The war

In wars, truth is the first casualty. This is war.

No wonder people are fussed. The news is an endless torrent of medical negativity, while common sense tells us the greatest damage to the largest number will be economic. Not sickness. Not death. But job loss on a Biblical scale. In the overall population, the number of infected is tiny. However this has caused a global meltdown. Civil liberties are being stripped away. Citizens have turned into social distance warriors and shamers. National and provincial borders have hardened. I hear people in my little town asking for road blockades. What a shame.

Job loss, financial loss, income loss, isolation and fear cause stress. Stressed people get sick easily. The number of victims will surely multiple. In the US a couple of million cases are on the way before a peak is glimpsed. You can do the math for Canada.

Late last week we talked about the changes this will bring. Jobless claims this week in both Canada and the US will be historic. The oilpatch is a disaster. Hotel occupancy rates of 5% are forcing many to close. Airlines are desperate. Airbnb is collapsing. The tourist season’s already lost. The number of small businesses that will not reopen may be legion. Unemployment rates could top 20% and GDP contraction hit 15%. Last time we saw numbers like that people were driving Packards and Cords. Or horses.

The next few weeks will get worse. This is not a health blog, so we have no idea where the pandemic is headed (neither do you, Trump nor your neighbour behind the curtains). But the financial markets have not yet found bottom. The spring real estate market is kaput. Government deficits will be beyond experience. And major corporations – who a few months ago were pulling in billions every quarter – are abandoning us.

Shuttered TD branch on Bay Street in Toronto, March 21st.


Effective Monday morning 239 RBC branches across the country will be dark. And TD chose Friday night at 9:30 pm ET to send out a notice that – effective immediately – fully a third of its branch network was closed. Instantly, almost 400 locations and all the people working in them were gone. No advance notice to clients. Not the finest hour in corporate Canada. By the way, an internal list of all the shuttered banks is here.

So are we headed for a depression?

In a war predictions are harder than usual. But not this time. The answer is no.

Over the coming days trillions of dollars will be announced and spent by governments as they pay laid-off workers, subsidize airlines, pump liquidity into the banking system, slash borrowing costs, forgive indebtedness and backstop corporations. Logic tells us pandemics are temporary. They come, wreak havoc, peak then pass. An economy that was firing on all cylinders in January and collapses in March can be functioning again in June. And in advance of that, financial markets will advance. They always do. Stocks are a leading indicator. Oh, life (and markets) aren’t going back to normal any time soon, but neither are they going to zero. Nor are we destined to re-live the Dirty Thirties. But you will never forget 2020.

I’d like you to meet Brodie. He just sent me this:

I’ve read every post on this blog since the very beginning and it’s helped my financial situation immensely. Late 30s. Married with 2 kids, small house with 80k left on the mortgage, 2 incomes totalling 200k gross and what used to be a half million dollar portfolio balanced and diversified across the three account types. Up until now I’ve been a disciple.

We’ve watched a significant portion of that portfolio evaporate. With the news (and the markets) getting worse every day it’s getting difficult to hang on. We’ve stuck with it through 2008 and every blip since, but it seems different this time (wow, did I really just type that?  :)

Worried about loss of employment for both the wife and myself as businesses and positions continue to be wiped out, and an eventual need to go into financial survival mode. Meanwhile, markets seem to have no bottom and with millions headed for unemployment I don’t see how valuations start to improve even in the next 1-2 years. To me the future looks far worse than most financial pundits and governments are willing to admit. (Seen what’s happening in Italy lately?, and the US looks to be headed for worse).

Still don’t sell into the storm? Still plan on using small cash savings and LOCs to tide us over in the event of a job loss (or double job loss) while we watch the portfolio burn? We are probably better positioned than most families and yet the fear is immense. Feel free to use this on the blog (edited down or whatever you do), or don’t if you think it will just panic others and add to the confusion.

Either way, thanks so much for everything you have done. Regardless of the outcome of this crisis, you have done more to help Canadians financially than any person or institution I can think of. Whatever happens, I’m very grateful for that.  Wishing you, Dorothy and Bandit health and safety, both mentally and physically, in these tough times.

The head tells us this will pass, not to panic and sell. The heart cries, but what if we’ve slipped into the unknown, the end of days? Is terror the correct response?

Well, Brodie, there’s only one right answer. Do what’s best for your family. Dumping assets, hoarding cash and hunkering for jobless Armageddon is certainly a strategy. But it comes with a heavy long-term cost. You’re not even half way through your life, and your kids have eight decades before them. Is it rational to think this one year will destroy the future? Or is it more logical to believe this is a debt-cleansing reset and a world full of fancy scientists will find a way to bury an infection from which 97% of people recover?

Will the coming days be darker? Yes. Will they end? Absolutely. The outcome of this war is known. Tell your children about bravery.


