How to stay balanced in volatile markets
While the current volatility is unsettling, it’s important to remain calm and focus on the long term. Craig Jerusalim, Senior Portfolio Manager, CIBC Asset Management, provides insights on navigating the current market situation.
How to Stay Balanced in Volatile Markets
[Soft music plays]
[Onscreen Text: Craig Jerusalim, Portfolio Manager, Canadian Equities, CIBC Asset Management]
Craig: Markets are really experiencing some unprecedented moves right now. The drop in oil, 20 to 30 percent in one day. The drawdown in the broad indices is really unprecedented in the scale and the speed of which it's dropped. And the problem right now is no one can give definitive answers, definitive answers of when the Coronavirus is going to be cured or when the imminent recession is going to come or not come. And it's really that fear of the unknown that is causing some market participants to panic. And there's no answer that I can give to fully allay fears of an imminent V-shaped bounce back, because no one knows for certain that that's what's going to happen.
Advice for clients really has to be in line with what you feel comfortable, what risk you feel comfortable taking on. However, don't try and time the market. All the evidence we've seen over history is that investors are really poor at getting out as the market is dropping and then getting back in when the market's rebounding. There's really only one mistake an investor can make throughout the history of investing, and that's selling at the bottom. If you miss just the 20 best days over the past 20 years, you would've wiped out 100 percent of your returns over that time period for the TSX. So instead, be comfortable with your asset allocation and be able to perhaps either dollar cost average in or dollar cost average out to help alleviate some of those fears.
[Onscreen Title: The importance of long-term investing]
Craig: Today's market price is probably not the low, tomorrow's low probably won't be the cycle low either, but we don't know when that rebound is going to happen. And there are a number of differences between the situation today and the situation in 2009, for example, during the financial crisis.
Today, there's a factor, the Coronavirus, that is causing people to just tighten up and cause people to not go out and spend, not travel. And that's causing a short-term demand impact. However, unlike in 2008 and 2009, there's not massive fraud in the system. There's not excesses in valuations or any bubbles forming. The U.S. consumer, for example, is much healthier today than they were in 2008. Saving rates are high. Debt service ratios are low. Unemployment is extremely low. So, there's reasons to believe that there's going to be some sort of built up demand that will come back to the market when those fears alleviate. We also know that interest rates are extremely low at all-time record lows and that the federal government is there for monetary and fiscal stimulus, as well as many other countries around the world that are going to be throwing everything they can at this economy to get it moving again. We don't know when that's going to happen, but we know we want to be positioned for it. So, we're not throwing out the babies with the bathwater or using the opportunity to high-grade portfolios to move to the highest quality companies, to be best positioned for that rebound when it happens.
[Onscreen Title: Portfolio positioning]
Craig: There's two sets of assets that we need to think about. The asset where the allocation is a little bit more flexible, where you could raise cash and you can move more defensive. And there's another set of assets that are going to stay fully invested. And that's the money that we're managing for clients, for the money that's staying fully invested in mutual funds, for example, we're not sitting on our hands and doing nothing.
[Onscreen Text: Five indicators we are watching in our portfolios]
Craig: There's five things that we're doing within those funds.
[Onscreen Text: 1. Look at company balance sheets]
Craig: The first is looking at balance sheets. Any company that is at risk in the short term, due to their leverage, is something that needs to be taken out of the portfolios. We have to be invested in the companies that can use this market disruption to their advantage as opposed to it causing risks from an ongoing basis.
[Onscreen Text: 2. Identify potential switch trades]
Craig: The second thing is we're looking for switch trades, which companies with similar exposures are down more than others because right now everything is moving lower. But at different paces. So, we're looking for the switch trades in the portfolio.
[Onscreen Text: 3. Look for overreaction in company shares]
Craig: The third thing is we're looking for companies that have just overreacted: which companies have are discounting a worst case scenario, recession, even though the cash flows are still recurring and ongoing.
Craig: The fourth is we're looking for the opportunities in the companies that have recurring earnings, that have domestic focused earnings, because we think that Canada is going to be less impacted than some other emerging markets around the world. We're looking for the companies that we know where their next dollar is going to come from. Think about all the companies whose bills you receive every month that you're going to continue to pay. Those are the telcos and the utility companies.
