During the current COVID-19 outbreak, both the markets and news change hourly. Days are feeling like weeks right now.
At Purpose, we always take a long-term view of managing outcomes. So how do you balance that with trying to stay ahead of planning for the long run when everything around us is changing so rapidly?
To help prepare for the week ahead, our founder and CEO, Som Seif, takes less than 10 minutes to talk about:
● What the markets were telling us leading up to the crisis
● The three ways you can react in times like these
● How we’ve been through this before and what we need to remember right now
Read the transcript:
Hi everyone, I’m Som Seif, founder and CEO of Purpose Investments. I wanted to share my thoughts and perspectives on everything that’s going on in the world right now, how all of us at Purpose are dealing with the disruption caused by COVID-19 and to give some insight to our partners, Investment Advisors and of course investors on what we recommend right now.
First off, we’re all in this together. And we’re all in search mode for the information to make better decisions with. The headlines are dramatic right now and are creating a lot of uncertainty and there are many factors that are impacting us all. From the high level of number of coronavirus cases globally, to the movements in stock market prices and of course the headline numbers around job losses most recently.
Things are changing daily. Info is changing daily. And so, we have to adapt our mindsets for the moment to be able to parse through all of this constant changing information and focus on what’s most likely to be successful and stable in the long term.
Nobody can predict the future. Nobody has all the information, and you’re going to be reading a lot of information, some that is valuable and some of that is less valuable.
It is my opinion, will always be most valuable, is to step back and take perspective that is longer term. I try to do this in two ways. First by creating a set of principles that I will stick to that I know that I can come back to anytime I am questioning myself. And, of course, second, to try and think about three years from now looking back with perfect information and then asking myself, how would I have wished I would have acted today?
Let’s start with my view on the current state of the world. The coronavirus is likely going to be one of the greatest moments in our generation. It’s very serious. Three weeks ago, I was very concerned that governments and people weren’t taking it seriously enough. Specifically in the United States. China and South Korea, where they were leading the issues, they took it seriously and were able to slow the spread and showed us how, economically, they could take a short, small-term hit to get back into proper path. Europe, of course, was very slow to take it seriously and it’s paying dearly. But Europe is not a critical component in my opinion. Aside from the social impact, it’s frankly been economically challenged for over a decade now. The US was really concerning. It was a week too slow, as a result, it was significant in the spread of the virus. I see the US headline numbers and the impacts being very sensational for some time. But this is data we should expect, and it’s mathematically driven. So other than just the headline impact, it will be calculated into the markets and the economic growth impacts.
As an aside, I see Canada having acted quickly. And I feel, putting aside of course the global impact on our economy and, of course, energy prices, we could get back to more normalcy earlier than we’ll see in the United States. But the U.S. has concerned me, and I am more positive now, especially in the last couple days, because of the way the government is taking it seriously again. Testing has ramped up meaningfully, on a day-by-day basis, and the government has shown that it will throw everything in its power to help solve this, to help the economy. This weekend, the amount of the stimulus that’s being weighed is over $2 trillion dollars, which represents about 10% of the U.S. GDP. This is real support. I would have thought that anything, a trillion and half, would have been amazing. To see two trillion means that this is a really important moment that they get. And it all comes down to how they allocate it and whether it can be effective. This will be a major positive for the U.S. economy.
Now it’s important to understand, when we turn to the markets themselves, the markets have generally priced in much of the information around the sensationalism. It’s only when the numbers surprise, on the higher or lower side, that the market will react. We’ve seen a meaningful movement in the markets to date, with negative 30%. And I believe the markets are priced in a lot of the negative forecasts. Unless the news gets worse than expected, or the government doesn’t provide the ample support for the economy, but I see the markets having priced in much of the outcome.
This said, what troubles me is the wild swing. Of course, most of it is because the markets are searching for info, just like we are. But the movements aren’t just because people wake up in a good or bad mood each day. There are also other factors at play we all need to understand. We’re seeing meaningful margin calls, redemptions from major asset managers and leveraged hedge funds, and other asset owners, of course, are seeing significant trading and selling. Indexing, which has become a pretty meaningful part of the market over the last five years, and momentum factor investing, which has been driving markets, which is something I’ve personally spoken about and warned about that was a risk for investors that was hidden in plain sight, these are things that are actually driving the market movements. When you see a thousand points on the DOW, up one day, down another day, you know, late trading in the last hour of the day, these are really important factors that are causing some of this movement. And we’re seeing these negative elements because of the programmatic trading factors that are in this market.
