10/25/2020
Fall of 2020 Commentary
Living in uncertainty and trouble time
I would have been walking the Camino Portuguese from Porto (Portugal) to Santiago de Compostela (Spain) at this moment if there was no COVID. But instead, all my 2020 travelling plans are cancelled, and I am staying home in Ottawa. I am not giving up walking, though. Regularly, I walk alone or with other walkers around Ottawa. In this unprecedented uncertain time, this seagull (in the picture below that I took along the Ottawa River on the Gatineau side) demonstrated her unwavering calmness standing in the middle of the turbulent current. It is a potent reminder to us during this pandemic of not being panicky, be aware of the surrounding, keeping steady, and taking appropriate action.
We completed our office move to the new place at 112 Kent Street in late August. It is a modern office with bright natural light and up-to-date technology. Unfortunately, no client meeting is allowed to occur in the office until the virus situation is under control. I am now working from my home office that is being upgraded with new computer software and hardware. We are using Microsoft Teams video link to conduct virtual meetings with clients. The technology allows us to instantly share documents and illustrations, like sitting right next to you in the comfort of your own home. Please let me know so that I can schedule a virtual meeting with you. Our operation is being streamlined and advanced with new technology to adapt to the rapid changes and maintain and improve servicing clients.
Macroeconomic and market developments
Today, the ongoing debate is over the shape of the recovery. Scenarios and models have been structured to formulate the outlook. This exercise resulted in a range of possibilities for the form of economic recovery. But with the unpredictable nature of the virus and the hard to control human behaviour, any of today's models can be obsolete when a new element is introduced.
The global economic recovery in its initial stages will be slow and uneven, according to many experts. It depends on the gradual easing of lockdowns, a gradual return to normal consumer behaviour, a vaccine's development, some additional fiscal support, infection rates, monetary policy, and public health policy.
The US.
We need to recognize that some parts of the economy remain very weak, including the service sector and the public sector. It is worrisome about the recent rise in infection rates, which could provide further headwinds for the US economy. The government must continue to provide fiscal stimulus, notably an extension of benefits to households and businesses impacted by the pandemic, as well as state and local governments. However, Congress and the Trump administration are playing politics in fiscal support to bridge businesses, households, and municipalities through this period. The Federal Reserve is pledging low-interest rates for years. And so we need to pay attention to fiscal and re-opening policies.
The re-opening of large segments of the economy is fraught with risk, and the number of COVID-19 cases is rising in several states. Renewed shutdowns of economic activity would bring additional market volatility, but importantly we do not expect the same draconian shutdown measures as seen earlier in the year. We know far more about this virus now than in March 2020 (the benefits of masks and social distancing, and the lower risk of outdoor gatherings), which should enable the nascent economic recovery to continue.
Financial markets are currently reflecting the stabilizing economic growth environment, complete with modestly higher bond yields, moderately weaker "safe-haven" currencies, firmer commodity prices, tighter credit spreads, and equity outperformance. Many economists expect these trends to continue the rest of the year. However, downside risks to this scenario may include a rise in U.S.-China tensions and a potential second wave of infections. The near-term could bring volatility with larger-cap and secular growth stocks outperforming. However, the recovery, albeit slow, will progress through the year. The election in November, many think, is already priced at the market price. Whoever occupies the Whitehouse will still have to deal with the virus monster. The difference may lie between the more distribution of wealth and the relief of taxes.
Eurozone
Visibility on the shape of the initial stage of the economic recovery in the eurozone (EZ) is low due to the importance of the travel and tourism sector in many large EZ economies, both in GDP and employment, especially France, Italy and Spain. Germany and northern Europe, where the activity is more heavily concentrated in manufacturing and professional/business services, recover faster than the South and France. The share of GDP is more massive in tourism.
On the positive side, several European countries have introduced legislation to provide at least partial income support for workers and households and even to protect jobs during the crisis. In Italy, for example, companies are forbidden from firing workers in 2020. These measures should help to support a substantial recovery for the economy. My Via Francigena Italian friends have reported that they can now travel and work, a lot happier than in the spring!
The excellent news is that an embryonic step toward a shared EZ fiscal policy may address competitiveness and economic growth for the region. Having a monetary union without a fiscal union has been extremely problematic. Many are optimistic that achieving a shared budgetary policy, it could be very helpful in improving business confidence and the EZ economy.
In terms of financial markets, the recent rebound has made valuations expensive even for the EZ, albeit not as expensive as the US stocks. On the fixed-income side, some sovereign bonds offer relatively higher results, such as Italy, but are effectively a bet on the European Central Bank's support. All in all, given that we are entering a severe recession, the potential risk-adjusted return profile seems more attractive for investment-grade than high yield. Many investment-grade bonds have fallen into a high yield bond category due to the change of credit status. These "fallen angels" ( A fallen angel is a bond that has been reduced to junk status because its issuer has fallen into financial trouble. Its bonds pay higher returns than investment-quality bonds but are riskier) provide exciting investment opportunities.
