Knowledge Centre

Q2 2020


There are increasing signs that the collapse in economic activity caused by the COVID-19 pandemic has bottomed out and a recovery is underway. The fact that markets have generally picked up from April’s lows is great news. Still, while the slump seems to have bottomed out, the recovery is likely to be slow and uneven. However, given time and sufficient policy support, demand should eventually recover. A lot will depend upon how long the virus lingers. The longer this disruption and uncertainty persists, the greater the risk.

In Canada, severe restrictions on activity are set to cause a dramatic drop in economic growth. The decline will briefly wipe out all the growth since August 2010 and represents the steepest, fastest slide in decades. Economic downturns are never pleasant but this one stands out for its suddenness and brevity, perhaps only lasting two months. That is not necessarily a surprise as large parts of the economy were shut down by law. It is likely going to be a long road to get economic output back to where it was pre-COVID-19.

Canadian bond markets just keep plodding along. The Bank of Canada is expected to hold rates at current levels and has pledged to support borrowers. Yields are in a holding pattern, but credit yield spreads have narrowed. And while underlying credit quality has deteriorated, the goal to facilitate financing and trading while keeping yields relatively stable has been achieved. Through this period of uncertainty short term bond yields remain near zero, while longer dated bonds have remained stable.

U.S. activity is coming back from its horrible plunge. People are returning to work, retail sales are climbing and stock prices are surging. If corporate profits can snap back close to normal over the next couple of years, current stock prices make perfect sense. Interest rates will stay close to zero as the economy will require an unusual degree of policy support for a long, long while. The most obvious threat would come from a failure to contain the coronavirus. However, a successful vaccine could brighten the picture practically overnight.

Internationally, Europe has quietly been making meaningful progress towards returning to normal. Daily cases of COVID-19 are declining. Recent data have shown glimmers of a recovery as cafes have reopened, stores are open and strict lockdowns have eased. Policymakers have been united and have worked swiftly to cushion the fallout by increasing stimulus. Challenges to rapid and sustained growth in Emerging Markets have been magnified by the pandemic. The crisis has triggered the largest, fastest single episode of Emerging Market capital outflows from equities, sovereign and corporate debt.

The performance of stock markets seems to defy logic. Investors, for the most part, have written off 2020 data and are looking towards the economic recovery. Returns so far are about hope and we are getting little hints of hope as the worst case scenarios for the economy could be mitigated. The second quarter saw massive gains across the board such that: U.S. stocks are actually up 1.9% in 2020 (all figures in Canadian dollar terms); Canadian stocks are down -7.5%; international stocks are down 6.0%; while emerging market stocks declined 4.6% for the year. Bonds have gained 7.5% in the past 6 months.

Lockdowns the world over are now mostly in various phases of removal. The tentacles of the shutdown are breaking as pressure to fully re-open economies intensify and the effects of the astounding amount of stimulus takes hold. Investors are starting to realize that this is not a bear market rally, but something more permanent. As the ranks of doubters thin bullish sentiment will likely grow and positive sentiment leads to more positive sentiment. Which can only lead to good things.


After a disastrous first quarter, the S&P/TSX Index rebounded strongly in the second quarter with a comfortable 17.0% total return as most global economies began to recover and countries started to ease lock down measures. Year to date the S&P/TSX suffered a loss of 7.5%. Reopenings and hopes for a vaccine added positively to investor optimism and in some major economies, such as the United States and Canada, the job market has been surprisingly resilient. Canada in particular added 290,000 jobs in May after two months of decline. This was far different than the consensus estimate of a 500,000 job loss. These numbers brought some relief that the governments’ aggressive programs appear to provide some cushion, although the future direction of the economy is unclear. Markets around the world have basically seen a V shaped recovery and have reported the best second quarter in decades as most losses at the end of the first quarter have been largely recouped.

The gains were widespread across the S&P/TSX with most sectors in double digit territory. Contrary to previous quarters where defensive sectors and Technology outperformed relatively, the second quarter saw a strong comeback of cyclicals, an indication that some economic revival is underway. Leading the pack was Technology with a 49.4% gain, followed by Materials at 41.6% and Consumer Discretionary was up 32.6%. Energy was also very strong with more than a 27% increase during the quarter on the back of production cuts by OPEC members to support dwindling prices. Only Telecommunications detracted from the index with a modest 2.6% loss. The S&P/TSX has benefited from the ongoing government support to corporations as well as extreme financial accommodation from Bank of Canada. Had these interventions not been enacted, most sectors would have remained vulnerable. Consequently a chain of bankruptcies would have been inevitable along with a protracted recession.

