Second Quarter 2020

Since we last wrote you, the coronavirus has raged on around the world. We have witnessed a wide variety of responses from governments everywhere. The approaches taken, and success rates achieved, have varied widely. On the one hand, nations like Taiwan and South Korea have done a commendable job and have been rewarded with vastly reduced rates of infection and an earlier return to economic recovery. On the other hand, supposedly modern western countries like the United States and the United Kingdom, have employed a disjointed and chaotic approach. They are now suffering the consequences. In an ill-advised rush to re-open their economies to gain political favour, these countries have doomed their economies to a second shutdown and a needlessly prolonged recession. In fact, in the absence of further fiscal measures, it is conceivable that this recession could extend into a depression if such ill discipline is not reversed.

It is no coincidence that the U.S. now leads the world in infection rates and resulting deaths. This tricky and unprecedented situation demands the most adroit political leadership. Instead, the United States could not have been more poorly served by its Administration. This is a shameful situation that will hopefully be judged for what it is by voters in November.

The damage to the economy at large and to working people in general has not been seen since the 1930s. And yet, stock markets have rallied strongly since hitting bottom on March 23rd. The markets have been fuelled by massive infusions of liquidity by central banks and drastic government spending initiatives. In the U.S. alone, economic stimulus has exceeded $2.0 trillion. Closer to home, the Canadian and provincial governments will see their respective budget deficits driven to unprecedented levels. In addition to this stimulus, it appears that many market participants are seeing through the “valley” to growth on the other side, presuming a “V” shaped recovery. During the second quarter, the S&P 500 delivered a total return of 16%, with the TSX doing even better at 17%.

We believe that the prospect of a “V” shaped recovery is too simplistic and ignores the long-term damage that has been inflicted on most economies. We wonder what will happen when all this stimulus comes to an end. Furthermore, we remain fearful that the virus will continue to infect jurisdictions that have emerged too early, causing a return to lockdowns and a delay to fully re-opening economies.

In our view, the equity markets have recovered too far, too fast. It appears that a “disconnect” has developed between valuations in the financial markets and the realities of the actual economy. Considering this, we raised the cash levels in your portfolio during the second quarter. Elevated cash levels serve two purposes. First, it helps limit the downside if equity markets turn down. Second, it provides the ability to buy into good companies at attractive prices, when we believe the time is right. If we are wrong, and the equity markets continue to surge, rest assured that a good portion of your portfolio remains invested in high quality stable growth companies that will participate in such a rise. While elevated cash levels do create some performance drag in a positive market, we feel that this is the most prudent strategy we can implement for you during these most uncertain times.

As per our own business operations, we continue to work remotely and will only return to our premises once we think it is safe for all our staff and their families. Our technology platform has allowed us to seamlessly service our clients and manage their portfolios without interruption.

As always, we encourage you to contact us if you have any concerns and thank you for the trust you have placed in us during these difficult months.


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