What pandemic? What bear market?
Speaking from his base in Atlanta, Donabedian shares his views on what the Federal Reserve is likely thinking, how the U.S. election could impact markets and why equities may take a directionless trading range for this year.
Transcript – What pandemic? What bear market?
[Soft music plays]
[Still photo of David L. Donabedian]
[David L. Donabedian, Chief Investment Officer, CIBC Private Wealth Management (U.S.)]
As the chief investment officer for private wealth in the U.S., my comments will be specifically tailored to what's going on in the States. Without a doubt, the question we've been getting most is: “How can the stock market be soaring given all that's going on in the world?” I'll address the “how” in a minute. But here you can see what has happened.
[What pandemic? What bear market? After collapse, a meteoric recovery for the stock market. A chart shows the market activity of the S&P 500 Index from June 2019 to June 2020. It remains relatively stable from June 2019 to February 2020, averaging about 3200 points. Then there’s a sharp decline to about 2200 points in March 2020 (-34% in 5 weeks), followed by a swift recovery around March 2020 to June 2020 (40% in 12 weeks). Source: Bloomberg, data as of 06.17.2020]
We had a 34% collapse in the S&P 500 index from mid-February to late March, but it's been followed by a 40% rally from those late March lows. So here's where we actually stand today: on a total return basis, the S&P 500 is down about 4%. And if you look at it over the last 12 months, the stock market is actually up to the tune of about 6%. So as our chart title here suggests, it's almost as if COVID-19 is a distant memory, even though in reality we know it's not. Also, the markets really did not react at all to the nationwide protest in the aftermath of George Floyd's death. But they've obviously been reacting positively to something. And I think it's actually really three things. First, as we moved from March to April to May, there was more clarity and overall better news on COVID-19 in terms of case count, hospitalizations and deaths. Now, some parts
of the country are seeing upticks in cases in recent weeks, but hospitalizations continue to decline.
[A man wearing a medical mask being tested for a fever. A medical worker with a mask and face shield examining the inside of a man’s mouth. A man wearing a medical mask, sitting at home staring out a rain covered window. A woman lab technician wearing an HVAC suit using a medical instrument to conduct a test]
But overall, that has moved to a path of more certainty, at least in the market's perception. Second, we've seen massive support of the economy and markets by the federal government and this not only put a floor under the valuation of risk assets, it actually incentivized risk taking.
[Sheets of US $100 bills being printed at a mint]
So for equity investors, we've seen the ultimate application of that old adage: “Don't fight the Federal Reserve.” And third, importantly, there's mounting evidence that the economy has already hit rock bottom and actually began to recover in May.
[A store sign that reads ‘OPEN’. A store sign that reads ‘WE ARE OPEN AGAIN’. A store sign that reads ‘WE ARE OPEN’ with a chalk drawing of an arm flexing underneath. A store sign that reads ‘OPEN FOR TAKE-OUT! 1:00 – 9:00PM’]
The economy actually added jobs back in May. And I know there was a similar result in Canada and retail sales rose 17% in May from April. So I think we're learning that in this unique shutdown of the economy environment, a little reopening goes a long way. So as we look at our investment themes, the good news is the economic recovery has begun and it's ahead of
schedule.
[Investment themes
• The U.S. economy collapsed in March and April. Recovery has already begun, but will be a lengthy process.]
I think the more challenging news is that we dug a very deep economic ditch very quickly and it will probably be a long road back to recovery. The hope, of course, is for a V shaped recovery. In other words, that we recover as quickly as we went into recession. More likely, though, a full recovery will take years. Our work suggests that it could take well into 2022 before we recover all of the lost economic activity caused by the COVID-19 shutdown. We're watching China as a potential leading indicator on the economy, given that it went through the COVID-19 shutdown and came out of it two months before us.
[Investment themes
• China may be a leading indicator of how economies can recover once COVID-19 health risks subside.]
So far, what we've seen there is that production levels in the economy have been nearly fully restored, but the consumer has remained rather cautious.