Hello? McFly?

DOUG  By Guest Blogger Doug Rowat


Dumping on commodities and emerging markets at the moment is like shooting fish in a barrel.

Because of the coronavirus, global growth is at a standstill with an outright recession being a virtual certainty. Meanwhile, commodity prices have been dropping faster than Dow Jones futures during a Donald Trump address to the nation. The oil price alone is down more than 60% so far this year.

I last highlighted commodities and emerging markets on this blog in December 2018, and as compelling and beautifully persuasive as my argument might have been, apparently the rest of the world didn’t see things quite the same way. Emerging markets have declined 12% since the posting whereas global equities overall have declined only 6%.

However, the underperformance of emerging markets serves to illustrate an important lesson for portfolio managers: learn to be comfortable holding positions that underperform. Every portfolio, if it’s properly diversified, will have lagging components.

Now, do I wish I could rev my DeLorean to 88 mph and revisit our emerging markets position of several years ago (and quietly delete my blog post from December 2018)? Of course. But my inability to do so illustrates the point of maintaining diversification—you will make forecasting and timing errors, but if you’re managing assets prudently, these errors should never cripple overall performance. Emerging markets sit at a 4–6% weighting in our client portfolios.

Emerging market equities have obviously failed to outperform, but we were smart enough to avoid a more considerable wager of, say, 15–20% in deference to their inherent risk and volatility.

We continue to feel that there’s an unusual disconnect between an eventual recovery in global economic growth and the current commodity price and emerging market index levels, especially in light of the massive structural changes occurring within China.

The Bloomberg Commodity Index, which represents a basket of commodities ranging from copper and oil to soybeans and sugar, remains almost 40% below its lows of the financial crisis.

Is this justified? The coronavirus is scary, of course, and much is unknown. However, it doesn’t threaten the very fabric of capital markets in the way that the financial crisis did. China, in short order, has gotten its coronavirus infection rate under control and life is slowly returning to normal. Does anyone believe that the US, with less than a third of China’s population and considerably more health care infrastructure, won’t be able to accomplish the same? And here’s another simple example of the difference between the financial and coronavirus crises: Americans, rightly so, are being encouraged to spend more time at home, but their home itself isn’t collapsing in value by 40% as they’re sitting inside it. Massive consumer leverage and reckless lending, while not cleansed from the US economy, are problems of another era.

Bloomberg Commodity Index past 20 years – commodity prices remain massively below financial-crisis lows.

Source: Bloomberg, Turner Investments

From a longer-term perspective, China, which makes up by far the largest weighting in our emerging markets ETF, continues to urbanize at a ridiculous pace (see chart). Since 2000, China’s urbanization rate has increased from 35% to almost 60%. This trend will moderate only slightly in the coming decade. As a point of comparison, the US urbanization needle has barely moved since 2000, increasing from 79% to only 82%. An urban consumer is far wealthier, of course, earning 3-4 times what a rural consumer earns. Urban consumers also have far more expensive tastes. This is a long-term trend that should be capitalized on.

China population urbanization rate 1968-2018

Source: Bloomberg, Turner Investments

Further, the copper price, which is an excellent barometer for the global economy because it’s used in just about everything from cellphones and dishwashers to cars and building materials, has obviously declined in value but to a far lesser extent than emerging market equities. In 2008, the copper price plunged 54% and emerging market equities dropped an almost identical 53%. Over the past two months, things obviously haven’t been pretty with the copper price down 13%, but emerging market equities have fallen a far more dramatic 26% possibly indicating an overreaction to current events. Needless to say, valuations for emerging market stocks remain very attractive relative to those of developed markets.

Clearly, I can’t tell you the exact moment when all of these factors will reach an inflection point and translate into higher returns for commodity prices and emerging market equites, but I do know that reversals of trend are usually abrupt and last for extended periods. Emerging market equities, for instance, gained 37% annually from end-2002 to end-2007 and gained 46% annually from end-2008 to end-2010. If we were to adopt a zero-exposure stance to emerging markets, we would almost certainly be caught wrong-footed and miss a good chunk of any future rallies.

Knowing, of course, that we also lack the incredible inventions of Emmett Lathrop Brown, we build our portfolios with minimal concentration risk to lessen the impact of bad timing. But, at the same time, it’s easy to get left behind during a recovery rally, so having zero emerging market exposure wouldn’t be prudent. So, with a longer-term view in mind, if your diversified portfolio currently lacks an emerging market ETF, now might be the time to hold your nose and take a nibble.

So, be accepting of your underperforming assets. No one bats a 1,000 in this business. This acceptance will ensure that you don’t entirely neglect risky assets in your portfolio. Risk cuts both ways. An emerging market and commodity price rally will eventually occur. Don’t get left behind.

Lesson’s over. Now make like a tree and get outta here!

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.