The unexpected resilience of Canada’s economy and others around the world should not overshadow the fact that significant uncertainties remain, especially the possibility of a second wave of the pandemic. The International Monetary Fund (IMF) recognized this possibility by revising its global growth forecast this year to a decline of 4.9% from an increase of 3%. The Bank of Canada’s outlook for the domestic economy, along with the Conference Board of Canada’s, listed the economy in contraction territory with an expected GDP decline of about 8% in 2020, excluding further showdowns. Thus expectations of a V shaped economic recovery appear unlikely as according to the Bank of Canada “the recovery period will likely be prolonged and bumpy, with the potential for setbacks along the way”. The recent downgrade of Canada’s credit rating from AAA to AA+ amid severe budget deficits appears to be more symbolic and it is not expected to have lasting consequences. Markets did not seem overly concerned as bond yields were almost unchanged. Canada’s renowned fiscal discipline appears to be intact and the sudden increase in the deficit is undoubtedly pandemic related.

The rebound of the S&P/TSX can partly be explained by a price to earnings ratio (P/E) expansion amid the enormous liquidity injection by governments and the Bank of Canada, rather than by organic growth. In some sectors such as Technology valuations have been stretched, although they are still cheap relative to their peers south of the border. Overall the S&P/TSX with a forward looking 20 times P/E ratio is at the higher end of its valuation in this economic cycle. Compared to the S&P 500 which has a forward looking P/E ratio of 22, the S&P/TSX appears to still have room to move upward.


During the second quarter of 2020 the FTSE Canada Universe Bond Index gained 5.9% and has risen 7.5% so far this year as central banks intervened to keep loans flowing. Financial conditions had been tightening as markets reacted to the growing epidemic so central banks reacted by cutting rates which sparked a bond market rally. The Bank of Canada cut rates three times in March to 0.25% and the U.S. Fed cut its rate to between 0.0% and 0.25%, which is effectively zero.

The Bank of Canada has been actively engaged with maintaining market liquidity while undergoing a leadership change as it was announced that Tiff Macklem has succeeded Stephen Poloz as Governor of the Bank of Canada for a seven-year term, effective June 3rd. It certainly is a challenging initiation for Governor Macklem as COVID-19 caused the Bank of Canada to slash its key interest rate and launch a series of initiatives to maintain liquidity in the bond market. One of those initiatives, the Bank of Canada Corporate Bond Buying Program, got underway in May but the corporate bond market price level has been flat as issuers flooded the market with new corporate supply. New corporate bond issues in Canada have surpassed the $100 billion mark so far in 2020, after totaling $108 billion in 2019. The flood of new issuance comes as issuers seek to build capital on their balance sheets to help sustain them through a slowdown. The new issues confirm that the bond market is functioning well as central bank programs have allowed issuers to access capital at favourable levels.

The federal government has so far borrowed about a quarter of a trillion dollars to prop the economy up during the pandemic lockdown which caused a bond rating agency, Fitch Ratings, to downgrade Canada’s credit rating to AA+ from AAA. S&P Global Ratings and Moody’s both still have Canada listed as top tier borrowers. Fitch Ratings said that while it is downgrading Canada’s rating, it expects Canada’s debt-to-GDP ratio to stabilize over the medium term before the economy gradually starts recovering with the help of monetary and fiscal stimulus.

In the U.S., the Federal Reserve has also launched a bond buying program by way of Bond Exchange Traded Fund (ETF) purchases which helped underpin spreads in both investment grade and high yield bond markets. The size of the buying is relatively limited and while helpful it is expected that the Fed’s Primary and Secondary facilities, which can be used to buy company specific bonds, will also be effective tools in the Fed’s toolkit if needed. The debate continues over whether the Fed will actually have to use these facilities or whether they have already been effective in calming markets without full scale adoption as investment grade spreads in the U.S. are now sitting within or slightly tight of levels that are reflective of a normal recession in the 200 to 250 basis points range. As well, a wide range of companies have been able to access the primary credit markets, which relieves pressure on the Fed in the near term.

