MARKET COMMENTARY

Fiduciary Trust Webinar

Market Update and Outlook

03.31.2020 - Ian Riach, Chief Investment Officer

The COVID-19 pandemic has redefined global markets. In this environment, we hope you find this special webinar helpful. Featuring Fiduciary Trust’s Ian Riach, Chief Investment Officer; Scott Guitard, Portfolio Manager; and moderator Manmeet Bhatia, Head of Private Wealth, the webinar includes these key takeaways that we found especially valuable.

 

Global macro equity and fixed income performance

The severity of some of the daily market swings has suprised Ian Riach, who notes that Canada has been hit especially hard as the COVID-19 crisis has coincided with a global oil price war. Canadian equities are down 23% year-to-date and almost 30% from the market peak on February 19, 2020. Bond markets, particularly in the coporate space, have also experienced pronunced volatility. Governments and central banks have therefore responded aggresively with fiscal and monetary stimulus not seen since the depths of the Global Financial Crisis of 2008.

Portfolio positioning during a crisis

Scott Guitard explains that heading into 2020, the Fiduciary Trust team were positioned defensively, with a slight overweight in cash, a neutral position in bonds and an underweight position in Canadian equities. While certainly not foreseeing a global pandemic, he believed that slowing economic growth and stretched valuations were a cause for concern. When the COVID-19 crisis triggered sharp market declines, his team waited a few weeks before using some of their excess cash to buy equities, albeit cautiously, given the continuing volatility. Currently, he foresees equity returns in excess of longer term averages; bonds, in contrast, are offering historically low yields and will provide negative returns when interest rates begin to rise and bond prices fall.

Oil price war

Ian Riach says that the root cause of the global oil shock is the battle between Russia and Saudi Arabia for market dominance. The increase in production by those two countries could also be construed as a shot at U.S. shale, which has threatened OPEC’s long-term position as the price setter in the market. The massive influx of supply, combined with a huge decrease in demand due to COVID-19’s impact on the global economy, has duly sent prices into a free fall.

Given the importance of its resource industry, Canada has felt the effects of this latest oil shock more than most—Western Canadian Selected traded as low as low as $3.82 on March 30.

Riach points out that current prices are not sustainable for any producer, but it’s very difficult to predict the price point where the market will eventually retain equilibrium.

Sovereign Debt

Manmeet Bhatia identifies the issue of sovereign debt and whether emerging markets and countries like Italy, Spain and Greece will be able to meet their debt obligations while still fighting the COVID-19 pandemic. Ian Riach would not be surprised to see defaults in some of the more vulnerable countries, but believes global bodies like the IMF and World Bank will ultimately step in to help prevent defaults wherever possible.

Debt is also a major concern for wealthier countries too; he points out that the U.K. had its credit rating downgraded at the end of March.

Discussing how this impacts Fiduciary Trust portfolios, Scott Guitard explains that the team currently has no direct exposure to Italian, Spanish or Greek debt. This isn’t the case for emerging markets, however, with exposure to Brazil, Indonesia and Argentina—this enhances the need for extra vigilance among their bond managers.

Sectors to avoid/opportunities to buy

Ian Riach suggests avoiding anything to do with mainstream travel or transportation for the time being; at least until there is some sign that the effects of the virus are lessening. Another sector to keep a close eye on is Financials, particularly the banks—there will be a significant impact on their capital bases if they are forced to write down or write off loans en masse. The yield curve being so flat, with the difference between short term and long-term rates at historic lows, is another negative for the banks’ bottom lines.

From a positive standpoint, he believes the eventual rebound will be indiscriminate, and all boats will likely rise with the tide. Certain sectors should benefit more than others, however, with a more longer-term sustainable rise.

He believes there will be enhanced opportunities in the Health Care sector, as clear vulnerabilities in the global health system have been exposed; he foresees more investment in pharmaceutical and genome research, as well as in implements and instruments for diagnostics and treatment.

Technology should also benefit as businesses have seen just how reliant they are on telecommunications—companies will invest to become more productive in a low-growth environment and to protect their supply chains.

Over the longer term, Riach also believes the beleaguered energy sector may provide outsized returns for those producers that can outlast the latest oil shock—the world is still reliant on fossil fuels for the foreseeable future, so there will be opportunities there.

 

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Ian Riach, Chief Investment Officer

Scott Guitard, Vice President, Portfolio Manager

Manmeet Bhatia, Head of Private Wealth

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