Knowledge Centre

Q3 2020


The good news is that the world’s economies have proven more resilient to the COVID-19 crisis than many had feared thanks to rapid policy action. Governments subsidized incomes and helped companies stay afloat while central banks cut interest rates and ensured that stressed financial markets remained liquid. However, the easy part might be over as the recovery that started off as a sprint is turning into a slog with the last stretch set to be the hardest. The outlook for the global economy is uncertain as cases rise and a vaccine still appears months away.

Canada’s economy is now just 5% below pre-COVID levels, but the recovery is slowing. At the recession’s peak in April, economic activity was 82% off pre-pandemic levels. Some parts of the economy have moved closer to pre-pandemic levels while others such as agriculture, forestry and fishing, along with retail trade, finance and insurance have all surpassed February’s highs. Consumer spending data, along with recent trends in employment, housing and household balance sheets suggests the recovery has continued as both monetary and fiscal policies remain supportive. While many sectors of the Canadian economy have roared back to life, a third of them remain stalled as almost 45% of the jobs lost were in industries such as accommodation, food services and energy. Small and medium sized businesses have seen the biggest job losses. Young people have taken the brunt of job losses, with 35% of jobs lost in the 15-24 year old group.

The U.S. economy may have been battered and bruised but it will likely emerge from the global pandemic quickly. As states eased restrictions, labour market conditions improved and consumer spending was revitalized. The U.S. economy has a history of resiliency and should rebound from the shortest recession on record, if it has not already. At first glance, unemployment across Europe appears remarkably low in the face of a savage recession as government support programs that subsidize workers’ wages have helped keep millions on the job. However, this is unlikely to continue as these policies are set to expire. The prospects for recovery hinge largely on the ability to reopen without experiencing a spike in Covid-19 infections and ultimately, upon the availability of vaccines and other treatments necessary to allow activity to return to more normal conditions. Some countries are seeing encouraging virus data, especially China where the disease first spread. It has managed to bring the pandemic under control and get further along the road to recovery than most of its peers. China’s early exit from their Covid-19 lockdown and stimulus measures should benefit emerging markets more broadly. Unfortunately, some countries like India, Mexico and South Africa may do worse as they struggle to contain the virus.

The stock market has been on a tear for much of 2020, but there is now more volatility as stocks have lost steam since notching new or near-new highs. The stock market’s ability to build off its recovery from COVID-19 lows is rooted in fundamental factors that will support further upside returns. The 3rd quarter was positive for most markets; Canadian stocks gained 4.7% and are only down 3.1% for the year-to-date. U.S. stocks climbed 6.8% in the quarter and are up a remarkable 8.3% in 2020 (all return figures in Canadian dollar terms); International stocks eked out a 2.7% gain over the last 3 months and are still down 4.0% for the year; while emerging market stocks soared 7.6% in the quarter and have gained 1.9% year-to-date. Bonds continued to appreciate, gaining 0.4% in the 3rd quarter and are up a robust 8.0% in 2020.

There will inevitably be bumps in the road to recovery with the main risks being a rise in COVID-19 deaths; a near-term worsening in U.S./China trade relations; and a premature withdrawal of fiscal/monetary support which is unlikely but a risk nonetheless. It is probable that the recovery will temporarily lose steam during the current upswing in new cases, but this outbreak will mainly act as an accelerant on developments that were already taking place to eventually put this crisis behind us.


After record GDP declines in the first and second quarters, global economies started to see broad-based revivals in the third quarter on the backdrop of further re-openings and continued government support measures. In Canada, where the contraction was relatively more pronounced in the second quarter, the rebound has been swifter than expected with a “V” shape in some areas such as retail and homes sales. Canada’s GDP has recovered some lost ground but is still below its pre-pandemic level. Many jobs have been recouped with August adding more than 240,000 jobs – a fourth consecutive month of gains. For the markets, the S&P/TSX continued to recover in the third quarter with a 4.7% gain despite renewed volatility in September over mounting concerns of a second Covid-19 outbreak. Though modest relative to the blowout second quarter gain, the third quarter return continues to indicate investors’ cautious optimism toward economic and financial recovery. Year-to-date the S&P/TSX has almost recovered from its 2020 decline, returning -3.1% as at September 30.