The bond market’s long term recovery will not be straight and easy but there is a compelling risk reward proposition for bond investors relative to equities as stock dividends have been cut and share buybacks have been reduced or eliminated. The crisis has also created clear winners and losers unlike past recessions. While Financials, Energy and Consumer Discretionary issuers saw earnings declines, sectors such as Consumer Staples, Utilities, Health Care and Information Technology may see decent earnings growth thanks to their valuable positions within the new work-from-home economy. Sector selectivity will be a key element for assessing bonds going forward

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 books are now closed on a tumultuous first half of 2020 that saw U.S. equities advance strongly in the second quarter, despite increasing concerns over COVID-19, as the Standard & Poor’s 500 index climbed 20.5% in U.S. dollar terms. However the index is still off 3.1% year to date. In Canadian dollar terms the respective change was 16.6% for the quarter and an increase of 1.8% for the first half of 2020. The loonie gained 2.1% during the second quarter but has lost 4.9% since the beginning of the year.

With the worst earnings outlook in recent memory, many analysts have all but given up on 2020 as the results so far imply at least a 20% annualized drop in corporate earnings. Economic shutdowns have sparked an unprecedented drop in free cash flow. Earnings estimates for 2020 now suggest a one year decline of 21.5%, the biggest four quarter slump since the third quarter of 2009, when earnings dropped 30%, and the worst calendar year for earnings since 2008, which saw a 29% decline. The current rally appears to be driven by extremely low interest rates and a flood of new money as liquidity found a home in secular growth and “stay at home” companies. It is somewhat similar to the market after March 2009 as the performance of economically sensitive stocks initiated a long term market rally.

The U.S. economy contracted 5.0% from January to March, the deepest contraction since the 2007-2009 recession, as consumer spending contracted at a 6.8% rate in the first quarter, the sharpest drop since the second quarter of 1980. There are some signs of recovery in retail sales thanks to the government’s historic fiscal package of nearly $3 trillion which provided a cushion for consumers through one-time $1,200 cheques and generous unemployment benefits. The unprecedented economic upheaval saw personal savings increase to a record $337 billion in April as the saving rate hit an all-time high. This hoarded liquidity could offer support as the personal savings rate in the U.S. hit 33%. Record household savings may help fuel a pickup in spending in the third quarter but economists caution that consumer spending is not out of the woods yet as many parts of the U.S. are experiencing a resurgence of COVID-19 infections.
The 5.0% drop in the first quarter was the sharpest quarterly decline since the 8.4% fall in the fourth quarter of 2008 but the first quarter period captured just two weeks of the shutdowns that began in mid-March. Some economists believe that GDP plunged about 30% in the second quarter, which would be the biggest quarterly decline on record, three times bigger than the current record-holder, a 10% drop in the first quarter of 1958. Forecasters believe the economy will rebound in the second half of the year. The Congressional Budget Office is predicting a 21.5% growth rate in the third quarter followed by a 10.4% gain in the fourth quarter.

The panel of economists who have the job of declaring U.S. recessions announced on June 8 that the country had entered a downturn in February, ending the longest economic expansion in U.S. history, 128 months of uninterrupted growth that had begun in June 2009 following the downturn triggered by the 2008 financial crisis. Many investors are predicting a steep but relatively short V shaped downturn and there are a number of reasons for optimism. A consequence of the high personal savings rate is that cash levels are also really high as money market funds now hold almost $5 trillion and deposits in commercial banks are at a record $15.4 trillion, These numbers also suggest a lot of investors who sold the March selloff never got back in.  Furthermore the federal government stimulus will continue with Phase 4 which includes a significant infrastructure spending component. Lastly, the U.S. probably isn’t going back into full lockdown mode as many believe the trillions of dollars in potential economic damage is too high.

The good news, if any, is that governments are taking a “whatever it takes” approach to shoring up the economy. The Fed has been all about supplying liquidity to financial institutions and ensuring that markets don’t seize up. This significant measure of liquidity should continue to assist markets during this difficult time.


