Knowledge Centre

Q1 2020


2020 got off to a pretty good start. The long anticipated signing of the trade agreement between China and the U.S. took place while leading indicators and the inventory cycle signaled that the global economic environment was improving. In the second half of January however, concerns over the COVID-19 outbreak started to take hold and economic disruptions in China rippled to global markets and sectors. All sectors of the economy in every country are affected to some degree. Businesses that were already struggling will now face a battle to survive; with company failures in one area having a knock-on effect in other sectors and regions. Most countries will experience a recession but it is unclear how deep and long any downturn will be.

The governments of the world are doing the right thing; they are essentially printing money to ensure liquidity on a scale not seen since the Financial Crisis of 2008 in order to assist businesses and individuals survive the coming months of disruption. As being done by other central banks, the Bank of Canada has slashed interest rates to record lows and launched a massive government bond buying program that will inject money directly into financial markets and dramatically expand the central bank’s balance sheet. The primary risk of this kind of money creation is its potential to ignite inflation. This concern is set aside for now as the primary objective is to restore Canadian production of goods and services relatively quickly once the shutdowns are rolled back, and to meet all the supply that fiscal and monetary policy will fuel.

A shift towards safe assets has hit equity markets and driven down government bond yields, although the markets remain highly volatile. The global economy looks destined to experience a recession, or very close to it, in 2020. Activity will slow in North America and Europe during the second quarter and potentially into the third. Heightened uncertainty and risk, or the inability to access funding, will force many businesses to delay their expansion plans, some of which will be cancelled if the overall economic outlook weakens further.

Markets will likely remain volatile as long as infection rates create uncertainty about the depth and duration of the COVID-19 recession. With previous virus outbreaks, like SARS and MERS, there was a short term falloff in economic activity followed by a bounce once the situation was contained. It is possible that most risky markets have attained their lows for this recession. A sustained rally however will require demonstrated control of the virus, evidence that fiscal and monetary policy stimulus is working, and a reduction of fear.

Obviously, the financial markets around the world tumbled during the quarter. The saving grace for most Canadian investors was bonds which were up 1.6%. The Canadian dollar, which fell -8.9% versus the U.S. dollar, had the beneficial effect of reducing the declines in U.S. based assets held in Canadian dollar accounts. U.S. equities only fell 10.7% (all returns in Canadian dollars); International equities declined 13.8% and even Emerging Market stocks slipped only 14.6%. In contrast, Canadian stocks dropped 20.9% as they were not propped up by the falling dollar.

The more investors move their investments around the greater the chance they will lose money or, if not outright losses, make far less than they would by leaving things alone. The spread of the virus has led to a dramatic slowdown in the economy, which means much lower stock prices in the short term. However that does not mean you should “do something” about it. The stock market knows things could get worse before it gets better. COVID-19 is bad for the economy, but it is not the same as 2008. Markets are looking for data and trying to understand what the future will look like. For investors this is emotional stuff which is stoked by opinion makers that investors need to “do something”. Emotions, hunches, and gut feelings typically lead to disastrous results more often than not. You have got to remind yourself that this, too, shall pass.


2020 started with a lot of optimism for the global economy even despite a slowing due to international trade concerns. The Canadian labour market showed strong resilience with three consecutive months of job gains as at February. Global markets were rising and the TSX peaked at 17,944 points. Then the coronavirus crisis erupted, catching many of the world’s governments and advanced health systems off guard. Canada’s economy was already facing temporary headwinds with growth expectations revised down for the year but those headwinds intensified significantly with the onset of the coronavirus crisis from the end of February and negatively affected all initial forecasts. The pandemic led to a supply chain shock and put a halt to global manufacturing and consumption in just a few weeks.

As the crisis exacerbated with lockdown measures across the country, the obvious potential economic impact in the near- to mid-term would be a recession rather than just a slowdown. Encouragingly, policymakers have been proactively responding to this unprecedented challenge with a mix of aggressive fiscal and monetary stimulus to what they now call “a material negative shock to the economy”. The markets moved into correction territory in late February after one of its worst weeks since the global financial crisis of 2008. On the backdrop of the sudden regime shift the index declined 20.9% for the quarter thereby erasing all of last year’s gains.

The positive performance of most sectors in Q4 2019 was short-lived as every single sector ended the first quarter of 2020 in negative territory, most of them with double-digit declines. Energy led the decline with a 58.8% loss, followed by Health Care at -35.7% and Consumer Discretionary at -33.3%. The Energy sector was caught by the continued deterioration in demand due to the COVID-19 crisis as well as the oil price war between Saudi Arabia and Russia. As a result the WTI (West Texas Intermediate) and WCS (Western Canadian Select) benchmarks experienced one of their worst quarters on record. Some stocks in the healthcare sector saw share prices cut in half as investors fled from the once beloved Cannabis stocks.

