Market Turnaround Raises Questions

It’s been a year of daunting lows and surprising highs. See our strategy in action and our forward approach.

08.11.2020 - Scott Guitard, Vice President, Portfolio Manager

Market Turnaround Raises Questions

By Scott Guitard,

Thus far, 2020 has been a tale of two quarters. In Q1, global equities experienced substantial weakness as economies shut down to slow the spread of COVID-19. In Q2, equity markets generated the best returns of the past two decades, on the back of optimism the pandemic had peaked and ongoing support by central banks and governments worldwide. In this edition, we look at working our way through the back half of 2020, questioning whether the rebound is warranted.

Money Market/Cash Equivalents

After a busy Q1, central banks in both the United States and Canada were quiet throughout the period from a policy rate perspective. We remained neutral on cash throughout the period, as equities recovered on a straight path and did not pull back materially as anticipated. We remain patient going into Q3 and will put cash to work if equity valuations look more attractive.

Fixed Income

The portfolio overweight to Canadian investment grade corporate bonds added value in Q2 as we saw a return to somewhat normal trading activity, which benefited bond prices. For this next quarter, we’ll be slightly underweight bonds. Though not overly excited about bonds’ absolute return potential over the next few years, we will continue to lean on them for capital preservation and diversification purposes.


Our modest overweight in equities enhanced relative performance, as this asset class drastically outpaced fixed income and cash during Q2. We have been pleasantly surprised with the recovery’s speed and magnitude, despite ongoing pandemic concerns and economic woes. Nonetheless, we are holding off increasing our equities overweight as we expect a more desirable buying window in the coming months while the world works through this current crisis.

Fixed Income Sectors

Canadian Investment Grade Corporate Bonds

The portfolio’s overweight to Canadian investment grade corporate Energy sector bonds boosted relative performance in Q2, as crude prices rebounded from rock-bottom lows. We believe current yields present a solid long-term hold in this market segment.

Government Bonds
Federally issued bond yields traded within a tight range in Q2. Though equities have experienced a V shape recovery, we expect the economy to lag and inflation to remain subdued in the near future. We remain underweight government bonds and currently view them purely as a hedge for balanced portfolios.

Global Bonds

The Templeton Global Bond Fund weighed on both absolute and relative performance during the quarter as the US dollar reversed course relative to the Canadian dollar due to a recovery in crude prices and the overall shift in investor sentiment towards “risk” assets.

Equity Markets

Canadian Equities

As compared to the S&P/TSX Composite Index, this category was the biggest detractor to overall Q2 returns. From a sector perspective, the underweight to Materials, and Information Technology (IT) stocks and overweight to Consumer Staples stocks hurt performance. Security selection in the IT sector also weighed on performance. We go into the second half of 2020 underweight Canada since we believe the economic recovery will be more difficult given lingering pre-pandemic concerns.

US Equities

US equities maintained their market leadership position. IT stocks were the best performing group, as momentum and thematic investors favoured this sector. The portfolio’s overweight in US equities bolstered relative returns although our underweight in IT stocks hurt relative performance in Q2. We are looking for opportunities to increase our US overweight, given the robustness and diversity of its economy relative to the rest of the world.

International Equities

While International equities also bounced back during Q2, this component’s performance lagged, due to an underlying fund manager’s decision to hold an excessive amount in cash. As in North America, we believe the “easy” money has been made due to oversold investor sentiment in Q1 and it will prove more challenging to achieve strong International equity returns in the second half of 2020. Therefore, we remain neutral on International equities.

Asset Allocation Process

Asset allocation decisions result from ongoing discussions within our Private Client Investment Strategy Committee. We begin by making strategic investment decisions against an internal benchmark—for example, the Balanced Growth Benchmark Portfolio—that’s based on a neutral asset mix and stable market conditions.[1] The difference between our investment strategy and the benchmark portfolio reflects our active commitment to effectively managing risk and generating superior long-term returns. In updating our investment strategy, we review our investment portfolio and benchmark and complete any required trades.





1 The Balanced Growth Benchmark Portfolio is comprised of 40% fixed income assets and 60% equity assets.



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