has the world fundamentally changed? Possibly. We do believe that globalization models may be scaled back and that China could be a net loser in this scenario as large manufacturers look for back up production and even sourced goods locally. Crucial supplies such as food and medical equipment such as the all-important personal protection equipment or PPE (face masks, gowns, face shields, ventilators etc.) will be sourced locally, even if it is at premium pricing. However, overall we are not convinced that thousands of years of human behavior will change. History tends to repeat as does human behaviour.
We remain optimistic that much of lost portfolio values will slowly claw their way back to par. We are concerned with both the level of government debt and involvement in our everyday lives now. We are lucky to live in Canada during these times and we hope this will usher in a stronger sense of community that many of us remember growing up.