Kurt Reiman, chief investment strategist for BlackRock Canada, seen here at his office in Toronto on Dec. 9, 201, spoke with The Globe on the markets and the economy.Aaron Vincent Elkaim/The Globe and Mail
The rapid spread of the novel coronavirus has changed people’s lives worldwide. Cases and deaths are rising, the unemployment rate is surging, many basic goods are unavailable or scarce, social activities are restricted and equity investors have rapidly seen the value of their portfolios collapse.
There are a lot of unknowns with this novel coronavirus. During this time of uncertainty, strategists attempt to provide sound guidance on the potential impacts from this pandemic.
We recently spoke with Kurt Reiman, BlackRock Inc.’s chief investment strategist for Canada, to gain his insights on the markets and economy.
Where do you think stock markets are headed?
There are three very important sign posts that I am following in order to gain some additional visibility on the direction for equity markets and risk assets.
The first one is the most difficult to understand, and that is the coronavirus outbreak itself.
The second point, the co-ordinated policy response is happening, so that gives me some optimism.
The third thing we are following is the liquidity within the financial system. With a number of central banks stepping in to provide liquidity to households, businesses and industries with funding – this is a point where we can have a degree of optimism.
As we continue to get news of increasing infection rates, potentially news of the health-care systems being stressed to the point of potentially breaking down, I think that is a risk factor that could temporarily come along and add additional risk aversion into the markets.
Have stock markets put in a bottom?
The market has fallen a lot and we can't discount that it's reflecting a lot of bad news.
When you think about prior episodes of economic weakness and declines in earnings, the earnings forecast declines were something on the order of around 20 per cent with multiples on markets that were down into the low teens, so if you assumed a true recessionary financial crisis-style drawdown in markets, then there is still room to go.
But, this is not a standard recession, this is not a financial crisis, this is a natural disaster that is happening on a global scale. When we came into this the economy was in okay health. This is not a standard business cycle [recession] and you can’t use that same approach here.
Could we see a quick economic recovery?
I would assume so. It should be a fairly strong recovery.
Unemployment rates are likely to spike and jobless claims as well. We know that if it weren’t for the efforts of governments stepping in and providing cash flow to businesses and consumers, we would see a much steeper economic falloff.
The velocity of the downturn in equity markets has been astounding. What actions should investors consider taking?
The severity and swiftness of the downturn in the stock market happened faster than any other time, including the Great Depression, and as a result, [for instance], the 60-per-cent stock, 40-per-cent bond portfolio that investors had as their ideal strategic weights has now become a 50/50 portfolio. That is not just true for individual investors but it’s true for large institutional investors and pension funds.
We are going to be hitting the end of the quarter and a lot of these funds are going to be looking to rebalance. Portfolios have drifted incredibly fast away from strategic weights and it makes sense to either, if there is cash, devote it to stocks – that is one avenue – or potentially take money out of the bond market and put it to work in stocks.
During the sell-off, bonds have gotten more expensive and stocks have gotten cheaper. Yields are still hovering around historic lows at a time when governments worldwide are injecting record amounts of stimulus.
It’s not just the value that has opened up in stocks and the degree to which the portfolio has drifted from its strategic benchmark but it’s also the inherent diminishing value that bonds now offer. Six, 12, 18 months from now, chances are inflation is going to firm some and interest rates are going to be held in check so the proposition of fixed income longer-term as a diversifier and ballast starts to have a number of question marks over it.
Where do you see investment opportunities? Bank stocks with high yields? Real estate investment trusts? Growth stocks?
As long as we are still in this period of contraction in economic activity, I think the appropriate stance is to remain balanced across large asset classes. Look for minimum volatility, companies that tend to deliver a smoother performance over time, and quality – companies with strong balance sheets and decent cash flow coming through.
Are there certain regions that you favour?
I would focus the portfolio on geographies where the policy response is going to be swift and/or places that seem to be on the other side of the outbreak, so China and Asia ex-Japan [that] seem to … have gained control over the epidemic. Also, the U.S. has a fair amount of firepower that it could use.
We raised our exposure to the U.S., China and Asia ex-Japan. We remain underweight Europe and we moved Japan to an underweight.
How does Canada fit in to your geographic allocation recommendation?
The concern here is the larger allocation to energy. That is one headwind that you are less likely to face in places like the U.S. or China. It is not just the demand shock from the coronavirus outbreak but energy is also getting hit from the supply shock from the Saudi Arabia/Russia price war, and it doesn’t look like that is going to end any time soon.
Is consolidation going to be a major theme for the energy sector in 2020?
Yes, consolidation is one possibility if the assets that are available to buy are considered valuable. But there might be bankruptcies before there is consolidation.
Outside of energy, what is your call for other sectors?
A lot of the others would seemingly stand to recover fairly quickly, I would think.
All of this comes down to earnings after the crisis passes. Will we get back to the trend level of earnings that was anticipated back in January, early February, and get back to the growth rate that was implied?
We have seen a large decline in the Canadian dollar relative to the U.S. dollar. What is your outlook for the loonie?
The loonie is taking direction from two of the three factors that typically matter, oil prices and risk aversion. Oil prices are down, risk aversion is up – hitting the loonie. The third one, which is interest rate differentials, doesn’t matter that much right now because they haven’t changed.
I think oil prices are going to remain low for an extended period of time and that means that the loonie is going to be weaker than the previous range that we talked about, which was 75 to 78 cents.
I anticipate the loonie could push back into the 73- to 75-cent range over the next six to 12 months. If risk aversion comes off and the markets recover that should help the Canadian dollar, as well as the stabilization of oil prices, even if the price war continues.
Given the moves in the Canadian dollar, what is your currency hedging strategy recommendation?
We recommend that Canadian investors hold global stocks unhedged, meaning that we want that currency risk in the portfolio.
A lot of investors are asking the question, “The loonie has weakened quite a bit, so do I now employ a hedge?" That makes sense because the loonie should strengthen. I think for some investors, depending on their time horizon, that is something that they could consider here.
That doesn’t mean that I have come off of my strategic view of being unhedged in the equity markets for Canadian investors. Generally, it has helped to limit losses.
This interview has been edited and condensed. An extended version is available online at tgam.ca/inside-the-market.
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