Craig: We're starting to sharpen our pencil on those cyclical companies. The companies that are down the most now but are likely to snap back at the time when the stimulus and the recovery begins. We're too early at this stage, but sharpening the pencil and getting ready for that rebound is important.
[Onscreen Text: The views expressed in this video are the personal views of Craig Jerusalim and should not be taken as the views of CIBC Asset Management Inc. This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. ®The CIBC logo is a registered trademark of the Canadian Imperial Bank of Commerce (CIBC), used under license. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.]
Will government moves end the wild ride?
CIBC Asset Management’s Patrick O’Toole explains the stress on investment grade and high yield credit markets, and where all bond types may go next as we move towards 0% interest rates.
Transcript: Bond Update – Will Government Moves End the Wild Ride?
[Soft music plays]
[Onscreen Title: Bond Update: Will Government Moves End the Wild Ride?]
[Onscreen Text: Patrick O’Toole Vice-President, Global Fixed Income CIBC Asset Management]
Patrick: The Fed's actions today should actually alleviate some of the pressures you've seen in the corporate bond market. And you could see those yields drift a little lower as credit spreads start to move a little tighter, and they gapped in this morning, about a quarter of a percent already in the United States market. There's no doubt there's been a lot of pain in the corporate bond market. They're actually negative on a year-to-date basis, whereas you've got government of Canada bond yields are very positive. And you're seeing the stress is most acute in the high yield area. You saw credit spreads there get as low as 337 (basis points) on January 16. As of Friday, March 20th, they moved to over a thousand basis points just over that line. And you've seen that total return negative 18.7 percent in the broad high yield market, the U.S. So, with these credit spreads I mentioned where we're at 230 (basis points) in investment grade, just over 1,000 in high yield. What's the recent history been?
Well, during the great financial crisis, investment rate spreads hit 360 basis points, high yield hit over 2,100 basis points. And the 2011 Greece crisis and the 2016 episode of declining oil prices got down to 25 bucks. We saw investment grade spreads get to 175 and high yield get to 880 under both of those episodes. So, the reaction so far is much worse than we saw in the 2011, 2016 episodes. But we haven't approached the great financial crisis levels yet. We're on the way there. I just suspect because of the speed of these programs that the central banks are implementing, we're not going to get to that stage, but we'll have to see.
There's no doubt that the fallout for companies is going to be still problematic. Insurance companies, pension funds and more so in particular, will have funding issues or at least matching their liability issues. Energy companies are going to see defaults start to soar. You're going to see M&A (mergers & acquisitions) and bankruptcies will be the story for the energy sector for the next little while. I mean, it's pretty much a lay-up we're getting a recession.
I call it basically like a flash depression. You know, depression is really a prolonged deep recession. This one looks like it might be a very quick depression. I've seen some estimates as high as 20 percent contractions in GDP in the second quarter. Some of the measures that we're all that we're taking now, will bend this curve. It looks like you'll see things snap back at some point later this year. So, as I said earlier, it means a new lower range for yield.
But the good news, I guess, you could take away is that yields are rising on the expectation that things are going to get better from these programs the central banks and the governments are implementing. Yield curve is normalizing, so you have positive slope yield curves in both Canada and the U.S. and that really is a sign that the future is brighter, and that this too shall pass. But I think the fallout really still is that we're likely stuck with new, even lower yields for the foreseeable future than you might have thought 2-3 weeks ago or so.
The Fed is going to be leaving its rate at zero percent for the foreseeable future. That's an attempt, and the other measures they're taking to try and get a V-shaped recovery when things stabilize. And I think that the buyers of the 10-year treasury bonds, which is kind of like the benchmark we look at, a month ago, you would have thought 2.25%, if we back up to that level, you'd see buyers come back in. I think in the world we're in now, it's more like 1.25 to 1.5%. And buyers return to the Treasury bond market.
We've been of the view that the central banks will use every and all tools at their disposal. It's been a mistake to underestimate their ability to come up with new programs as we've seen today. The Fed announcing some new programs to help the corporate sector. And they'll be injecting money in for the businesses, as well, to absorb lost wages for workers. The worry is more so the politicians don't give them the added authorities in time that they might need. But so far so good on that front.
So our advice is don't panic. We've seen these episodes before. Riding it out tends to be the thing to do at these levels that we're seeing on investment grade spreads and high yield corporate bond spreads as well. You're getting probably the second-best levels we've seen in the last 20, 30 years. So, the differences we're seeing this time, I think is really the speed of response from the central banks and the governments. There's going to be more programs coming in all likelihood, but they are really pulling out all the stops.
