Morgan Stanley chief economist Chetan Ahya’s most recent research report, “Sharper but Shorter”, is generally positive about the potential for a global economic revival. There are, however, important caveats for developed markets that arise from the precedent of China’s ongoing resurgence.
Mr. Ahya writes that while Chinese manufacturing activity has seen a V-shaped recovery, “spending on [non-technology] consumer discretionary products is still lagging somewhat … Restaurants have 50-80% of their customer base back, but night life venues are still closed in Tier 1 cities.”
Developed economies like Canada’s are at least 60 per cent dependent on consumption. So the failure of Chinese consumers to fully participate in the country’s economic rebound implies the risk that consumption-based economies will recover more slowly than China’s.
For Canadians, including investors, the timing and pace of a general business bounceback is everything. Citi credit strategist Matt King noted that commercial bankruptcies will increase at a similar exponential rate to the spread of COVID-19 infections.
Mr. King cited a survey of small and medium sized businesses in the U.K. (I posted the accompanying chart on social media here) who were asked how long they could remain solvent during a lockdown. The results indicated that 40 per cent of the companies would run out of cash in eight weeks. After 12 weeks, 60 per cent of these businesses would be forced to close.
Government support varies in scale, speed and effectiveness in each country so the U.K. bankruptcy numbers aren’t necessarily applicable to Canada directly. The exponential increase in business failures as quarantine conditions continue, however, is likely to apply everywhere. This is why the timing of the recovery is so important.
From an investment prospective, any delays in a domestic economic revival threaten the survival of companies with weak balance sheets. Stocks representing financial strength should be favoured in portfolios.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown (most for subscribers only)
Five more cornerstone stocks that are likely to perform well through the market turmoil
Last week, Gordon Pape introduced the concept of Cornerstone Stocks – key companies that should perform well even in a pandemic and emerge stronger on the other side. The first five were Walmart, Costco, BCE, AT&T and Franco-Nevada. This week, he’s adding five more to the list.
Rebound in small caps signals growing confidence in post-pandemic recovery
In a rally dominated by the giants of the stock market, the little guys are having a moment. Small-cap stocks, which sustained the brunt of the market crash sparked by the COVID-19 pandemic, have staged a rousing comeback over the past two weeks, even after factoring in a two-day dip to end last week. Tim Shufelt reports
Check your schadenfreude, advisers. Robo-advisers are thriving in the bear market
Robo-advisers are thriving in the market turmoil caused by the pandemic. Market leader Wealthsimple had almost twice as many new account sign-ups in March than it did in the same month of 2019. WealthBar had an 81-per-cent increase in new clients in March and April, while Nest Wealth reports that March was one of its best months ever for signups. Online brokers BMO InvestorLine, Questrade and TD Direct Investing have also racked up many new clients lately, as have the free stock-trading app Wealthsimple Trade and an advice-DIY hybrid from Bank of Montreal called adviceDirect. Digital investing firms like these face a big test over the coming months and years in retaining these new clients. But right now, they’re making a case for long-term legitimacy. Rob Carrick tells us more
A contrarian case for investing in this long-term care stock
The world of eldercare has been thrown into turmoil as the coronavirus preys on the aged. Extendicare (EXE) operates 120 senior care and retirement living centres in Canada, and provides home health care services. The Contra Guys own shares in the company; so far in this horrible pandemic, they are not planning to sell. Here, they explain why.
Four investing lessons from the coronavirus pandemic
Just as scientists and governments are learning important lessons about the coronavirus, investors are getting a crash course in crisis portfolio management. In the spirit of taking something positive from a horrible situation, here are some key investing lessons we’ve learned, courtesy of our John Heinzl.
Warren Buffett is optimistic? Pessimistic? No, realistic
You could always count on the folksy and cheery optimism of Warren Buffett. But if you listened closely to Buffett over the weekend during Berkshire Hathaway’s shareholders’ meeting — his annual “Woodstock for Capitalists” was conducted virtually because of the coronavirus pandemic — his words often betrayed a deep sense of concern about the immediate future. That should be a warning to all investors and policymakers. Read more from Andrew Ross Sorkin of The New York Times
Others (for subscribers)
The highest yielding stocks on the TSX, plus risk data
John Heinzl’s model dividend growth portfolio as of April 30, 2020
Monday’s analyst upgrades and downgrades
MCAN Mortgage insiders bought the sell-off
Think Wall Street’s back to normal? Not so fast, options markets say
Fund managers fish for dividend plays amid sharp cut
Globe Advisor
Why cybersecurity is a sector worth investing in
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Ask Globe Investor
Question: I am aware that withholding tax on U.S. dividends can be avoided if one holds U.S. stocks in a registered retirement savings plan or registered retirement income fund. Does this exemption also apply to registered disability savings plans?
Answer: No. Under the Canada-U.S. tax treaty, only accounts that specifically provide retirement income are exempt from withholding tax on U.S. dividends. These accounts include RRSPs, RRIFs, locked-in retirement accounts, life income funds and other registered retirement accounts. RDSPs are not considered retirement accounts and are therefore subject to withholding tax on U.S. dividends. Withholding tax also applies to non-registered accounts and – this often surprises people – to tax-free savings accounts and registered education savings plans. The withholding tax rate is typically 15 per cent of the dividend. (This assumes your broker has filed a W-8BEN form with the Internal Revenue Service on your behalf, which brokers usually do automatically. Otherwise, the withholding tax rate is 30 per cent.)
--John Heinzl
What’s up in the days ahead
Jennifer Dowty takes a look at AirBoss, a rallying TSX stock that’s helping in the health care fight against the coronavirus.
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Compiled by Globe Investor Staff