On the economic front the first quarter of 2020 would make history as one of the swiftest economic downturns on record with widespread damage both on the supply and demand side. This is notable because unlike some previous economic crises which were more local, this one has impacted almost every part of the globe and in some instances with unprecedented total lockdowns. However we must underscore that this is a health crisis first and foremost on the backdrop of COVID-19. Consider that at the beginning of the year most global economic indicators were in line with some moderate GDP growth and expectations for an imminent recession were very low. The real reason for the sharp economic downturn along with one of the fastest bear markets in history is the current lack of a proven treatment for COVID-19, as well as the overwhelming challenges in containing the outbreak.

Anticipating the seriousness of this new threat, policymakers responded swiftly and aggressively. In Canada, the Federal government has been mitigating this situation with staggering fiscal packages in the billions of dollars. From a monetary policy perspective, the Bank of Canada also took an aggressive stance to lower its key rate from 1.75% to 0.25% in just three weeks; a rare occurrence and an attempt to help dampen the economic shock of the COVID-19 crisis. Even though economies around the world have quickly morphed into recession or even depression in some cases; nonetheless, the primary cause is sanitary and should any positive development emerge in the fight against COVID-19, most of the ingredients in the form of monetary and fiscal stimulus appear already in place to bring the economy and financial markets back in a positive direction.


The Canadian FTSE Universe Bond Index rose 1.6% in the first quarter of 2020 while the FTSE Corporate Bond Index returned negative 2.5% in the same period. Financial conditions tightened rapidly in March as markets reacted to the growing epidemic, sparking a series of rate cuts by central banks. In the U.S. the Federal Reserve cut its benchmark interest rate on March 3rd to between 1.0% and 1.25%. The next day Bank of Canada followed the Fed’s lead and cut its benchmark interest rate by a substantial 50 basis points to 1.25%. As markets continued to fall, the Bank of Canada cut rates by 50 basis points two more times to 0.25% and the U.S. Fed cut its rate to between 0.0% and 0.25%, which is effectively zero.

Bonds are considered to be the stable foundation of an investment portfolio but as the need for a shutdown of much of the North American economy became increasingly clear, almost all financial assets came under pressure between February 19th and March 23rd. A massive margin call, to those investors who had borrowed to invest, sparked vast deleveraging and drove borrowers to sell anything and everything liquid which included high quality bonds. Credit markets froze as fears over the coronavirus intensified and investors worldwide fled to U.S. dollar cash.

The sell-off culminated in the third week of March, which saw the largest outflows from bond funds on record in the U.S., as mutual funds and exchange-traded funds invested in bonds suffered more than $100 billion of outflows, nearly four times the previous record. Much of the proceeds herded to cash as more than $90 billion poured into money market funds. Seeking to liquidate assets without locking in big losses, investors cashed out of bond funds. The redemption spree spared no corner of fixed income markets. Investors pulled record levels of cash out of funds focused on investment grade, emerging market, municipal, mortgage backed, inflation protected and long term government bonds. They sold their most liquid bonds, as investment grade bond funds saw the brunt of the redemptions. Funds holding high grade corporate debt saw around $55 billion of outflows. Once fund managers got rid of their most liquid holdings to meet redemptions, some were eventually forced to sell their most illiquid holdings at a hefty transaction cost. The cost to buy and sell sub investment grade corporate bonds, or “junk,” surged close to 1,160 basis points, surpassing the levels seen during the sell-off in low rated debt at the end of 2018.

The response by policy makers in Canada and the U.S. to the sudden collapse in employment was extraordinary. The legislation which has passed, and even more which is proposed, will flood economies with a remarkable amount of cash, albeit with a lag, as governments ramp up to deliver an unprecedented amount of stimulus, both to the suddenly unemployed and their employers. The measures helped calm bond markets as corporate bond spreads, the level of compensation investors demand over a risk free benchmark, retraced about 32% of their worst levels by the end of March.