For the quarter, gains were broad-based across sectors as reopening plans included more of the economy, along with notable strength of some Cyclicals. Industrials led the pack during the quarter with a 12.5% return followed by Utilities with 9.9% and Materials with 8.8%. Only two sectors were in the red with Energy declining 14.9% and Healthcare down by 14.2%. The Energy sector continues to be under pressure as has been the case over the last few years. Recently there has been some disconnect between Energy’s rough ride and the underlying prices; most Energy benchmark prices have managed to hold within a narrow band despite investors avoiding the sector as the pandemic conditions continue to be unfavorable for demand. The staggering rebound of technology stocks since their March lows has finally taken a breather late in the quarter with increased sell-offs due to investors reassessing their valuations. The pullback in Technology and some other growth sectors slightly trimmed valuations, although these sectors still remain relatively overvalued.

For the coming months, improving macro-economic momentum is the main prognosis for many analysts, albeit with a caution as some risks still exist; primarily a second wave of the pandemic and another round of shutdowns. The OECD (Organization for Economic Co-operation and Development) in its last report also expects the global economy to remain more resilient than previously anticipated for 2020 with a 4.5% decline of global GDP versus 6% initially estimated. In Canada, the rebound and resilience have been impressive. Though far from a “V” shape as forecast by some, the shape appear in line with a “K shape” where some sectors do well while other lag. Unprecedented income support programs along with household debt deferral provisions contributed enormously to this resilience. One notable example that has been supportive to the demand side is the insolvency ratio in Canada which plunged to 23-year low thanks to various government income replacement programs for households.

As for the future of the Canadian market, the S&P/TSX, posted a 2.1% decline in September, the first decline since March. Despite its strong overall rebound since March, the S&P/TSX continues to lag most of its global peers and is lagging its counterpart south of the border by about 5%. The rally has been concentrated in sectors such as Technology and Consumer Staples resulting in multiple expansions relative to their historical range. However, other sectors such as Financials and Industrials exhibit lower multiples and thus a lot of value. The recent forward guidance from the Trudeau Government, as well as from Bank of Canada, has stressed the importance of using all possible measures to avoid further slowdowns. Thus there is still a lot of ammunition to support the economy and investors have reason to expect that Canadian markets will soon reflect their true value.


During the third quarter of 2020 the FTSE Canada Universe Bond Index gained 0.4% and has risen 8.0% so far this year. Yields on 10 year Government of Canada bonds have averaged 0.6% over the last six months. The Bank of Canada kept its key interest rate unchanged over the quarter at 0.25%, after cutting rates three times in March in the immediate aftermath of the pandemic. The U.S. Federal Reserve also maintained its rate at between 0.0% and 0.25%, which is effectively zero.

S&P Global Ratings, a debt rating company, confirmed Canada’s AAA rating as it cited the country’s ample fiscal and monetary buffer and its diversified economy. Canada and Germany are the only members of the Group of Seven to retain their AAA ratings with S&P. Canada also maintained high ratings with debt rating companies DBRS Morningstar and Moody’s Investors Service after Fitch Ratings downgraded Canada in June, citing the deterioration in its public finances from the pandemic. S&P’s rating is partly based on the expectation of an economic rebound that will shrink the country’s fiscal gap. The federal government’s deficit may approach 16% of economic output this fiscal year, the largest since 1945, while the economy is on path to shrink 6.8% in 2020, the biggest drop in almost a century, according to government estimates. DBRS views the overall fiscal response positively. While the International Monetary Fund has forecast Canada’s federal, provincial and municipal debt to expand from 89% of GDP last year to 109% of GDP in 2020, DBRS remains confident in the government’s ability to handle the burden because its stimulus measures are temporary, were issued for fiscal strength and will incur low borrowing costs.

Canada’s central bank governor Tiff Macklem said its key interest rate would stay close to zero until Canada’s recovery is fully underway. He has also promised the Bank of Canada will step in wherever necessary to support the economy as it recovers. Canada’s recovery has evolved in line with the scenario laid out in the central bank’s July Monetary Policy Report. The report noted that Canadian GDP fell by 11.5% in the second quarter, resulting in a decline of over 13% in the first half of 2020. The Bank expects a strong reopening phase will be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support. The Bank has also committed to continuing its quantitative easing program, buying Government of Canada bonds at a rate of $5 billion per week.

