Monday, April 13, 2020

Q2 Outlook

Trouble has a habit of coming in two’s and three’s. First quarter of 2020 will go down in history for the pandemic that propagates through the world as we speak idling the entire global economy. No finance or economic text book has a recipe for handling such a situation.

US and Canadian stock markets were down by over -30% at the worse point. Government and central banks dramatically increased money available to any one in need pulling the markets by the end of the month. So TSX ended down by -20.9 % and  US  S&P 500 down by -19.6%. Keep in mind that at the end of the month, markets moved up and down by 10% in a single day. Volatility which hit a record high has come down some but still many times higher than what we have seen in the last calmer decade. We must adapt our lives in response to COVID 19 including our investment strategies.

The Energy sector as well as Consumer Discretionary, Health Care and Financials were down over 20% in the quarter while Consumer Staples, Information Technology, Telecommunications and Utilities were down less than 10%. The decline in the markets which began in late February and intensified in March was a combination of two factors. 1) Saudi and Russian increases in oil production targets which drove down the price of oil as well as oil & gas equities and caused fear of lack of financing ability in the sector, 2) the spread of the COVID-19 virus and the effect on overall economic output of business closures flowing over to reductions in salary, travel, and retail spending. public events as well as possible overload of healthcare systems

No one is sure of how the global economies will repair and how long would it take to get some semblance of normalcy. Over the short term which is growing from a few weeks to months now, it is a trader’s play land and investors’ nightmare. Many companies are trading at multiyear lows offering high dividends which is an area we invest. They were not spared either.

Governments worldwide responded to the spread of the virus with closure of non-essential businesses and self-isolation and social distancing protocols to permit healthcare resources to keep up with the number of patients and with monetary and fiscal stimulus policies to provide support for those not working. The pressure on the Oil & Gas Exploration and Production sector was, therefore, twofold. Coming on both the supply side and the demand side. First, prices were down as excess capacity flooded the market and second, demand declined significantly as a large proportion of the economy was shut down.  

We would want to avoid or minimize exposure to those who would be hurt most in this time period and overweight those who may come out unscathed. Companies in technology will again end up being part of the solution and may even flourish, utilities will continue to give us gas, electricity and petrol as well as pay dividends. Energy and resources will take some time until factories hum and planes fly. Banks and finance companies will survive but unlikely to show any growth. 

The timeline for the re-opening of businesses is unclear and is dependent upon the spread of the virus and the effect on healthcare. Our philosophy of investment in the backbone of the economy with capital invested to provide dividend income has shown its strength. Because of our philosophy, investments in the Oil & Gas Exploration and Production sector are minimal while Investments in Utilities, Telecommunications and other essential services have proven valuable.

Our approach is to hold the course: to maintain investment in companies providing the backbone of the economy, companies whose products and services are required even when the majority of businesses have been shuttered; to continue to ensure that the companies we have invested in are well-capitalized; to continue the benefit of  dividends paid to provide income to clients.  We have seen very few dividend reductions in the companies we hold and we expect no increases until recovery is well under way. However, these companies that provide essential services will be operating throughout this crisis and will survive to provide the products and services required when recovery comes.

No comments:

Post a Comment