As investors survey the aftermath in the wake of the pandemic it is clear that some sectors of the economy will be hit harder than others. The energy sector in particular has been hit with a drop in demand due to the pandemic, as well as a supply side shock, as Russia and Saudi Arabia opened the taps to flood the market with oil over a managed supply disagreement. As energy prices plummet many highly leveraged, lower rated companies will succumb and push the default rate in the energy sector higher by yearend. High yield energy sector bonds lost 40% of their value in the U.S. in the first quarter as a grim 86.5% subset of high yield debt in the energy sector is distressed. Overall, high yield debt lost 13% in the first quarter, the biggest drop since losing 18% in 2008.

The good news, if any, is that governments are taking a “whatever it takes” approach to shoring up the recently unemployed, as well as the numerous small and big businesses that have been battered by the pandemic. These measures are gradually allowing some strategists to become more optimistic about investment markets.


The Standard & Poor’s 500 index fell 19.6% in U.S. dollar terms over the first quarter of 2020 and in Canadian dollar terms the index was down 10.4%. The loonie finished the first quarter with a 9.2% loss. The severity of the blow from the COVID-19 outbreak means the world’s largest economy may be entering recession, if not already in one. The hit to consumer spending and business investment, plus the oil price damage likely means a contraction in first and second quarters. Predictions for the U.S. economy still vary wildly.

Almost all levels of government have kicked in to help support the economy. The Federal Reserve is acting as a liquidity provider on a major scale but in addition is now a lender of first and last resort. The Fed has done more in March than it did in most of the first year of the 2008 crisis. Meanwhile the federal government has passed fiscal legislation that literally floods the economy with an extraordinary amount of cash. The government is directing cash to individuals, businesses, cities, states and hospitals. For example US$1,200 is being sent to most adults and US$500 to most children in the U.S., US$500 billion has been allocated to support businesses with loans and loan guarantees, US$150 billion is going to states and cities, and US$130 billion is for hospitals. The legislation also provides for an additional US$350 billion in loan guarantees for small businesses to help them avoid layoffs and many of those loans could be forgiven if firms meet certain conditions. The government is telling the business sector that so long as they pay their rent and wages and maintain their staff, they will be made good. Not every business gets saved but many will. There is a chance that all of this infusion of money into the economy will help stem a potential recession in the second quarter.

There is no precedent for a fiscal stimulus program this big that feeds into the economy right away. The numbers keep climbing and they total somewhere between US$2 trillion or US$2.5 trillion. This is huge and this is immediate, not spread out over many years as other big stimulus plans have been constructed. The FDR New Deal was US$800 billion in today’s dollars. The Reagan tax cuts came to US$170 billion annually. The Bush tax cuts amounted to US$150 billion annually. The Obama infrastructure package in 2009/10 was barely over US$80 billion per year. The Trump tax cuts of 2018 came to US$150 billion annually. The long-term ramifications of all this fiscal and monetary largesse are unknown but that problem is for future taxpayers to worry about. This is not just an income and debt transfer on an epic scale but also a generational transfer to the Millennials and Gen Zs who will end up paying for all this.

Looking forward it is possible that the fiscal stimulus could overcome the financial shock. The key will be when employees get to go back to work and how much caution there will still be from the lingering virus. The debate over a return to work will continue for some time to come but in the meantime the unemployment rate is poised to jump sharply. There is a chance that this will be a short-term dislocation, especially if companies are allowed the chance to hold on so that displaced workers have a job to go back to. Even if there is a delay as we return to normal, there will be a renewal in spending that the consumer sacrificed in the past month in the services space from restaurants to medical care, beauty salons, theaters and sporting events. Even travel. It doesn’t take a lot to rebound from zero.

There is a possibility that the fiscal stimulus more than offsets the big downside hit. The stimulus goes well beyond income replacement as it also provides a bonus to the economy. Together with loan guarantees, the measures should remove a lot of the bond default risk. If anything the economy may well come out with a net gain of between US$500 billion and US$1 trillion. Then tack on that we are going to end up with an accommodative Fed policy for an extended period of time, with zero rates and open-ended quantitative easing as far as the eye can see. We cannot overlook that the monetary and fiscal stimulus is bigger than anything we have ever seen before and will be intact long after the COVID-19 crisis is over.


Businesses fell quiet across most of Europe and Asia as the COVID-19 pandemic paralyzed economic activity. Manufacturing activity has tumbled with sharp slowdowns in export powerhouses like Germany and Japan overshadowing a modest improvement in China. This has upended supply chains and lessened demand for goods as consumers worried about job prospects and stayed indoors. Clearly, the world’s economy is set to enter its worst recession since the Financial Crisis of 2008 in the first half of this year. While we optimistically anticipate a recovery within months it is not assured.