In late August the U.S. Federal Reserve (Fed) announced a significant change in how it will manage interest rates as it plans to keep rates near zero even after inflation has exceeded the Fed’s 2% target. The Fed began its reassessment of its interest rate policy in November 2019. Currently U.S. inflation is hovering at a sub 1% annual rate, well below the Fed’s 2% target which was adopted in 2012. The Fed will now allow an overshoot of its 2% target which should lengthen the expansion and delay the day of reckoning for equity markets from higher interest rates. The change also signifies that the Fed expects that borrowing rates will likely remain ultra-low for years to come. Fed Chairman Jerome Powell made clear that the policy change reflects the reality that high inflation, once the biggest threat to the economy, no longer appears to pose a serious danger, even when unemployment is low and the economy is growing strongly. Rather, Powell said, the economy has evolved in a way that allows the Fed to keep rates much lower than it otherwise would, without igniting price pressures. Powell said that the Fed’s decision to allow unemployment to fall to a 50 year low before the pandemic had played an important role in lifting the fortunes of low income workers. The new Fed policy underscores its belief that a low jobless rate is critically important for the U.S. economy.

A similar shift is expected from the Bank of Canada which is also reviewing its policy approach. Though it is debating a range of different options, the most likely is a framework that will allow higher inflation to offset past misses. The results of the Bank’s review are due in 2021 when the government and the central bank will renew their agreement on an inflation control target. The end result will likely be a policy that allows interest rates to be lower for longer.


U.S. equities advanced strongly in the third quarter, despite ongoing concerns over COVID-19, as the Standard & Poor’s 500 index climbed 8.9% in U.S. dollar terms. The index is up 5.6% year to date. U.S. equities saw broad gains across most sectors, with technology stocks leading the way. All sectors of the S&P 500 had gains in the third quarter except for energy which tumbled almost 20%. In Canadian dollar terms the respective change was 6.8% for the quarter and an increase of 8.3% for the year to date in 2020. The loonie gained 2.1% during the third quarter but has lost 2.7% since the beginning of the year.

The pandemic is now a ‘known known’ to investors and, barring a more significant second wave in the winter, it is unlikely that the market will be spooked again by the virus itself in a similar manner to what we saw in March. Initially policymakers seemed far more willing to spend heavily and amass huge deficits than they were during the last crisis, at least in part because low interest rates made payments on government debt cheaper. The aggressive response was largely successful. After shedding millions of workers in March and April, the official jobless rate peaked at 14.7% in April, before companies began bringing staff back in May and June. Stimulus cheques and enhanced unemployment lifted personal incomes in April and May which supported spending. A predicted wave of foreclosures and evictions largely failed to materialize. By August the unemployment rate had fallen to 8.4%, defying expectations that it would remain in double digits into next year. The economic revival is slowing, but not as sharply as some investors predicted once expanded unemployment insurance and other programs began to ebb.

Stocks have lost steam since reaching new highs in early September as the S&P 500 index lost about 4% for the month, its first monthly decline since March. Some investors attributed the slump to the fact that stock prices, in particular shares of some big technology companies, had become too expensive after rising roughly 60% since late March when the Federal Reserve moved to prop up the economy. Beyond the market volatility, an uncertain electoral outcome also has implications for an economy still struggling with the coronavirus. The economy has recovered from the worst of the downturn and some pockets of strength, such as housing, have emerged. The U.S. created 661,000 new jobs in September and the unemployment rate fell again to 7.9% to the lowest level during the pandemic but the gain in hiring was the smallest since the economy reopened and pointed to deceleration in the recovery. The decline partly reflected an increase in hiring, but more worrisome, nearly 700,000 people exited the labour force and stopped looking for work because jobs were scarce. They aren’t counted in the unemployment rate.

Heading into the year’s final quarter, investors came to terms with the likelihood that no more stimulus money would be coming as the approaching presidential election has paralyzed Washington’s ability to provide fresh support to the struggling economy. Investors crave clarity regarding political outcomes. They like knowing that a Republican administration will deliver tax cuts and deregulatory policies, or whether a divided government will create gridlock. But this time around the most market friendly outcome would simply be an overwhelmingly clear electoral result. How the market responds to the election may depend less on which candidate wins and more on how conclusive the result is.

The pandemic driven decline in U.S. bond yields to below 1% has allowed equity markets to trade at more expensive valuations in terms of price-to-earnings ratios. While the U.S. central bank has pledged to keep rates low and is operating a variety of programs meant to keep credit flowing to households and businesses, they are not a substitute for direct federal spending. Ultimately, the combination of an effective vaccine and a government committed to pumping the economy with stimulus should provide a solid foundation for the stock market going forward.


Unlike during the Financial Crisis of 2008, international government support during the COVID-19 pandemic, which includes direct payments to workers in addition to interest rate cuts by central banks, has been twice as robust and has boosted economies and stock markets around the world. Because central banks have created excessive liquidity and driven bond yields so low, equities are extremely attractive on a relative basis. Rising levels of new COVID-19 cases is the biggest threat to the recovery as fresh restrictions to quell a resurgence could slam the economic gains into reverse.

