Quarterly Outlook: 2020 Q1 Review and Q2 Outlook

Executive Summary

Market and Economic Review

Welcome to the new world.  It’s incredible how life, the economy, and the markets have changed in a matter of weeks.  Corona, for the longest time, was associated with the cold refreshing taste of a beloved Mexican beer enjoyed with a slice of lime. Now, Corona is only used when referring to the highly contagious and dangerous virus COVID-19.  Early in 2020, many thought this virus was China’s problem so the stock markets kept hitting new highs and stretching valuations, while the rest of the world went on its merry own way.  Fast forward to late February and the narrative started to change quickly. Now jump to mid-March and panic starts to set in as Canada, USA, and Europe start locking down their population and prohibiting international flights as well as border crossings.  This leads to record numbers of unemployed around the globe.

Equity markets around the globe sold off aggressively with concerns that the global economy was coming to a grinding halt and profitability would drop drastically (see Markets table below).  Default risk was also a major concern in the debt and lending markets so credit spreads, the cost a corporate borrower pays above the government bond rates, spiked to historical highs as investors sold bonds at any price given fears of possible default and bankruptcies. The government response was fast and furious and that helped the markets bounce off their lows but not necessarily guarantee profitability and a return to normal, in the short term.

The governments and central bankers around the globe jumped into action given the fear of the markets seizing and liquidity becoming a major issue.  The Federal Reserve and the Bank of Canada both cut the overnight lending rate to banks to 0.25%.  The banks followed suit and reduced their prime lending rates accordingly.  They even reduced the egregious interest rates on credit card to help the consumer.  Banks also introduced mortgage deferral programs to help those in need to stay in their home during this lockdown.  Governments around the globe introduced trillions of dollars of stimulus collectively to bridge the economy until the lockdowns end.  This is unprecedented but needed financial support.  The long-term cost is unknown but the citizens of the world will be paying for it for some time.  We talk about inter-generational wealth transfer with high net worth clients, but going forward we will be talking about inter-generational national debt burden with our children, grandchildren and great grandchildren, as governments around the globe go further into debt to support their economies.

Source: Thomson Reuters, Morningstar CPMS ** Change & Current Yield as of March 31, 2020

Oil prices continue to struggle as Saudi Arabia announced huge discounts back in early March given they did not come to an agreement with Russia on production cuts.  This was all before the majority of lockdowns and flight cancellations took place.  Oil dropped by over 30% and continued its downward trend.  In April, OPEC+ and Russia came to a production cut agreement but this did not help much as the supply of oil and gasoline continued to rise as consumption was at unprecedented lows.  There is nowhere to store the oil or gasoline as tankers and storage facilities are near capacity.  Major oil producing countries are feeling the pain of reduced revenues and ballooning budget deficits.  Canada is not alone as Alberta and Newfoundland struggle with record low oil prices and demand.  The Shale Oil industry in the US is expected to see record level of bankruptcies as most of the companies are smaller and highly indebted.

For economies to reopen, the experts are suggesting a staged process in order to mitigate the chances of a second wave that may burden the already overworked health care systems around the world.  Drug companies are racing to develop a vaccine or treatment that can help those extremely ill with the virus.  So much is being learned about COVID-19 and yet so much more still needs to be learned.  Hope is what keeps us going and with many other challenges that humans have faced, the world always gets together and eventually finds a solution.  The challenge is no one really knows what the duration of our current reality will be and how long will life, as we knew it, allude us before a vaccine and reliable treatment is found.  The duration will dictate how consumers, corporations, governments and investors behave.


Geo-Political Concerns

Trump’s impeachment appears to be a distant memory now as the pandemic of COVID-19 takes centre stage in every country around the globe.  There may be many issues being dealt with behind the scenes but COVID-19 is the only one that everyone is truly focused on.  It’s a silent war being waged on the masses across the globe and every country is battling it head on.  Sweden appears to be the only country that has taken the ‘herd immunity’ route and many are watching to see if that strategy will work or backfire.  So far, they have not experienced a runaway train and their case counts are no different than other countries of similar size.

Iran which has been the epicentre of the Middle East, has not completely turned away from the politics of US-Iranian disputes.  The White House Administration is being accused of a ‘Maximum Pressure’ campaign against Iran as it struggles with the ever-increasing number of COVID-19 cases.

The blame game!  US blames China for the virus and China made claims that the US military infected the people of Wuhan.  The blame keeps going back and forth which is wasted energy.  The two countries along with the brightest scientists around the globe should be focused on a solution and not finger pointing.  The US trade war and tariffs strained relations with China but they should focus on dealing with the pandemic so that the global economy can get started.  The health of the economy is a major issue that needs to be addressed and the healing could take longer than expected unless collectively we come to medical solutions for this pandemic.