You know, you're not seeing it just here and in the U.S., but you're seeing it in Europe as well. People learned the lesson from the great financial crisis. If you're going to do this, you have to come in quick, sharp, and you're not going to offset the damage from everybody staying home for who knows how long. You certainly can set the stage for a broad, sharp recovery once things do stabilize. And that I think, going to be the follow from the steps that these central banks and governments are taken and taken so far.
So what should investors do in this time? I think one of the things you want to look is start to deploy some of the cash you might have built up. There's always cash for the rainy day. You'd have to say this is more than just a rainy day. It's more like a big hurricane. A tsunami floods, everything else stacked up at the same time. So it's time to start slowly deploying some of that cash in the fixed income markets. Corporate bonds really are extremely attractive at these times. Now, we've seen, as I said earlier, you haven't seen spreads these this high since the great financial crisis exceeded the last couple of episodes like the 2011 Greece crisis, the 2016 episode where oil prices get down to U$25. We are well above those levels already. These are great entry points if you're buying corporate bonds. You don't have to be in a huge rush, but start to slowly deploy some of that capital.
Equity investing: Lessons learned and current opportunities
Colum McKinley, CIO, Global Equities, CIBC Asset Management, discusses the importance of dividends, and why he sees current value in Canadian banks and REITs.
Equity Investing: Lessons Learned & Current Opportunities
[Soft music playing in background]
[Title reads: Equity Investing: Lessons Learned & Current Opportunities]
[Onscreen Text: April 9, 2020]
[Onscreen Text: Colum McKinley, CIO, Global Equities, CIBC Asset Management]
Global economies, financial markets, even our own daily lives are experiencing substantial disruption as a result of COVID-19. The world is coping with a significant and important issue. As long-term investors we want to obsessively worry about the risks in the near-term but remember the important lessons of financial history. And history has shown us over and over again that these periods of uncertainty, volatility, and angst ultimately, in the fullness of time, appear to be buying opportunities.
[A still image of people walking on a city street wearing masks, follow by a sign on a store door that reads ‘we are closed’, followed by an image of a US dollar bill with president wearing a mask, followed by a black and white image of depression-era people gathered together, followed by an image of a man standing in front of a wall-sized graphic showing changes in the stock market.]
I am very fond of Buffett’s old adage to “be greedy when others are fearful”. Fear remains very high today. We expect that in the coming months economic data and corporate operating results will deteriorate substantially. In meetings with business leaders they’re telling us that visibility in the near-term remains low. If we stopped there then this would be a bleak story but positives are happening in the background that should be providing investors hope for the longer-term. The battle against covid-19 continues to focus on flattening the curve, or slowing the growth of the number of new cases reported each day.
[A still image of a masked woman in a medical lab putting a liquid solution into a beaker, followed by an image of a mother and child, each wearing masks, and applying hand sanitizer, followed by an image of a man washing his hands.]
An important positive is the adoption of self-isolation or quarantine that is occurring around the world.
[A still image of a masked young woman staring out her window, followed by an image of a masked young child looking out his living room window, holding a sign that reads ‘#stayathome’.]
We have witnessed that strategy deliver results in other countries. Even now we are starting see progress in flattening the curve in many countries around the world.
[A still image of a hospital room, with a patient lying in a bed, being shown information to him on a tablet by his doctor.]
The great personal sacrifice we are all making is working. We continue to monitor this closely and we expect to eventually see a thawing of the restrictions and constraints on the broader economy. At the same time, central banks and governments have unleashed an unprecedent amount of stimulus into the economy.
[A still image of the Legislative Assembly of Ontario building, followed by an image of the Bank of London, followed by an image of the US Federal Reserve.]
In fact, they continue to demonstrate through their actions that they are prepared to do anything and everything needed to backstop the economy and provide liquidity into the financial system.
[A still image of a sign reading ‘Wall St.’, followed by a close-up image of Wilfrid Laurier’s face on a $5 bill.]
Once we get back to our normal lives, an incredible amount of pent up demand will exist. The stimulus and liquidity support will help the economy quickly regain its footing.
[A still image of a crowd at a concert, followed by an image of three men watching a soccer game at a sports bar, followed by an image of a happy group of people at a restaurant.]