[Vehicles driving down a busy highway in China. A busy shipping container terminal in Hong Kong. A timelapse of the cityscape in Guangzhou, China]
We have seen the Federal Reserve go all in with monetary stimulus, along with many other central banks.
[Investment themes
• Global monetary policy has gone “all in” to provide liquidity to stressed capital markets. Fiscal policy is just as aggressive. More policy initiatives are likely.]
They've driven short-term interest rates to zero. They're doing massive bond buying to suppress longer-term rates. And they've instituted nine different programs that support the credit markets. We estimate the overall impact of what the Fed is doing at three times their impact during the great financial crisis just over a decade ago. It's been remarkable and it has very quickly stabilized credit markets and that was really a necessary condition before the stock market could advance. Meanwhile, elected Washington has put several trillion dollars into the pockets of households and businesses.
[The White House. A woman wearing a medical mask in a store examining a soap dispenser with a wooden exterior. A woman in a medical mask shopping in a grocery store. A man in a medical mask in a hardware store shopping for aluminum siding]
This income support, I think, is one of the reasons that the economic recovery looks to be a bit ahead of schedule. Now parts of that program expire at the end of June and then other parts expire at the end of July. My thinking there is: it's an election year. So that means there will probably be another fiscal support package and probably north of a trillion dollars that will be passed in July to kind of keep the money flowing in what is still a very fragile economy. In terms of what all this means for the interest rate outlook, at its most recent policy meeting, the Fed projected that short-term interest rates would remain at essentially zero through the end of 2022. So that's another two and a half years. We could see a slight increase in longer-term bond yields in the maybe 0.25% to 0.5% range over the next several months.
[Investment themes
• Bond yields are likely to remain very low as inflation is dormant.]
But of course, that would still leave interest rates across the yield curve, way below historical averages. In terms of the stock market, as our first chart showed, we have seen kind of a V shape to this equity market cycle.
[Investment themes
• The “V” phase of the equity market cycle is likely nearing its end; a trading range is likely in the months ahead.]
We think that's nearing its end and that what we're going to see over the course of the year is more likely a volatile trading range, a sort of a directionless trading range that bounces up and down. Part of that is obviously the incredible extent of the recovery that's already occurred, that 40% rise we talked about. Valuations are a bit on the high side and in general, it seems like market sentiment has moved from worrying about all that could go wrong to focusing on all that could go right. And, of course, reality is likely to be somewhere in between. And just to make the second half of the year all the more interesting, the presidential election has been much more off the radar screen than it normally would be, of course, due to COVID-19.
[Investment themes
• The presidential election has gone off the radar screen due to COVID-19 but will likely reemerge as a market-moving factor after midyear.]
But that's bound to change, right? We're going to go into the second half of the year, get closer and closer to November, and investors are going to do more thinking about the likely election outcome, who will be elected president, who will control the Congress and what that might mean for market impactful policy in 2020. So it's bound to have an impact. We also approach that issue with the knowledge that positioning around election outcomes can be a very dangerous thing for an investor, as Americans learned in 2016.
[Soft music plays]
[CIBC Private Wealth Management” consists of services provided by CIBC and certain of its subsidiaries, through CIBC Private Banking; CIBC Private Investment Counsel, a division of CIBC Asset Management Inc. (“CAM”); CIBC Trust Corporation; and CIBC Wood Gundy, a division of CIBC World Markets Inc. (“WMI”). CIBC Private Banking provides solutions from CIBC Investor Services Inc. (“ISI”), CAM and credit products. The CIBC logo and “CIBC Private
Wealth Management” are registered trademarks of CIBC. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors. This information, including any opinion, is based on various sources believed to be reliable, however, is subject to change. © CIBC World Markets 2020]
Equities: Why invest now & which sectors?
CIBC Asset Management’s Colum McKinley and Natalie Taylor share insights on navigating current equity markets. Find out the historical context of the recent sell off and which businesses are expected to excel as the economy reopens.
Transcript - Equities: Why invest now & which sectors?