The European economy plunged into an unprecedented slump in the second quarter, putting it in a deep hole. Europe’s COVID-19 induced heart attack was dire and could linger for longer than expected. Italy, Spain and France will likely be the worst performers. Germany is one of the few countries where the recession is moderating. Most European countries have reopened their borders while hotels, bars and restaurants are lurching back to life, for now. Economic recovery may once again falter with growing evidence of a resurgence of COVID-19 and the potential reimposition of restrictions on activity. The European Central Bank had been propping up the Eurozone countries pretty much single-handedly. Now the Eurozone governments will launch a €750 billion recovery fund, a mix of grants and loans that will be handed to countries to rebuild their economies.

Britain has suffered a record collapse in economic activity, more than any other Group of Seven economy, when the COVID-19 lockdown measures were in full force, though the decline was slightly smaller than first estimated. It is on course for its biggest annual fall since the 1920s. The main reason why the economy has fared so badly is that the lockdown was introduced at “a later stage” in the outbreak, particularly when compared with others in Europe. As a result, Britain has suffered Europe’s highest death toll. The economy may also lag others because of structural disadvantages, notably the fact that the economy is so dependent on the services sector. The British economy faces further headwinds, notably its future trading relationship with the European Union following the its departure from the bloc in 2021.
While Japan has avoided a depression, no one could argue that its economy is thriving. An aged population and unresponsive private sector continue to sap its flexibility. Fortunately, ongoing monetary stimulus has spared politicians from having to undertake the reforms needed to improve the country’s economic competitiveness. The country has the lowest productivity growth among leading industrial economies. The Bank of Japan’s balance sheet has expanded to about 120% of the country’s nominal gross domestic product from about 20% since 2008, as the central bank finances government deficits by printing money.

Stock markets across the world have rebound sharply from first quarter lows. Overall, international stocks gained 4.9% in the 3rd quarter, but are still down 6.7% for the year (all figures are in U.S. dollar terms). Europe climbed 4.6% in the past quarter; however it is still down 8.4% year to date. The U.K. is particularly weak falling 0.2% in the quarter and an abysmal -23.4% for the year. Asian markets gained 6.2% in the 3rd quarter and are down only 2.2% for the year; being propelled by Japan’s 7.1% gain over the past three months and respectable 0.3% decline for the year.

The big question is how far the recovery has to run. The pace is now slowing due to ongoing social distancing rules, spending caution and weak demand. In addition, the rebound in new COVID-19 outbreaks across the globe may force reluctant governments to impose strict national lockdowns and economies could suffer. The other major risk is the damage to the labour market as government support programs were enacted which prevented unemployment from surging but may be only delaying rather than preventing devastating layoffs.


The recovery in emerging markets equities continued in the third quarter with one of the strongest quarterly returns for equity markets in decades, clawing back 96% of the losses from the pre-COVID-19 peak. After the shocking damage caused by COVID-19 during the first quarter when the emerging markets were down nearly 35%, the second quarter was equally dramatic recording one of its worst quarters of economic contraction in history even as the stock markets collectively gained 18%. The powerful combination of central bank liquidity injections and government fiscal spending drove the markets back toward previous highs.

China became the first major economy to grow since the start of the coronavirus pandemic recording a strong expansion in the latest quarter after anti-virus lockdowns were lifted and factories and stores reopened. Growth was a dramatic improvement over the second quarters contraction, its worst performance since at least the mid-1960s. However, it still was the weakest positive figure since China started reporting quarterly growth in the early 1990s. China is likely to recover faster than some other major economies due to the government’s decision to impose the most intensive anti-disease measures in history. Manufacturing and some other industries are almost back to normal but consumer spending is weak due to fear of possible job losses. Disputes about trade, technology, human rights and Hong Kong remain worrisome as the U.S./China relations remain a wild card risk.

Despite the overall improvement in emerging markets, some individual countries are in the throes of deep challenges in the short term. The Turkish lira is in free fall sliding to a record lows, a result of the Turkish central bank refusing to raise interest rates until very recently. The Russian economy is dramatically shrinking and has been one of the worst performers in emerging markets in the past few months. The Mexican central bank will probably cut the key interest rates (which is still among the world’s highest in real terms) for a 10th straight time as the economy teeters on the edge of the worst recession in almost a century. Brazil has suffered more than almost any other country from COVID-19, with more deaths than any other country outside the U.S. As a result, the Brazilian economy suffered a record setting decline forcing the central bank to cut interest rates to an all-time low.