A lot needs to go right for global growth to rebound after COVID-19. Stabilization in the second half of the year depends critically on countries’ ability to get the virus under control and provide sufficient stimulus to offset lost income. The pace of deterioration is breathtaking. Even so, it is important to keep in mind that in contrast to the Asian financial crisis, the Financial Crisis of 2008, or the European sovereign debt crisis, the upcoming contraction is not a reflection of economic imbalances. When this outbreak is over, it is likely that growth sectors can rapidly bounce back.

Policymakers across the globe have announced massive monetary and fiscal stimulus measures to try to mitigate the economic fallout from the pandemic, keep cash-starved businesses afloat and save jobs. But many measures have been stop-gap steps to deal with the immediate damage to corporate funding and shore up banking systems amid worries of a credit crisis. To avoid a longer downturn, central banks need to be aggressive in providing stimulus, backstopping debts and preventing financial stress from turning into a debt crisis.

Business activity has cratered across Europe as attempts to contain the COVID-19 pandemic pushes governments to shut down wide portions of their economies. Manufacturing sank to its lowest level since mid-2012 when the currency union’s debt crisis was raging. With consumers clamping down on all discretionary spending, economies have become paralyzed by worries about health and job security. Governments and the European Central Bank have unveiled unprecedented stimulus measures, as the economy is contracting more quickly than ever before during peacetime. Italy and Spain have so far taken the biggest hit as they saw activity collapse. Services in Germany also collapsed and firms shed staff at the fastest rate in almost 23 years. In France, the economy is operating at two-thirds capacity. While in Britain, the surveys showed a record breaking slump among services and manufacturing firms as the spread of COVID-19 led to a spiraling of delays and hammered business confidence.

Even before COVID-19, Japan’s economy was in trouble. Exports were plummeting on slowing demand from China and a tax increase that was keeping shoppers out of stores. Now it is facing severe circumstances because of the pandemic. Desperate to get through the storm, the government has passed several stimulus measures. Unfortunately, in the days since the decision to delay the Olympics, Japan has been announcing significant upticks in COVID-19 cases. Business sentiment soured to a seven year low as many fear that Japan has allowed the outbreak to fester.

International equity markets are clearly down but down in a relatively uniform way. While there are outliers across individual countries, the main regional marketplaces declined in the quarter within a tight range. As a whole, International markets fell 22.7% (all figures in U.S. dollar terms); European stocks dropped 24.8%; while Asian stocks declined 22.5%.

The COVID-19 pandemic has brought trade to a crawl as leading nations come to virtual standstills to curb the virus. Tourism has nearly evaporated; bankruptcies are starting to pop up among hotels, restaurants and tour operators. Large sports and cultural events have been canceled or postponed. The net impact of these types of issues and more will require a dizzying amount of money and time to eventually generate a sustainable economic boost.


After a solid start to the year things quickly turned for Emerging Markets after the outbreak of COVID-19 in China. The pandemic triggered a rout in global equity markets generally, and Emerging Markets in particular has been beaten down relative to the rest of the world. The discount emerging market equities hold relative to U.S. equities now stands at 65%; the largest ever. This might make Emerging Markets sound appealing to bargain hunters but there is still reason for caution.

The fall in Emerging Markets had much to do with the stress on the global financial system including a worldwide scramble for U.S. dollars that was blamed for amplifying the stock market selloff and volatility across financial markets. Efforts by central banks have been credited with helping to ease those funding pressures in the short term.

In addition to the pandemic issues, oil prices plunged in March hitting a 17-year low due to a trade war between Saudi Arabia and Russia. Unfortunately, the positive correlation between emerging market stocks and commodity prices remains near all-time highs. Fortunately, a rebound in oil prices, if sustained, may offer some respite on hopes for a deal that would end a price war that has threatened to flood the world with unneeded crude at the same time that demand fell off a cliff due to the pandemic.

While much of the world is shut down, strong Chinese factory data is holding out hope for an economic revival. China’s Manufacturing Purchasing Manager Index rose to 52.0 in March from a record low 35.7 in February (the index had dropped to 38.8 during the Financial Crisis of 2008) as the domestic economy struggled to resume normal production amid the epidemic. This comes as life in Wuhan, the city at the centre of the COVID-19 outbreak, gradually returns back to normal after the lockdown at the start of this year. Of course, underlying activity remains well below par. How quickly the world’s biggest engine of economic growth starts humming again remains to be seen. Even when production is ramped up again, there are questions about whether or not customers will be in a position to buy which could be a serious drag in the months ahead.
Singapore is bracing for the worst recession in its 55 year history after the COVID-19 pandemic knocked its bellwether economy into a sharp contraction in the first quarter. It has also announced that relief measures now amount to 11% of its GDP and industrial output has plunged 22.3% after imposing increasingly strict anti-virus measures, the biggest contraction on record. Singapore’s growth is like the canary in the mine shaft and likely warns of further economic pain to come for other countries.

