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 Growth Stocks Continue to Outperform?

 

[Soft Music]

[Amber Sinha, Senior Portfolio Manager, CIBC Asset Management]

[Amber Sinha speaks straight to camera, with a computer monitor and a bookshelf behind him.]

So, growth has outperformed value for the better part of the current economic cycle. I would attribute that to a few reasons.

[Blue lines shoot from country to country on a computer-generated image of a globe. A close-up of U.S. $100 bills fanned out.]

One being that ever since the global financial crisis, I would say the global economies never came back to the full extent. So, the economies have been growing but subpar. And that environment tends to favour growth stocks because you know growth is hard to find in that environment.

[An aerial shot of Parliament buildings in Ottawa. The exterior of the old Bank of Canada building. Canadian $100 bills being minted in sheets.]

Another reason I would say is that despite the suboptimal GDP growth—we've gotten a lot of support from the government, whether it's fiscal stimulus or monetary stimulus. So, again, this seems to be an economy that's driven increasingly by stimulus, as opposed to the real engines of GDP growth.

[Computer-generated images of gold bars.]

When we have zero rates growth, stocks tend to do better because their cash flows are far out into the future. And if you did use the discount rate for those cash flows, certainly those stocks were more attractive. So that, I would say, is another sign.

[The lights turn on in a big data server room. A skyline view of Silicon Valley. A stock ticker showing results for Great Britain, Switzerland, Canada and Australia. U.S. and Chinese bank notes piled together.]

And last but not least, I think technology has been really powerful, gets more powerful by the day. The technology companies are dominating virtually every stock market index in the U.S., even in China. And again, technology tends to be a growth sector. So, you put all these three things together, pretty strong case for growth over value in the current cycle. The environment going forward, at least in the near-to-midterm, shouldn't be drastically different from the last 10 years. So, in that sense, I wouldn't see a change in growth over value outperformance going forward.

[Soft Music Plays]

[Will U.S. markets climb higher?]

Given the rapid recovery in the U.S. Market, I would say that the better investment opportunities probably lie outside North America, for now.

[Exterior images of the New York Stock Exchange.]

The U.S. Market has had a fairly strong rebound, we are back to the highs from earlier this year. So, we are basically at higher levels than in December of 2019. And you know should just take a pause and think about it. So, December 2019, there was no recession in sight for what was supposed to be a small problem limited to China.

[A doctor holds up a vial filled with blood infected with COVID-19]

The global economy is in a fairly deep recession. We might be past the peak of the pandemic, but we are certainly not all clear. Should the market be where we were in December 2019? So, that's a little bit of a challenge I think in the U.S. Market.

[Exterior of an EU logo sign in front of a building. The Tokyo skyline at night. The Busan skyline at night.]

When you look outside the U.S., I think the recoveries have been more muted. Whereas the situation on the ground with regards to GDP, with regards to the pandemic, certainly looking better outside North America. So, I think in terms of sectors, I would say that are some powerful themes that have been playing out.

[A time-lapse image of factory automation. A close-up of computer code on the screen of a laptop. A cyber security professional looks at data on four computer monitors. A doctor talks to an elderly patient in a hospital room.]

That COVID has only briefly interrupted: automation, or cybersecurity, or an aging demographic, and all the needs that come with that. These trends have not changed from COVID. In fact, some of them have actually been accelerated.

[A time-lapse image of three doctors in full PPE monitoring a patient in a hospital room.]

When we look at stocks in these areas, which have not fully recovered, because of the market action in those markets, that gives us a place to look for new ideas where the fundamentals remain solid, but we get an opportunity to buy them from the volatility in the stock market.

[Soft Music Plays]

[Key investor takeaways]

As investors we have to be mindful of a few things, one being any resurgence in the pandemic.

[A doctor in full PPE monitors a patient in a hospital room. Hospital staff in full PPE spray down a clear curtain.]

At this point, I think the market is getting comfortable with the fact that we are past the peak and a vaccine is just around the corner.

[Syringes circle a vial on a table. A close-up of four clear vials labeled “COVID-19 TRIAL”.]

I think we should have a little more careful stance on that and watch for cases from around the world. I would also say that stock markets have recovered.

[Stock traders watch monitors on a trading room floor. A trader looks at a graph on a tablet.]

So, we need to take a step back and make sure the exuberance of the market is actually reflected in the real economy as well. There may be some disconnect between the stock market and the economy at this moment. And so, I think that's something to watch out for.

[A close up of badges and stickers that say, “VOTE”.]

And I think just as a general comment, we are in an election year, things could get volatile around that. We want to make sure we know all the risks we are taking in our portfolio.

[The American flag flutters in slow motion. A computer-generated image of the Republican and Democratic party logos.]

We are not getting into any stocks that have a binary outcome, depending on whether the Republicans win, or the Democrats win. Last but not least, I would just say that technology gets bigger and bigger with almost every passing week. So, one has to have a more realistic view on the real value of technology stocks, and some of them are undervalued today and some definitely not. So, I think an extra level of due diligence required, at least in the large cap technology space in the U.S. for now.

[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.]