May 2020
The information set today is moving rapidly as events related to COVID-19 are fluid and changing daily. That being said, I want to give you our thoughts on the market and economic realities and, most importantly, communicate to you what we are doing to manage your portfolios.
In the past month or so, markets have struggled to transfer risk in an orderly fashion. Large amounts of selling, both forced and discretionary, by market participants, created order imbalances that have led to sharp price corrections. In addition, regulatory reforms made to the banking system after the financial crisis have reduced the ability of banks to store and manage risk. The combination of these factors has created the nearly unprecedented volatility we have seen in recent days.
Encouragingly, this de-risking and leverage unwinding would appear to be moderating. What this means is market price action will soon reflect views on the depth and breadth of the economic shock and earnings fundamentals as we move through the next phase of dealing with this pandemic. Central banks have also been extremely active with policies geared towards providing liquidity to the system, normalizing the transmission of credit and reducing volatility.
There is no disputing we are now heading into a very challenging economic environment. However, from our standpoint, it is important to distinguish between recessions caused by endogenous shocks and those caused by exogenous shocks. Most recessions are caused by endogenous shocks – something within the system is out of balance and is the root cause of an economic downturn. In contrast, this health pandemic is an unusual external shock. Yet to be seen is the pattern of recovery once health concerns have passed and the economy is re-started.
Governments around the world have responded to the pandemic with staggering levels of fiscal support for the economy, with a strong likelihood more is on the way. Although some believe central banks are out of options, there are always ways for them to bring stability to financial markets and economies. Ultimately, government support is necessary to minimize the number of bankruptcies, to support small business owners and to reduce the number of people who become dislocated from the labour market. Government leadership is also needed to manage and calm the fear that can permanently change people’s risk tolerances and consumption patterns.
Looking ahead, we are likely some time away from getting clear visibility on the success of central bank and government policy. Given this, we believe it is prudent to focus on asset classes and opportunities we know will be able to come out of this, even in the midst of an uncertain macro environment. Opportunities in fixed income, where investments have a maturity date and a defined income stream, are an example of an investment outcome that is more certain. As such, we like the environment for credit-based fixed income portfolios. On a reporting basis, these investments can experience day-to-day volatility, but given there is a set maturity date, this volatility is temporary and does not impact final returns. In addition, securities that generate high levels of cash flow should also do well going forward, but require a little more patience. Our Dividend Distribution strategy is an example where certainty on the path of economic growth is less important than stabilization in the economy, given the level of dividend yield the portfolio pays.
Our portfolio strategy today centers around the belief that as the COVID-19 crisis starts to come to an end, there will be an increase in demand for portfolios that generate income. Interest rates are at record lows and are likely to remain low for some time. Our belief is that retired individuals, pension plans, financial institutions and insurance companies will need securities that generate income and these kind of investments will be sought after.
I want to assure you we are not sitting passively as markets gyrate. Our trading teams are up and running remotely, but seamlessly, and are being proactive with your capital. There are opportunities in the market, and it is our job to identify and leverage them on your behalf.
From all of us at Gluskin Sheff, I hope you, your families and your loved ones are safe and secure, and managing the best you can through these difficult times.
Thank you for your business and trust. I look forward to getting together with you again in happier times.
Sincerely yours,
Jeff Moody
President & Chief Executive Officer