The UK.
UK economic performance seems likely to be somewhat weaker than the eurozone. The UK has lax enforcement and compliance with lockdowns (as did the US). Also, it has a more fragile public health system than her European peers. The result has seen higher rates of mortality and excess deaths, with a severe economic downturn.
Another concern is that Brexit is around the corner. The government has ruled out extending the transition, insisting on a trade deal or a "hard Brexit" by year-end (perhaps believing that a no-deal Brexit would not be traumatic compared to the lockdown). It seems that the government is pursuing mini-deals in different sectors rather than a comprehensive deal, pointing to greater friction in trade and weaker productivity growth.
These combined challenges may lead to a limited return to "business as usual" than other major economies. As the lockdown is gradually released, a bounce in activity would likely be constrained by both the threat of secondary outbreaks as well as Brexit-induced pressures on spending. Until the parameters of Brexit are more transparent, and post-pandemic and post-EU policies are clarified, uncertainties would prevent a rapid return of big-ticket expenditures by households on consumer durables, by businesses on significant new capital expenditures, and significant new foreign direct investment plans. However, the resilience of the UK consumer could surprise despite the headwinds in turning up their spending.
The subdued economic growth coming out of the lockdown along with Brexit will likely lead to low-interest rates, a weak currency, and some pressure on risk assets in the shorter term. But over time, cheap valuations and policy support should boost sterling and UK risk assets.
Japan
Japan's GDP growth is currently expected to drop substantially. Japan's economy was already weak before the COVID-19 crisis as the consumption tax hike last October hindered consumption. Large-scale fiscal stimulus through two rounds of supplementary budgets is likely to support economic growth. With a leadership change, we need to wait to see if there is a new direction steering the economy.
The most critical risk for Japan's economy over the next few quarters is a decline in exports. Capital goods exports from Japan may deteriorate as the global economy braces for an extended period of negative output gaps. The second wave of COVID-19 in significant economies could also hurt exports. An increase in bankruptcies in service industries is also a concern.
In terms of markets, Japan's bond market has maintained stability in recent months despite the pandemic, as the Bank of Japan's yield curve control policy provided stable condition (yield curve control (YCC) involves targeting a longer-term interest rate by a central bank, then buying or selling as many bonds as necessary to hit that rate target. This approach is dramatically different from the Federal Reserve's typical way of managing US economic growth and inflation by setting a key short-term interest rate). In March, the central bank's decision to double the size of its purchases of equity exchange-traded funds supported equity prices. If the Federal Reserve adopts a yield curve control policy toward the end of this year, a stable interest rate differential between the US and Japan would likely encourage capital flows from Japan to the US, generating depreciating pressures on the Japanese yen against the US dollar. However, in the concise run, the decline in excess demand for the dollar, which should be accompanied by normalization of global capital markets, is likely to create appreciating pressures on the yen.
China
The outlook for China remains constructive. The Chinese economy has mostly returned to normal in many ways, although consumption and private investment continue to be weak. However, many experts still expect sequential improvement as consumers and businesses feel more confident about spending money as pandemic-related uncertainties wane. As with Japan, the downside risk that the V-shaped bounce-back in the manufacturing Purchasing Managers' Index (The PMI is an index of the prevailing direction of economic trends in the manufacturing and service sectors) that we saw in the first half will not be sustained in the second half due to global demand being seriously impaired by the spread of COVID-19;
China's fiscal stimulus and monetary loosening policies have been conservative when compared to its peers. The additional measures announced at the National People's Congress meeting appear to be calibrated and positive. It makes sense for Beijing to save some dry powder in case the macro-environment deteriorates. Many expect loosening monetary policies would continue. In terms of financial markets, China was the first major economy to re-open, so it makes sense that China's stock market has performed relatively well thus far this year. Additional rounds of liquidity injection by the People's Bank of China over the second half of the year should bode well for the China onshore A-share market. Market participants all keep watch of the geopolitical tensions between the US and China. However, the Phase 1 trade deal remains intact at this point and that tariffs hopefully will not be redeployed. About fixed income, the return to average growth is likely to start in China and other Asia Pacific countries, which will benefit corporates and financials.
Emerging markets (EM)
Many emerging market (EM) economies are experiencing severe challenges from the direct impact of the pandemic and the economic costs of the lockdowns – and they have limited capacity for fiscal support and public health system support compared to developed market economies. The recovery in capital flows to EM after the sharpest, fastest reversal ever recorded in March due to the Federal Reserve's sharp easing. That said, significant differences in economic structure and policy responses point to a considerable differentiation in EM countries' emergence from lockdowns, longer-term economic performance, and financial returns.