In the midst of the crisis, investors are best to consider the old Gretzky advice of “skating to where the puck is going to be”. While calling a market at bottom is always difficult, we remain confident that looking out a year or two from now we’ll reflect back on today’s prices as a buying opportunity. And we want to ensure that we use this volatility and crisis to our advantage.
[Soft music playing in background]
[Title reads: Importance of dividends]
It’s in times like this that we are reminded of the importance of dividends to equity investors. Dividends are an incredibly significant source of return for equity investors. In the ten years ended December 31, 2019, the compound annual total return of the S&P/TSX Composite index was 6.9%. Approximately half of that total return was attributable to dividends. For equity investors, dividends represent the proverbial bird in hand. As markets have fallen, yields have increased. Many of the best companies in Canada today are providing yields in the high single digits. Buying today allows us to lock in these yields. This is very similar to the opportunity that existed in the global financial crisis. Banks have traditionally been a source of attractive dividends for Canadian investors. They have diversified businesses, they have strong management teams, and solid capital positions. They are expected to be a continued source of strong dividends for investors. In the near-term, bank earnings will be clearly challenged. Banks are a levered play on the economy. And as we witness the short-term deterioration of the economy, it’ll affect the profitability of these businesses. As a result, their dividend payout ratios will rise. Again, turning to history as a useful guide to today’s environment: since 1980, payout ratios rose above 100% only two times. The first was in 1987 when the big six reported negative earnings. And the second in 1992 when earnings declined by 60%. In both those periods the big six did not cut their dividends. In our analysis of the banks we have generated meaningfully stressed scenarios. We expect that the banks will be able to maintain their current dividends. And for investors that provides a stable and attractive dividend in a low bond yield environment. In addition, investors will benefit from the capital appreciation once markets and economies stabilize.
[Soft music playing in background]
[Title reads: Real Estate Investment Trust Units (REITs)]
Another source of attractive yield and an area of opportunity today is the REITs. Real Estate Investment Trusts own a variety of buildings and property, including apartments, offices, retail malls, and industrial units.
[A still image of a building under construction, followed by an image of a row of apartment buildings, followed by an image of a condo, followed by an image of an industrial shipping building.]
These are hard assets that are foundational to the economy.
[An image of a happy family sitting at their front porch.]
In addition, the cashflows are governed by contractual relationships in the form of leases.
[A still image of a close-up of a person putting their signature on a contract, followed by an image of a couple signing a lease.]
Over the last ten years to December 31, 2019, the S&P/TSX real estate sub-index has outperformed the composite, delivering a total return of 10.3%. Much like other parts of the market, these stocks have experienced substantial volatility recently.
[A graph shows the S&P/TSX Real Estate Sub-index on a monthly basis from 2010 until now. It shows a steady rise over that period, from 1500 points to 4000 points, until a recent, very sharp decline to 2000 points.]
This is creating opportunities. In today’s environment, REIT operating results will be affected. REITs are working with their tenants to provide relief in the short-term. Many are reducing or outright deferring rents for 2 – 3 months. As long-term investors, we look at these buildings that will provide monthly cash flow for 50, 60 years or more. 50 years is 600 monthly payments. While reducing or foregoing 2 or 3 months in the near-term will effect their short-term results it doesn’t meaningfully have changed the long-term value of these buildings. Yet recently REIT valuations have declined meaningfully, with many down in excess of 40% from their highs. In today’s environment they’re providing dividend yields in the high single digits, and very very attractive valuations for solid businesses.
[Soft music playing in background]
[Title reads: Attractive valuations]
Our portfolios are made up of high quality, blue chip businesses. Today, we are seeing the opportunity to add to these businesses at very attractive valuations. Our continued work and recent conversations have left us with higher conviction of the ability of these companies to navigate and survive this uncertainty. We know from past experience we will at some point look back at the current world as a buying opportunity. We continue to be ever vigilant about managing risks while ensuring that we don’t waste this crisis and the opportunity that it is presenting.
[Soft music playing in background]
[Disclaimer: The views expressed in this video are the personal views of Colum McKinley and should not be taken as the views of CIBC Asset Management Inc. This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this video should consult with his or her advisor. All opinions and estimates expressed in this video are as of the date of publication unless otherwise indicated, and are subject to change.
®The CIBC logo is a registered trademark of CIBC, used under license.
The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc.
Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.]