HOW FAST WILL CANADA’S ECONOMY RECOVER IN 2021?

[Soft music plays]

[Benjamin Tal, Deputy Chief Economist, CIBC World Markets]

The recessions impact on housing

At this point, if you care about the economy is going, you have to ask yourself three

questions: how bad is the winter going to be? How strong the recovery is going to be in

the second half? And how much scarring are we going to take? Namely, what is the

long-term impact of the double dip recession of COVID?

[Bracing for a bad winter]

Let's start with the first question, how bad? It will be bad. But we are in the midst of a

double dip recession.

[Aerial views of an empty rail yard and an empty residential street.]

The economy is now in the midst of shrinking by about two percent. So clearly, we are

in a recession already. We know that.

[An empty apartment complex in winter. A snow-covered swing set.]

We know that the winter is going to be very long, and the number of cases will rise, and

the vaccine is still not there sufficiently. So, I believe that the first quarter will be very,

very difficult. And I think that the market is already pricing it in. We have seen it in the

bond market already. The good news is that you can find some positives in the negative

in the sense that even this recession could have been much worse.

[A sign that says, “SORRY WE ARE CLOSED DUE TO THE CORONAVIRUS!”, is

plastered on a shop window. An aerial view of refinery on the water.]

We have to realize that we are not shutting down the economy completely the way we

did in March or April.

[A time-lapse shot of a grocery store where a man wearing a mask looks at the camera

and holds on to a shopping cart as people pass him by. A woman sits on the couch

holding a credit card. A closeup of a man holding a credit card and typing onto a laptop.]

Also, we are much more productive at this point because we are used to living in this

kind of situation, and e-commerce is more available for businesses, again, allowing

them to do their work in a more efficient way. So overall, yes, it's going to be negative. It

could have been much worse.

[Strong recovery looming]

The good news is that the recovery will be stronger than currently the market is

anticipating.

[Time-lapse images of the sun rising over cities at dawn.]

I believe that this recovery in the second half of the year, starting in the spring, will be in

the neighbourhood of five, six, seven percent GDP growth, up from negative two. So, it

will be very significant. Why? Because we are ready for this.

[An aerial view of a residential neighbourhood. An aerial view of a mansion. A

computer-generated image of multiple skyscrapers and small homes emblazoned with

the Canadian flag—in between the building are gold dollar signs.]

We have a situation in which individuals, households today in Canada are sitting on noless than one hundred billion dollars of extra money, excess cash, excess saving,

looking for direction. There is so much pent up demand in the system. There is money,

income actually went up dramatically, while spending went down.

[A Canadian flag flaps in the breeze in downtown Toronto. A closeup of a green light

flashing.]

Most of this money is held by wealthy individuals and they want to spend and the

minute they have the green light to spend, they will spend that money.

[Images of phones touching debit machines. A young couple shops in a high-end store.

A time-lapse shot of a bustling airport.]

And this money will be spent, where? Not on goods but on services, exactly where you

need the money to go, exactly where we need the jobs to go. Namely, the multiplier

impact of this spending will be very significant.

[A wide shot of baggage being loaded on an airplane. An airport worker fuels-up a

plane. A waiter places a coffee cup on a table.]

Most of it will stay at home and it will go exactly where it should be going, namely the

service sector generating employment where we need to see employment.

[An aerial view of a small city covered in snow. A time-lapse image of a busy market]

So, the short answer, the winter will be tough. The recovery in the second half of the

year will be stronger than expected. We are in a position to take advantage of this kind

of situation.

[A CG image of Canadian money being printed. A card swipes through a debit

machine.]

The money is there. The ability is there. Consumer confidence is there. The income is

there. We just need the green light to spend and this money will be spent in a very

significant way.

[Long-term economic implications]

The third question, the long-term implications, namely the question is to what extent

COVID-19 is an event or a condition? And I believe that in many ways it is an event, in a

sense that after 2008 it took the economy many years to recover with major structural

changes because we lost capacity, we lost employment, and it was very long and tough

process to recover.

[An empty warehouse. A time-lapse image of workers in a manufacturing plant.]

At this time, I think it is very different. We have to remember that this is a very abnormal

situation, in which the vast majority of people are not feeling financially the impact of the

crisis. Most of the jobs lost were in low wage occupations. So, you have a very

asymmetrical damage here, which means that many people will be able to recover very,

very fast.