[Soft music plays]
[Still photo of Colum McKinley]
[Onscreen text: Colum McKinley CIO, Global Equities, CIBC Asset Management]
Colum: As a result of COVID, 2020 has been a period of incredible uncertainty on many fronts. In our personal lives, we've worried about loved ones and the threat of COVID; in our work lives, overnight, many of us began working from home. And unfortunately for a large part of the population, jobs were temporarily lost. And so COVID'S impact has been incredibly broad and yet intertwined with all of our daily lives. So it's not surprising that this has led to uncertainty and volatility in financial markets. And we've seen and experienced that periods of heightened uncertainty can create significant opportunities. If you think back to the opportunity that came as a result of post the global financial crisis, that was one of the best buying opportunities that investors faced for quite some time.
[A chart titled ‘Long-term investors see through crisis’, showing the stock market steadily rising from 2009 to 2019, in spite of a series of international incidents.]
Colum: And to navigate today's environment, we have a couple of thoughts or pieces of advice that we think that investors should be considering. The first is using the expertise of your advisor.
[Shot of an investment advisor talking with two clients, followed by another shot of an investment advisor talking with two clients.]
Colum: Today is an environment where working closely with a professional that has a deep understanding of your needs and investment goals, and the time horizon that you have for your investments, that they will be best able to position your wealth for success in the future.
[Shot of an investment advisor sitting at a desk, looking at charts and typing numbers into a calculator, followed by a shot of an investment advisor talking with two clients, followed by a shot of an investment advisor sitting at a desk looking at a chart and typing on a laptop, followed by a shot of a couple sitting in their living room, talking as they pour over papers and work on a laptop, followed by a professional sitting at his desk, working on his financial plan.]
Colum: And the second is, we think that this is an environment where investors should think about the long term. The economic and corporate data that's being reported today is both dark and bleak. But that's not what's going to drive future returns. Governments and businesses are starting to look to the return to normal, get back to their day-to-day activities and business as it once was.
[Timelapse shot of a busy super highway, followed by a timelapse shot of a busy downtown intersection, followed by a timelapse shot of a busy city street at night, followed by a timelapse shot of a busy shopping mall.]
Colum: Governments have injected significant stimulus into the financial system that's going to help us back onto the path of recovery.
[An aerial shot of Parliament Hill in Ottawa, followed by an aerial shot looking up at the major skyscrapers in Toronto’s financial district, followed by a timelapse shot of a busy waterfront walkway with a beautiful, tree-filled park behind it.]
Colum: And we've seen again in the past that these types of environments create great opportunities for investors. If you think about post the global financial crisis, that was the longest bull market that investors had experienced in the history of investing. And even through that period there was incredible uncertainty. We faced natural disasters. We faced government shutdowns. We faced elections with uncertain outcomes and implications for economies and financial markets. And so what's really important is to focus on businesses that can navigate these periods of time. And so that's one of the key things that we have been focusing on, is in embedding our long term focusing in portfolios, is by focusing on the highest quality businesses. So we're looking for companies with strong liquidity and access to capital.
[A slide showing the logos of various fiscally strong companies, including CIBC, CP, Brookfield, BCE, Apple, RBC, TD Bank, Merck, Telus, Procter & Gamble, Starbucks, Microsoft and Magna.]
Colum: Businesses led by experienced and capable management teams that are positioned to take advantage of the uncertainty that we're seeing today. We're focusing on companies that have attractive dividends. They're generating strong cash flows. They're able to maintain those cash flows through this uncertainty. I think it's one of the things that's quite interesting about this environment. You can quite easily construct a portfolio with dividend yields of 4.5%, 5% or higher in some of the highest quality businesses in the Canadian marketplace. And if you think about long term returns, long term equity returns in the high single digits, if we can build portfolios with mid-single digit dividend yields, that's almost half of your future returns already locked in in the form of a cash flow. So we think that focusing on high quality businesses that have the capability to thrive and survive through this environment will be the key to success. I'm going to pass things over to Natalie now to focus on some of the areas that we're seeing specific opportunities.
[Still photo of Natalie Taylor.]