The effects of the COVID-19 pandemic to the global economy could be worse than the 2008 Financial Crisis. It has triggered the steepest and fastest economic decline since the Second World War. However once the lockdowns have eased activity should rebound quite strongly. Having said that, persistent weakness is likely to mean the world will take a long time to return fully to its pre-virus levels. Central banks are at, or very close, to their limits and yet fiscal support could still be ramped up even further if necessary. Across developed economies, stock markets and currencies fell sharply after fears emerged about the coronavirus outbreak and yet the worst hit countries have generally bounced back the most strongly as concerns have been reduced. If the virus is contained, then most major economies will continue to recover substantially between now and the end of this year.

Economic output will contract in more than 90% of countries. This is the first recession since 1870 triggered solely by a pandemic and it continues to disrupt markets. Fiscal policy responses have been unprecedented in scale and scope and have served to cushion the near-term shock. Most central banks have cut interest rates to about or below zero to buffer the effect of the coronavirus. However, with job losses occurring on an extreme scale and intense pressures on small and medium-sized businesses, the path back to normality could be slow. Still, there are signs that the worst may be over soon.

Europe has experienced a sharper plunge given the lockdowns in most Euro zone countries and the region is likely to continue to struggle throughout this year as governments relax restrictions slowly. The depth of the downturn is highly uncertain. The subsequent recovery might be very quick by past standards, but output and employment will not return to their pre-crisis trends anytime soon. Individual governments will be left with much higher debt levels and further down the line, much higher debt loads will make these countries more vulnerable to a loss of investor confidence. The U.K. COVID-19 lockdown is widely expected to be extended as the decline in new cases is only slowing marginally. The Bank of England is seeing signs that lenders are becoming more cautious about extending credit to households which could stymie any sudden increase in consumer optimism.

Japan has extended the state of emergency for the whole country. This will not likely result in a significant additional hit to economic activity given that many were already staying at home and many retail shops had already closed. Japan’s economy will shrink significantly in the wake of the coronavirus outbreak. The government has responded by announcing a fiscal support package with vastly inflated headline numbers, so more fiscal support may be required.

Australia and New Zealand slashed rates into negative territory. The recent sharp fall in the number of new coronavirus cases suggests that the restrictions imposed to stem the outbreak will be gradually eased. Even so, both economies will be weaker than most anticipate. Unemployment rates have risen into the double digit range and headline inflation will edge up due to a rise in energy prices.

World stocks have been on a rollercoaster ride in the first half of 2020, initially increasing then crashing before rallying sharply over the last three months. International stocks for the year are down 11.1% (all figures in U.S. dollar terms) after gaining 15.1% in the second quarter. European stocks are down 12.4% for the past six months; Asian stocks (ex Japan) are down 12.9% and Japanese stocks have only fallen 6.9%. The U.K. has been amongst the worst performing markets falling 23.2% this year.

Investor morale has improved for three straight months as the recovery from the impact of the COVID-19 pandemic seems clearer. The big unknown is the prospect of a vaccine becoming widely available. In the meantime, extraordinary policies will be needed to walk the tightrope towards recovery without leaving long lasting scars (a fall in living standards, high unemployment and weak investment) and damage as the world’s economies reopen.


While 2019 was tumultuous for Emerging Markets, it pales in comparison to the COVID-19 pandemic that has swept across the world. The pandemic has run rampant in some major emerging market economies. In the six months since COVID-19 was first discovered in China, countries stricken first are now significantly loosening lockdown restrictions. And many equity markets are rebounding, partly on the back of large stimulus packages. In fact, the biggest surprise of 2020 thus far has been the speed of the market recovery in select markets.

The COVID-19 crisis comes on top of slowing growth trends for Emerging Markets due to a partial reversal in globalization. These issues threaten growth, which has worked in all the emerging market countries that have closed the income, wealth, and capital asset risk-premium gap with developed countries. Increasing trade barriers and technology constraints might limit export prospects as countries diversify away from concentrated sources of supply with countries like India, Turkey and Mexico.

Most emerging market central banks have been able to cut interest rates substantially in order to cushion their economies. Interest rates in a handful of countries are close to zero, but these are typically economies with strong balance sheets and credible central banks. Weaker countries on the other hand are reluctant to undertake conventional monetary policies given their mixed success and resources which could cause further harm to their economies.