Opening up the economy:  How soon is too soon?  That is the multi-trillion-dollar question.  People have to get back to work and students back to school but it has to be done in a strategic and systematic way to ensure a second wave is mitigated. Given this unprecedented crisis, the size of the global economy, the level of unemployment and the 7.7 billion people on this earth, there is no ‘one answer fits all’.  Governments are relying on the medical and scientific professionals to pave the path and once one path is paved, many eyes will be watching to see what is working and what is not. As mentioned earlier, behaviours will be very different coming out of this crisis than they were before. What is the trickle effect throughout the local and global economies? 


Our Investment Review and Outlook

Given this unprecedented economic and health crisis, investors were surprised by the swift action of governments around the globe from both a lockdown and rescue plan perspective.  The playing field has changed and now the capitalistic mindset is to not fear the worst because the governments and central banks will rescue us regardless of what happens.  This may be true in the short term, but is this type of intervention sustainable?  With interest rates near record lows for the major developed economies (see government yields below), the cost of funding the stimulus needed may be low but in the end the debt still has to be paid back and that can only be done effectively with higher taxes down the road.

Global Yield Curve      Source: Thomas Reuters, as at April 2, 2020

Our fixed income strategy is focused on mitigating exposure to credit default. During the ‘March (Market) Madness’, we sold the high yield fixed income ETFs given our concerns of default.  We remain concerned about default risk even though the central banks have been purchasing corporate bonds as part of their asset purchasing program.  The level of economic fallout will dictate the default rate so we prefer to see how economies reopen and how the credit markets behave before fully investing in corporate bond ETFs.

Our equity strategy is focused on companies than have strong balance sheets and cash flow that will allow them to weather this storm.  In March, we sold stocks like Magna, since we believe car sales will struggle for some time.  We sold Lazard Asset Management given its highly leveraged balance sheet, reduced assets under management, and investment banking opportunities. Lastly, we sold Lyondellbasell, a chemical company which sells into the refinery business.  We are concerned with gasoline storage capacity and the fact that no one is driving or flying.  We believe it will take some time to work off all the excess inventory of fuel before full refinery production is back on line.

We are holding excess cash in anticipation of the markets retesting the lows, as many major firms and their strategists are expecting.  Unemployment continues to rise around the globe as more businesses, which held off in hopes of an early re-opening, are now laying off more staff.

Most economists are expecting Q2 GDP to decline anywhere from 25-40% which would imply a major drop in earnings.  Based on the Morningstar CPMS research sources, earnings for companies that make up the S&P/TSX Index are expected to drop an average of 30% while earnings for companies in S&P 500 Index are expected to drop on average by 28%.  For this reason, we and other strategists expect the stock and bond markets to retest their lows.  Fundamentals will become important again as the stimulus ‘high’ wears off.

The IP Diversified Alternative Income fund continues to generate income; however, the economic lockdown has introduced some volatility into the fund with distributions from some of the underlying funds being moderately impacted as well as valuations in the real estate fund being impacted by March’s market sell off.

We are also re-evaluating our geographic asset mix and will allocate more cash to the regions we believe will recover faster from a revenue and earnings growth perspective.

We want to reinforce that fact that we are taking a staged approach before fully deploying the excess cash and becoming fully invested.  We are focusing on adding companies with strong balance sheets, a competitive advantage, and will benefit from the changing dynamics of working from home.



In short, we believe the markets will retest their lows given the Q2 GDP, the level of unemployment and earnings forecasts. We also expect more volatility for the foreseeable future.  Therefore, we have focused on the following:

  1. Bond and credit market activity and when to invest in Fixed Income ETFs
  2. Changes in geographic asset mix for equities to take advantage of a faster market recovery
  3. Stocks that have a competitive advantage and a strong balance sheet and cash flows
  4. Alternative funds allocation and diversification
  5. Staging timeline to dollar cost average and eventually be fully invested

It is important to remember that the bottom is never really known until time has passed, so if we buy during these dips we will mitigate decision regret as we navigate through this challenging environment.  Furthermore, as long as corporate dividend policies remain intact, the portfolios will benefit from receiving dividends during this time.

We continue to operate by our fundamental and evidenced based discipline to meet the principles we outlined at the beginning.

  1. Capital Preservation
  2. Income
  3. Prudent Growth

We understand the past few weeks have been challenging on all of us. We’re here for you and please don’t hesitate to reach out with any questions or comments.


  • Buy low and sell high
  • Get paid while you wait
  • Be patient and disciplined
  • Avoid emotional and thematic investment options, and
  • Stay true to your strategy



IP Investment Counsel Inc. (“IPIC”) is a Portfolio Manager (“PM”) and Exempt Market Dealer (“EMD”) registered in the provinces of Ontario, Quebec, British Columbia and Alberta.    The information contained herein is for general information purposes only and does not constitute an offer or solicitation of managed account services.  This newsletter, prepared by Habib Saikali and Richard Kluska, expresses the opinions of the authors. The opinions set out herein are effective as at the date of publication and the authors do not undertake to notify the reader of subsequent changes.  Certain general or market information contained herein has been obtained from sources believed to be reliable.  However, IP Investment Counsel Inc. cannot guarantee their accuracy. Given the current market environment, information can change minute by minute and therefore influence the views of the authors at any given moment.