[Onscreen text: Natalie Taylor, Portfolio Manager, North American Equities, CIBC Asset Management]
Natalie: Thanks, Colum. So I wanted to start off just highlighting some of the obvious outperformers and underperformers in the COVID health crisis. So as you can see on the slide, some of the bigger winners include tech, biotech, e-commerce, as well as streaming services.
[A chart titled ‘COVID Outperformers vs. Underperformers’, showing companies/sectors that have performed well during the COVID crisis (Netflix, Amazon, software, biotech) and companies/sectors that haven’t performed well (autos, retail REITs, hotels, retailers, airlines).]
Natalie: And we think that the benefits that they're enjoying are largely reflected in current valuations. On the flip side, stocks that have underperformed in this environment include leisure and travel, airlines, retail and real estate with retail tenants. And we think these sectors will take a bit longer to recover and there is significant uncertainty and as such we also think that current valuations largely reflect that situation currently. So where are we finding opportunities? One sector that we think is attractive currently is restaurants and in particular, quick service restaurants. Generally, these businesses have attractive business models that are capital light and franchised and are relatively defensive in the product that they sell, being food.
[A chart titled ‘Restaurant sales recovering’, showing that quick service restaurants suffered somewhat in late-March/early-April 2020, but have been recovering since then, while casual dining restaurants, over that same timeframe, were hit very hard initially, and have since made minor recoveries.]
Natalie: It's also been one of the hardest hit sectors in the COVID lockdown, and the valuations reflect that. So typically restaurants will do sales of 3% to 5% in a normal environment, and that has reversed quite sharply and down 30% to 50% for quick service and down as much as 80% to 90% for casual dining. We're seeing trends of stabilization throughout April, and that's largely due to the restaurants' ability to adapt and leverage their drive-through and delivery capabilities and also some return of customer demand. We think that sales are likely to accelerate further as economies start to reopen. The second sector is the auto-related sector. So globally, there's been a significant decline in miles driven in the range of 40% to 50% as employees are working from home and staying close to home.
[A chart titled ‘Driving Mobility Recovering’, showing how methods of transportation have changed in the US since the COVID crisis began. Driving has declined -30%, walking -44%, and transit -75%.]
Natalie: Similar to restaurant sales growth, we've seen an improvement throughout the month of April. And we think that once economies reopen, travel by car will be the preferred form of transport in order to maintain social distancing. We think fuel stations, auto repair shops, fleet managers are likely to see near-term benefits from these trends, while oil companies and auto companies may benefit over the longer term - however, in the near-term, they're experiencing supply issues that need to be worked out. Lastly, I wanted to touch on the gold sector. We believe that gold can continue to rally similar to what we've seen in the global financial crisis.
[A chart titled ‘Gold Equities Trading at a 5% Discount to Spot’, showing that gold is a good investment during periods of capital and operating issues.]
Natalie: And that's really because of the unprecedented amounts of stimulus that we're seeing today. And also the potential for more stimulus to come as gaps in the recovery are identified. If the recovery in the economy is swifter than expected, the stimulus could lead to inflation in the fullness of time, and gold is a good hedge in an inflationary environment. Lastly, as you can see on the slide, the equities are not currently reflecting the current spot price of gold and are trading at about a 5% discount. We believe that over time the gold price remains high at these levels and that as operations resume, that that discount can narrow. I should also mention that the environment that we're in currently is very dynamic and we are monitoring signposts and developments and trying to manage risk as best as we can, and the opportunities that we're seeing are constantly evolving.
[Soft music plays]
[The views expressed in this video are the personal views of Colum McKinley and Natalie Taylor 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 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.]
A Shock to the System: Perspectives April 2020
Despite the turmoil caused by COVID-19, we’re encouraged to see that central banks and governments reacted quickly. Extraordinary measures are being used to stabilize the financial system and cushion the economic hit.