[A customer grabs a coffee to go at a coffee shop. A new empty restaurant. An aerial

view of a manufacturing plant under construction.]

Also, it's mostly services and it is much easier to start a new restaurant than establish a

new manufacturing facility. So, the recovery would be faster. And for people who are

feeling the pain, the government is there, which is another positive.

[An aerial view of Parliament in Ottawa. A CG image of multiple skyscrapers and small

homes emblazoned with the Canadian flag, in between the building are gold dollar

signs.]

The Canadian government is spending much more than any other country in terms of

support. And that's why the savings rate in Canada is rising and that's why income is

rising. And that will buy us some time until we are ready for the recovery.

So bottom line, the recovery will be stronger than expected. And then we have a

situation, in which, the recovery will be long lasting, and it will not be as bad as we have

seen in 2008. Because the very specific nature of this crisis means that the recovery

would be long lasting.

[Impact for investors]

When it comes to investment, clearly, the near-term is not positive for valuations, but I

believe that the market is already pricing it in.

[An aerial view of Google headquarters in Silicon Valley. A time-lapse shot of an airport.

An aerial view of a city in winter.]

That's one of the reasons why technology is still doing relatively OK, while the victims of

COVID are not doing so well. That will continue to be the case during the winter.

However, I think it's time to start thinking about taking positions in the laggards. In those

industries that are not doing so well now.

[An aerial view of a train. A low angle shot of an airplane landing. An aerial view of a city

in winter. A luxurious hotel lobby. A time-lapse of a shopping mall.]

Because I believe that the minute we turn the corner, especially in the second half of the

year, you will see transportation, aviation, hospitality, restaurants, retail doing better

than expected. So, the laggards will become the winners.

I think we have to start thinking and take opportunities here in terms of valuations,

because now the market is starting to focus only on the near term, while the medium

term would be much, much better. Better than expected.

[Soft music plays]

[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 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.]

Reddit GameStop and the Short squeeze: Market Impact

[Soft music plays]

[Craig Jerusalim, Portfolio Manager, Canadian Equities, CIBC Asset Management]

Reddit and message boards in general are nothing new. However, when you have a pandemic

on your hands and masses of bored people sitting at home on their phones, combined with

generationally low interest rates, zero cost fractional share purchases, and stimulus cheques

sitting in bank accounts, we had the perfect scenario for the gamification and exploitation of

targeted loopholes.

[CRT televisions are piled on top of each other. One turns on and images of the Wallstreetbets

reddit page, a GameStop storefront, skyscrapers, a man in casual cloths looking at his phone,

and compute-generated imagery of stock market data.]

Now, don’t be fooled. This isn’t quite the David versus Goliath story that it’s made out to be in

the media. It’s more likely a case of David plus Goliath versus Goliath. As there were likely many

sophisticated hedge funds and professionals on both sides of the short squeeze.

[The prisoner’s dilemma]

Now, the speculative frenzy in GameStop and AMC has already begun to abate, just as we

assumed it would. Because in the end it comes down to fundamentals. But more importantly

than fundamentals it comes down to human nature. This was your classic game of prisoner’s

dilemma.

[Images of men in casual cloths looking at their phones. Images of stock market data.]

If every retail investor that had bought those stocks held onto their long positions and

continued to buy more, then theoretically, they could have continued drive the stocks higher

and send the shorts running for the exits.

[compute-generated imagery of a laptop keyboard with the word, “Exit” on one of the keys.]

But the incentive structure is such that no one wants to be left holding the bag. So, greed and

self-interest dictate the run for the exits.

[Ramifications?]

So, what are the ramifications?

[1. Short sellers will be less vocal in their positions.]

Firstly, short sellers will be a less vocal in their positions so as to not draw attention by retail

mobs.

[2. This is a sign of froth in the market]

Second, this is yet another signpost along with SPACs and Bitcoin of froth in the market,

which has to be monitored, as well as the potential that these actions erode confidence in the

market, which could hurt overall sentiment.

[A close-up of gold coins]

[3. Expect additional regulations to come into effect after the fact]

And finally, three. Do expect additional regulations to come into effect after the fact.

But other than those, and a little bit of excitement, markets will move on to the next big thing

like they always do. And GameStop will become a tiny footnote in history.

[Soft Music plays]

[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 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.]

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.]