Emerging market stocks rose 9.7% in the third quarter and are marginally down for the year -0.9% (all figures are in U.S. dollar terms). China is responsible for more than 35% of the market’s performance since the 23 March bottom, with Korea and Taiwan contributing another 30%. Looking more closely at the third quarter, the performance of a few e-commerce and information technology stocks drove emerging markets. Just two, Alibaba and Taiwan Semiconductor, accounted for more than 40% of the index’s returns. Overall, Asian stocks gained 11.7% in the 3rd quarter and were up 10.0% for the year. Emerging Europe stocks fell -3.9% in the past quarter and were down -27.4% year to date. Latin American stocks fell -1.2% in the quarter and an abysmal -35.9% for the year.

Amid a better than expected rebound from COVID-19 lockdowns, the global economic outlook is looking a little better than first feared. Emerging markets are in many ways facing tougher economic challenges from the pandemic given more limited social safety nets and healthcare capacity and less scope for aggressive macro policy easing. While the threat of another wave of the virus in emerging markets is on the horizon and investors should temper some of their optimism, emerging markets stocks are likely still on their way back up.


Canadian Real Estate Investment Trusts (REITs) fell 1.5% in the third quarter and have suffered a 22.4% decline so far this year, while World REITs were up 0.2% for the quarter but down 12.0% year to date (all return figures in Canadian dollar terms). Looking at the impact by property type, industrials were the only positive with returns of 11% and all other categories were negative, including residential (-10%), retail and office (-17%), and seniors housing (-30%). Sentiment appears overly bearish after the REIT sector sold off heavily in March as investors were concerned about the implications of social distancing and online shopping for shopping malls and office buildings. The size and pace of REIT price recoveries will likely be uneven between property types and perhaps by geography. Areas in the industrial space are booming thanks to the demand for e-commerce, distribution and data centers. Retail also has some positive stories for essential services such as grocery stores and pharmacies. Shopping malls were hit hard during the shutdown and could see changes in consumer behavior as early indications have been that foot traffic isn’t back to normal levels. People are being more purposeful in malls, going to a particular store, making a purchase and departing.

Real estate has been one of the more interesting asset classes during the pandemic. Canada’s private real estate market is mostly roaring again after it briefly froze up because of COVID-19. Home sales and prices in the nation’s biggest cities have rebounded sharply as reflected by a national home price index which rose 7.4%. Markets such as Toronto and Vancouver have seen residential demand go through the roof, while other areas of the country have dried up.

Office space has been hit hard and will have question marks going forward. Not all areas of the world experienced the same level of shutdown as Canada and some areas still have high occupancy rates. While many will return to offices once the pandemic is over, some occupiers will re-assess their needs. Broadly, office rents remain paid so the question will be the renewal dynamic. Office vacancies are rising in Canada as commercial tenants increasingly look to sublet surplus space. Canada saw much of the country’s downtown office markets record a full percentage point uptick in vacancy rates in the third quarter. In Toronto, downtown office vacancies rose to 4.7%, from 2.7% in the second quarter, while Vancouver’s downtown office market recorded a 4.6% vacancy rate, up from 3.3%. Of the newly vacant office space in the third quarter, sublease listings accounted for 40%. An increase in sublet availability is often a precursor to lower rental rates but even though subleasing has spiked considerably, it’s still not yet at a level where it would raise red flags because as a percentage of total inventory it is still low. The office is not going away and strong job growth is anticipated during the post-pandemic economic recovery which should see demand for office space pick back up. De-densification of office spaces will offset any loss of workers who continue to work remotely after the pandemic. If employers increase the square footage per person in the office by 25 to 50%, that erases the gap of those who work from home.

The worst has been avoided. Government loans to small business and enhanced unemployment benefits have supported a strong but incomplete recovery in demand and have substantially muted the normal recessionary dynamics that occur in a downturn, with fewer bankruptcies and fewer permanent layoffs than would have occurred otherwise. Unfortunately, the recovery is in danger of losing momentum when economic scars emerge and there is a risk that the rapid initial gains may transition to a longer than expected slog back to full recovery.

At the moment investors are simply riding a wave of momentum. It is clear that what the real estate market is doing is simply following the path of least resistance. The COVID-19 pandemic is now a ‘known known’ to investors and, barring a more significant second wave in the winter, it is difficult to envisage the market being spooked by the virus itself in a similar manner as earlier in the year. It appears, a return to nationwide lockdowns is off the table and the central bank support remains alive and well. So, the market’s sensitivity to news about COVID-19 appears to be in decline.

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