Transcript: A Shock to the System: Perspectives April 2020
[Soft music playing in background]
[Title reads: A Shock to the System: Perspectives, April 2020]
[Onscreen Text: April 16, 2020]
[Onscreen Text: Luc de la Durantaye, Chief Investment Strategist and CIO, Multi-Asset and Currency Management, CIBC Asset Management]
So in terms of economic outlook, obviously it is very dependent on the evolution of the coronavirus. Judging from what we know of what happened in Asia, which they are about two months, two and a half months ahead of us, we should be able to see a peaking in cases and a dying down of cases by the end of the first half of this year, at which point an economic recovery should take hold and carry us into the first half of 2021. In terms of the magnitude at this stage, it's very difficult to assess the magnitude. Certainly we will face a sharp economic recession in the first half and the degree of recovery will depend on a number of things. What we want to see is being able to see if we have an antiviral drug that comes over the next few weeks and if we see as well a vaccine being implemented within the next 12 to 18 months, we can forecast that this recovery could be almost a full recovery because we will have relieved, if you will, the risk of a recurring, second phase of the pandemic.
[A still image of a scientist working on a medication in a lab, followed by a still image of two lab technicians, one of whom is prepping a medication in a syringe, following by a still image of a lab technician holding a small vial of a medication, followed by a patient in a doctor’s office about to be given a coronavirus vaccine.]
The more these antiviral drugs' introduction and a vaccine is pushed back, then the more gradual the economic recovery will be. And from a regional perspective, we can also see some advantages in the sense that Asia has been ahead of the pandemic, it started there, and then North America is kind of at the tail end. And so we see a regional benefit. We'll see Asia, China recovering first, potential in Europe, and then the US after, which will provide also some investment opportunity on a relative basis.
[Soft music playing in background]
[Title Reads: Investment strategy]
So certainly when we hear global recession, it can be frightening. But we have to realize that financial markets have already discounted quite a bit of that news already as they usually do. Correction in equity markets of 30 to 35 percent as we have seen, are a typical correction in terms of percentages during recession, regular recession. And so from that perspective, we see that there has been value that has been uncovered in financial markets in many places. From a credit market as well, the central banks around the world have been providing a lot of support to various aspects at various areas of the credit market. [A still image of the US Federal Reserve, followed by a still image of the EU flag.] And that's certainly reassuring in the sense that you have strong backing from central banks in various areas of credits, which is also a place where investors should start looking into in terms of adding positions. And finally, we had been talking a lot about gold. That provides a good hedge. We would continue to recommend to hold gold at this stage. It's been a very stable and growing asset in this type of environment and we continue to see that in the future. [A still image of a stack of five gold coins, followed by a still image of many gold bars.] And finally, we had mentioned to hold a little bit of cash. Well, we think that at this stage, having cash is a good opportunity. [A still image of bills of various international currencies.] There have been some opportunities in the market during this correction, and it would be time for investors to gradually put some of that cash to work and finding some of the best opportunities.
[Soft music playing in background]
[Title Reads: Currencies]
So we have to touch a little bit on currency, there's been a lot of dislocation. The US dollar has been very strong. It's somewhat typical in these types of environment where the dollar is used as a financing currency around the world, and then when you have recession, there's a struggle around the world to find US dollars. The Federal Reserve, though - so the US dollar has been very strong. It has become very expensive. And the Federal Reserve on top of that has started to ease the need for the search for US dollars around the world through their, what's called their swap lines with the various central banks around the world. So we're already starting to see a reversal of the US dollar. So we would be careful from here. We would find that the US dollar is likely to be more weak than strong going forward. As long as the pandemic is kept under control. The reverse of that, we have a Canadian dollar that sold off quite a bit. The tricky part with the Canadian dollar is what is going to be happening with oil prices. With the recession, there's a shortage. Demand has declined quite dramatically. And so we're seeing oil prices at very low levels, which we think is very important for the Canadian dollar and the Canadian economy. So we think that it's going to be difficult for the Canadian dollar to rally strongly until we see the glut of oil in the world market resorb itself and oil prices going back up, which is not going to be something that's going to be with us until the second half of this year. So we would still be prudent on the Canadian dollar. We don't think it can appreciate a lot from here.
[Soft music playing in background]
[Disclaimer reads: “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.”]
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.]
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.]