Friday, October 9, 2020


 Covid19 is not going away anytime soon. We do not know when the planes will fly regularly, restaurants open properly and movie theatres have something to show. Ironically. September lived up-to its reputation as being the most negative of the months for stocks. Still the S&P/TSX Total Return Index rose 4.7% in the quarter. Sector performance was widely distributed with the Industrials, Utilities, Materials, Consumer Staples and Consumer Discretionary sectors strongly positive while Health Care and Energy were strongly negative. Year-to-date the index is down 3.1% with Information Technology and Materials the most positive while Health Care and Energy have been the most negative. Worldwide stock markets generally rose in the quarter particularly in the US with technology rich NASDAQ up by 11%.

 The Information Technology sector has led the Canadian market this year fueled by the premise that reduced travel will continue to spur use of technology in the workplace and online shopping. Shopify has a weight of 6.4% of the index, a price earnings ratio over 400, a price-to-book ratio of 26 and a dividend yield of zero. For comparison, The Royal Bank of Canada has a weight is 5.5% of the index, a price earnings ratio of 13, a price to book ratio of 1.7 and pays a dividend yielding 4.5%. We highlighted our concern about the unsustainable enthusiasm for technology stocks last quarter. This has not changed. However, this is similar to the dotcom era of the late ‘90s and participation in overvalued securities which pay no current income for clients is not investment, it is speculation. 

 One fallout of the pandemic is dropping interest rates all over the globe, nearing zero in North America. This has created a conundrum for balanced account investors. Historically balanced accounts have typically 50% bonds and 50% equity. This means nearly half of the money pays no income and after you look at all costs including management fees, gives a negative return. This means bonds are no longer “fixed” income, it may move up and down like stocks but there is little fixed income. One approach I have used is to mix cash with low volatility income stocks and preferred shares to simulate a bond of old. So far it has worked.

Hot sectors anticipate earnings will come roaring back. I too am hopeful for the rest of the year although we still have the pandemic in second wave and no vaccine yet. A new administration and perhaps a new senate means any recovery must come from the consumers and businesses. Upcoming growth will change many things from what sectors flourish and which will bite the dust, to will the bond yield stay at zero, or negative or rise sharply. We just don’t know.

 Companies that have good steady income like utilities, telecom, pipelines and banks rarely cut their dividends which are quite handsome at this moment. We expected few dividend reductions in the companies held in our portfolios. This has been the case to date. Even though markets have been volatile, income from such investments has remained stable. Dividend paying securities have been clawing back market value against the headwind of the speculation in the market. We will stay this disciplined course despite the changing winds of market sentiment.

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