After China’s deep slump in the early part of the year, its economy is starting to recover but the road ahead is long. The initial acceleration of activity as lockdown measures were eased is already running into constraints of weak demand. Industrial production is, on the whole, getting stronger but there are still quite a few difficulties and uncertainties. Heavy job losses and fears of some virus flare-ups have kept consumers cautious.

India is experiencing its slowest growth in four decades and things are likely to get much worse as the country struggles because of the lack of a concerted public health response. Its central bank has made an emphatic response with aggressive monetary loosening and large-scale fiscal stimulus to prevent a depression. With exports collapsing, economic activity will contract sharply in countries across the Asian region due to draconian restrictions on travel and commerce.

Emerging Europe is experiencing its largest peak-to-trough fall in economic activity in decades. Success in slowing the spread of the virus and aggressive policy support suggests that their recoveries will be stronger than those in Russia and Turkey, where virus outbreaks are escalating and policy support has been more limited. Latin America as a whole will fall this year at a steeper pace, even as central banks cut interest rates further, due to a lacklustre response to the crisis. So, their recovery will most likely be weaker than elsewhere in the emerging market world.

Although emerging market equities have recovered some ground since their lows, they are still substantially down on the year. As a whole they have fallen 9.7% (all figures in U.S. dollar terms) year-to-date after climbing 18.1% in the second quarter. Asian stocks have led the rebound and are only down 3.4% for the year; while emerging European stocks are down 24.5% and Latin American stocks are down a crushing 35.1% over the past six months.

The COVID-19 shock is a human tragedy. It is also a stress test for the world. China appears to have troughed in the first quarter and the rest of Asia is likely to trough in the second quarter. Unfortunately, many other less developed nations are in full pandemic crisis mode so recovery remains incomplete. Currently, investors’ concerns centre on the durability of the recovery, the extent of a potential second wave, as well as what unprecedented policy easing would mean for macro stability and balance sheets.


Given the sudden and acute lockdown recession triggered by COVID-19 over the past few months, investors might assume that the entire real estate or Real Estate Income Trust (REIT) marketplace has been hard hit by sudden losses or reductions in rental income and wholesale erosion of occupancy. This is not the case. There are however clear losers and winners. The worst hit areas are clearly hotels which are closed and have been hit by the lack of business and holiday travel. The retail sector has also been devastated currently collecting just 20% to 25% of their rent.

The immediate concern is that the virus will induce a rise in precautionary savings by households and businesses. If so, this would depress demand and economic output. The result would be low inflation, low interest rates and a need for prolonged fiscal support in most economies. This could plausibly last for many years.

The spread of COVID-19 caused the world’s economies to shed millions of jobs. The impact will result in negative GDP growth before modest stabilization occurs, possibly in the third quarter. While the overall real estate market was on steady footing entering 2020, the economic concerns related to COVID-19 challenging retail, hotel and multi-family assets are highly concerning.

The agony for malls is not new as e-commerce continues to absorb greater amounts of retail sales but their attraction has withered further in the face of lockdowns and widely applied social distancing measures. Larger e-commerce distribution and supply-chain operators are benefiting from a short term bump due to increased inventories. On the residential side, robustness in the apartment space due to the trends of millennials delaying homeownership and older baby boomers transferring to rental housing in retirement is encouraging.

Single family rental housing has been fairly well insulated. Retirement housing is facing near term challenges as they try to keep their doors open after the crushing effect of widespread COVID-19 related fatalities. While offices have been a cornerstone of the modern economy they are being threatened by long term secular changes in the current work-from-home environment.

Disruption from Covid-19 will likely push home sales to record lows but pent-up demand and record low mortgage rates will help activity bounce back. Commercial property values have fallen by nearly 10% as activity slumps. Investment and leasing activity are set to fall as well. However, if the virus is brought under control in coming months, rental growth should bounce back and a low interest rate environment will support property valuations.

Canadian REITs continue to underperform equities and international REITs. Despite gaining 7.3% in the second quarter Canadian REITs are still down 21.2% for the year. Global REITs also climbed in the quarter, 8.3% (all figures in Canadian dollar terms) however they are still down 9.0% over the last 6 months.

That global central banks have rushed to support their economies has been extremely well received by the financial markets. Central banks do not seem fazed by the possibility that their actions may be fuelling mania in some corners of the market. The implication of this support to the broader economy will eventually filter down into the real estate space.

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