Markets have entered a somewhat calmer stretch in recent days, a sign that the most chaotic period might be pausing for now. The first quarter however was anything but calm, as Emerging Markets were dragged down -23.6% (all returns is U.S. dollar terms). The decline was paced by Latin American stocks which were pummeled, falling 45.6%. Emerging markets in Eastern Europe were marginally better; down 36.5%. Surprisingly, the place that was the start of this turmoil contracted the least, down only 18.1%.

Given their strong ties with China, emerging market stocks bore the brunt of the sharp decline and the most economic pressure. As long as the number of COVID-19 cases keeps rising and economic activity remains seriously disturbed, it is uncertain how large the impact will be. The positive thing for Emerging Markets is that prior to the outbreak, things were just starting to look brighter. Interestingly, South Korean, Philippine and Indonesian stocks are the first to enter a new bull market, rising over 20% from lows, as investor sentiment potentially turns. After all, in the history of pandemics, equity markets tend to decline sharply and then recover rapidly.


The full impact of COVID-19 on real estate has yet to become clear but it could be unprecedented. Real estate has historically performed well in stressed situations relative to other investments. They also provide diversification benefits and income at a time when government bond yields are likely to fall as investors seek safety. Some real estate projects will be delayed or jeopardized due to practical constraints on completion or concerns over the outlook for the economy and occupier demand. The extent of COVID-19 containment policies will have a material impact on investment transaction volumes. However, any hesitation should be partially offset by a bounce back effect once uncertainty is alleviated. Any reduction in interest rates will also encourage further flows of capital into the real estate sector. From a valuation perspective, the impact on real estate prices is expected to be relatively short-lived.

The travel, hospitality and leisure sectors are being hit hardest. Real estate transaction activity in these sectors (both leasing and investment) is likely to decline significantly, at least for the duration of the current crisis and potentially beyond. Occupiers will be intensely focused on cash flow, particularly those that will see a material loss of income due to social distancing and travel restrictions. Landlords will receive some requests for rent deferrals or reductions and challenges around service charge levels in buildings that need to be kept secure and operational, but which tenants may be unable to occupy.

Retailers were also among the first hit. COVID-19 will exacerbate the challenges faced by the retail sector. Already facing structural challenges ahead of this crisis, the sector will become even more vulnerable. Many retail businesses will be dependent on government support to survive. Many others are unlikely to make their rent payments and some could go out of business. Commercial property occupiers have already been affected. The office sector which accounts for 10-12% of the economy, will see the rate of homeworking increase sharply due to an unprecedented global experiment in flexible working. In the immediate future, social distancing could provide a stress test for many co-working and flex office operators. Occupiers with healthy balance sheets and low leverage will be more resilient.
Residential markets are likely to see sharply slower transaction activity. Potential buyers will find it hard to arrange viewings even if they want to; sellers will be reluctant to put product into a difficult market and the practical aspects of arranging completion will prove highly problematic. Student accommodation is generally a defensive sector and rental incomes here should be less significantly impacted than in many other sectors in the short term. Infrastructure investments are generally long term in nature and designed to withstand economic downturns. Most infrastructure assets play an essential role in our society and will be vital in getting the global economy back on its feet, so government policy is likely to be supportive.

The disruption to real estate securities has been severe but likely only temporary as valuations are likely to return to normal more quickly than in previous traditional recessions. Still, Canadian REITs dropped 26.6% in the quarter and REITs elsewhere in the World declined 22.5% (in U.S. dollar terms). However, the Canadian dollar, which fell -8.9% versus the U.S. dollar, had the beneficial effect of reducing the declines in U.S.-based assets held in Canadian dollar accounts; as such, international REITS only fell 13.6% for Canadian investors.

The nature of viral outbreaks such as COVID-19 is that it is difficult to predict their extent and duration. While further volatility is expected, opportunities will no doubt arise alongside severe challenges. Mispricing is more likely to occur and investors should be ready to act as the selling has probably been overdone. Many REITs are now trading at unprecedented valuations, which are even steeper than the previous record lows during the Financial Crisis of 2008. Importantly, the sector has historically rebounded from big discounts, so the appetite for real assets will likely continue to support the sector.

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