Canada’s energy sector has gone through a rather painful evolution over the past few years. High oil prices, oh so many years ago, unleashed a long-term global supply response during the past decade including large long-term projects and the acceleration of the U.S. shale revolution.
It was hard not to notice the excitement surrounding initial public offerings (IPOs) last week as we saw SNOW in September. In fact, IPOs are having a banner year with businesses rushing to raise capital and provide liquidity for early-stage investors given the ample appetite for speculation and new stocks. The pandemic has changed the world, and investors are looking for the leaders of tomorrow.
For those paying attention to markets this year, most would agree that 2020 has not just been an eventful year but one of record speeds. The February correction that grew into a bear market set all-time record speeds for a correction (-10% decline) and bear market (-20% decline). It took eight days from the market high on February 20 to breach correction territory and only 21 days to reach bear market territory. The market then bottomed on March 23 and started its record speed ascent. All the while it managed to avoid, surprisingly, getting the bends by rising 55% over 142 days. Within that rise, there has been a 6% one-day decline and a 7% decline over 3 days. There have also been many pretty big up days.
All things come to an end – bull markets, bear markets, economic cycles, even pandemics. And we believe that in the coming months investors should begin to increasingly position themselves for the other side of the current environment. We are not implying things will be back to normal, but they will likely be a lot more normal in six months than they are today. That means there are both opportunities and risks in today’s market, as what has worked well in the past six months may not do so in the next six.
One would think that with unemployment around 10%, you would be hard pressed to find positive economic data. This economic cycle – if we can call it a cycle – is so unique that trying to follow a regular road map for recessions is certainly challenged.
Investing is not easy and never has been. However, the healthy performance of bonds and equities over the past 30 years has certainly helped reduce the portfolio impact of any missteps along the way. The adage “a rising tide lifts all boats” certainly holds true. Over the past three decades, Canadian equities, global equities (in C$) and Canadian bonds have each annualized between 7-7.5%. Even if you knock off about 1.8% due to annualized inflation during that period, you are still looking at a real return over 5% from these major asset classes. This is a pretty
friendly environment for creating wealth with a standard 60/40 buy and hold strategy.
Active management is all about placing bets on companies or sectors that the portfolio management team believes are poised to outperform; and by extension placing smaller or no bets on areas of the market expected to underperform. These “bets,” relative to the overall market, comprise how a strategy is different to the overall market, typically measured by a market-capitalized index or benchmark. This results in being – in often-cited terminology – overweight, market weight or underweight a given sector.
Last week was busy for watchers of Canada’s economic data, with the main event being the Bank of Canada (BoC) rate announcement. Not surprisingly, the bank left rates unchanged. It also released its Monetary Policy Report, which is always an interesting read. The good news is that Canada’s economy has fared better than the BoC’s worst-case scenarios and, in general, new bank Governor Tiff Macklem’s comments were somewhat more upbeat than expected. This was evident from the
Canadian dollar’s immediate move upward.
This is not the way we expected to wrap up the first six months of the new decade. A year that opened with decent – albeit shaky – economic prospects faced an abrupt and unprecedented economic contraction resulting from the COVID-19 pandemic. In more recent months, expectations over re-opening and a V-shaped recovery set the stage for remarkable comebacks across most asset classes.