It's our hope this finds you well and safe. Given the continued impacts of the COVID-19 pandemic and the ongoing changing investment landscape we'd like to provide you with an update regarding our general view of the markets and the actions we've taken in portfolios.
It's seemed like longer than just two months since our last email update in March - Coronavirus Update. If pressed on the subject it feels like a year has passed since that time, as so much has changed. In our last update we discussed how dire the circumstances seemed, as portrayed in the media. The entire world stood on the verge of lockdown and quarantine and for the most part that has come to pass. The markets fell by approximately 30% and no asset class was spared the panicked selling for liquidity, despite quality. The aftermath led to almost every asset class selling off. There were small pockets of resilience like the tech sector and companies that supported virtual business operations but for the most part almost every sector saw losses and none greater than the energy sector which still remains impaired, potentially for years.
Today bond yields have fallen to virtually 0%. Here in Canada the 90 day Treasury has hit 0.25% with long bonds just above 1.00%. Compounding historically low central bank rates are the unprecedented open market activities of the Bank of Canada. The Bank has actively participated in the markets by buying debt securities and providing liquidity far beyond any type of actions taken in 2008 during the Credit Crisis.
The federal government also provided support to businesses, and unemployed persons to temporarily bridge the gap that lockdowns have caused. Unemployment immediately surged to double digit figures that resulted in 13% of the workforce unemployed. These figures are lagged and it is expected that we may very well be seeing higher unemployment rates that will rival that of the Great Depression - in the region of 20% plus.
As sobering as it is, the graph above shows the relationship in Retail Sales and Unemployment. Many of those who have lost jobs, especially in the Service Sector, may not return to gainful employment for a protracted period of time. The government bailouts and unprecedented deficit spending will lead to increasing tax rates for all Canadians in an economic environment where fewer are without gainful employment. This does not bode well for high long-term economic competitiveness and growth.
Yet the market has responded by shrugging off these fundamentally worrisome numbers and the general climate surrounding the pandemic. Despite that, we still have the spectre of a COVID-19 second wave, that may reappear in the fall. In addition, any good news about a vaccine, being around the corner, should be tempered with the reality that most vaccines take years of research and testing before they are deemed viable to disseminate to the population.
We've been very active over the past two months to take advantage of our high cash position to reposition portfolios so as to "load the spring" of a market rebound. We took advantage of low equity values and added to positions that incorporated Canadian banks, North American Utilities and additions to Global Gold stocks.
Despite equity benchmarks still being very negative, most of our portfolio mandates have recovered from the drop in value to now being positive for the year. The returns above for our portfolios are composite returns and reflect the combined returns of all portfolios that fall under each mandate. At this juncture, the market seems content to continue higher while the outlook remains murky at best. Current equity prices leave little to no room for worse than expected earnings reports and other negative news surprises that may arise, such as a spike in Covid-19 infections and renewed calls from health officials for lockdown measures.
For this reason, continued higher activity may be needed to properly balance market risks & return with the future cash flow needs of you, our clients. In addition, we still maintain a 12.5% cash position (on average) across our whole portfolio (cash positions may vary given mandate and specific portfolio construction for individual clients). We feel that markets may still turn sour near the year end and we wish to protect the downside in the event that occurs.
We are open to working with you and your clients, helping to shape portfolios that concentrate on capital preservation and risk mitigation. Portfolio management should always start by managing the risks first. Once a proper risk mitigation strategy has been implemented we increase the probability of providing sound stable long-term returns.
If you wish to reach out to the portfolio management team please feel free to do so to discuss how Accilent Select can help your clients.
Be well and stay safe.
Mark Taucar, CFA
John Lombard, CFA, CFP
Daniel Pembleton, CFA, MBA
President, Portfolio Manager
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