But investors shouldn’t get caught up in it. Rather, we should understand they’re out of our control, and we and avoid being a part of them. Or, if you want, you can try to take advantage of them if you’re savvy enough. But given all of this, how should we be thinking about portfolios and what should we be doing?
To me, there are three ways to react with your portfolio in times like this. First, you can panic or say I don’t know how this will play out and therefore I don’t want to be a part of it. And therefore, go right into cash and get out of it all. This is a tough call. Personally, I think this is a mistake, but for some they will do it.
My only recommendation is to ensure you know what will be your buy signal to get back into the markets once you’re in cash. See, it’s easy to sell. It’s hard to understand how to buy again. And this is where this becomes an extremely tricky decision. Now, most people make the wrong decision because they don’t get back into the market and what happens if the market goes up from here? Are you willing to take the lump of buying back in in a higher market? This is an extremely difficult decision.
Second option, is to do nothing. Keep doing exactly what you’ve been doing in the past. This is advice that many give, it’s important to understand what this signals though. It assumes that the world will look the same, and that portfolios should look the same, as they did before this pandemic. For example, if you owned airlines in your portfolio before, you’d be saying you’re going to continue to own airlines in your portfolio in the future. If you own 10% of your portfolio in government bonds, when they were at 2%, you’re saying you should continue to own them at 1% and so on. I think this is an important thing to appreciate, and to recognize that I believe the world today looks different than it did 90 days ago. So, a stay put decision might not be the right decision for many.
The third way to think about this is actually to react in different way and to say, you know, this has played out, there are really important changes and challenges and opportunities. Position your portfolio for the opportunities that are presenting themselves now. Proactively and strategically ask yourself what companies, sectors, asset classes, have changed and which ones will win in the future and which won’t.
At Purpose, right now we’ve been thinking through all of this stuff. Our portfolio managers are constantly thinking about how to balance for the future. We look at asset mix, and where they want to go over the next month, quarter and year, and with what mix of equities, dividends and bonds do we want to have in the portfolios and what level of risk management? To me, this is really where people should be positioning. Take advantage of the dislocation in assets. The factors that are out of our controls, such as margin calls and redemptions and momentum selling, and make sure to use these to position your portfolio for success.
I’ve been through this before. When I was building Claymore we struggled through the 2008 financial crisis and I learned a lot. During the period in ’08, we took the time at Claymore to ask what does the next three years look like? At the time, it was realizing that companies weren’t going to go to zero. When everyone felt the least hope, the opportunity was real to be positive and tell people to position for the future.
It was hard, but with a disciplined approach we were able to win through it. Looking at today’s parallels, I look at a company like RBC. Its stock is down over 37% from its peak with a dividend yield of over 5.5%. Now has RBC lost its ability to generate strong cash flows over the next two, three years? Will its operating profits be down 37% in total over the next 4 months? No. Sure, it will have a difficult two quarters ahead but it’s not going to zero. Remember that when you look at the price of RBC.
How about Apple? It will for sure have growth challenges in 2020. It will have a difficult two quarters of earnings ahead. But will people stop enjoying Apple products and buying them? What will its average profits look like over the next three years? Again, I’m more bullish than the current stock price would suggest.
Another great area of meaningful dislocation is preferred shares. These are basically quasi-bonds, that are issues by banks, telcos, utilities, and today they’re trading in yields that are kind of in the range of 7-10% even before their preferential dividend tax credit. There hasn’t been a default in preferreds in over 20 years, and the credits behind them are amazing. Yet the market has thrown them to the curb. Today I would be aggressively re-balance into preferred shares.
Now when I look at government bonds, I continue to be bearish on them, and for the long term. And if you’ve enjoyed the long duration bond returns of the last few months, then good for you. You should take advantage of them, and you should take these returns and re-balance them. For example, the spread between banks tock dividends today and 10-year Canadian government bonds, has never in over half a century been as wide as it is today. These are signals to take the other side of the train.
My confidence comes from a simple perspective: This shall pass. And the markets generally bottom before the news does. For advisors and their clients today, it’s a time to be positioning for the next phase and for the next two to three years. Don’t be afraid. The market, and the economy, are not going to zero.