India is experiencing a drastic surge in infections, and the lockdown has taken a severe economic toll, worsened by the lack of fiscal space to cushion the blow of lockdown. As a result, the economy is being re-opened even as the epidemic curve seems to steepen rather than flattening. The good news is that the government is pursuing necessary supply-side reforms that it had avoided ahead of the 2019 elections, concentrating on redistribution and demand-boosting measures. These reforms to labour markets should encourage investment and boost growth, mainly if the government follows through with financial sector reform, including recapitalization and restructuring of accumulated lousy debt. If and when India's government follows through, foreign direct investment and CAPEX (capital expenditure) may well respond strongly as it has in every past major episode of reform in Indian history. The risk remains that the reform process may prove slow and insufficient. However, India's recovery could well disappoint.
In Brazil, the pandemic has begun running rampant, while the federal government has held back on imposing restrictions even as state governments have taken a more hands-on approach. The government has suspended its self-imposed fiscal restraints in response to the pandemic, and the central bank has cut rates further from record lows. All of this should help put a floor under the economy. Still, a return to business and a sustained growth recovery in Brazil, Latin America and EM as a whole will likely hinge on successful containment of the pandemic and a sustainable recovery in the global economy that helps boost commodity export prices and volumes.
Countries like South Korea have a robust contact tracing infrastructure and are better equipped to manage any virus resurgences. The greatest threat to these countries is the weakness in global demand for their products. According to many experts, the outlook is more attractive for Asian emerging markets equities and debt relative to other parts of emerging markets.
Some Measures to mitigate retirement income risks
For those approaching retirement or are already in the retirement phase, the uncertain market, less a falling market, creates many worries. Here are some suggestions to ease these worries in these troubling times:
• To create or maintain a cash reserve
o You may want to keep enough cash on hand to cover two to three years of retirement expenses. This will not be affected by the ups and downs of stocks and bonds. Thus you do not need to see them at an inopportune time.
• To re-balance portfolios to reflect your risk profile
o Over time, the equity and the fixed income allocation will drift due to market fluctuation. It needs those that have gained in value to be sold to buy more of those that have lost weight --- sell high and buy low. Stocks need time to recover. We have to be patient and prudent.
• To postpone the retirement date
o Under such uncertainty, postponement of retiring may be a wise choice, giving the savings more time to recover while there is still an active employment income coming in.
• To cut spending
o Income – expenses = savings
o Paying attention to expenses reduction is as important as increasing income or return. And the reduction process is mostly under our control, not like the market.
Some COVID-19 observations and reflections
1. The virus treats us all equally, regardless of our culture, religion, occupation, financial situation or how famous we are
2. We are all connected --- something that affects one person affects another. We can put up border barriers, but the virus does not need a passport.
3. Our health is the most precious, not the fortune created. If we do not look after our health, we won't look after our wealth.
4. The virus reminds us of the shortness and fragility of life. I can attest to that! Just look at the death toll from the nursing home.
5. Like walking the Camino and the Via Francigena, it reminds us of the need for the essentials --- food, water, medicine, as opposed to the luxuries that we sometimes unnecessarily give value to.
6. It reminds us of how important our family and home life are, which sometimes are being neglected. The virus forces us back into our houses to rebuild them into our home and strengthen our family unit.
7. It reminds us that our real work is not our "job"; that is what we do. Our real work is to look after each other, protect each other, and benefit one another-- such as the front line workers.
8. The virus checks our egos dead. It can bring our world to a standstill, no matter how great we think we are or how significant others believe.
9. It brings out our actual colour. We can choose to cooperate, share, give, help, and support each other. Or we can turn to the other side and let the horror crashing down.
10. It reminds us to be patient, not to panic. Pandemics happened in history many times and will pass, albeit with terrible death and sorrow.
11. It reminds us that this can either be an end or a new beginning --- time for reflection, understanding, learning from our mistakes, starting a new cycle!
12. It reminds us life is cyclical, just like a business cycle or an investment cycle.
13. It reminds us of so many blind spots in life that we either do not see or take it for granted.
14. It reminds us that we are humans that make mistakes often. But we know how to learn and recover.
Four free months of term life insurance
From Sept. 1 until Dec. 1, 2020, Canada Life ™ is making a special introductory offer of four free months premium on qualifying, new Canada Life term 20, term 30 and term to age 65 policies. This includes their additional benefits (riders). For a new policy to qualify, the client's application for the policy must be received between Sept. 1 and Dec. 1 inclusive.
The pandemics have influenced many people's financial security perspectives, including using life insurance to protect the family's economic well beings. Let me know if you want to review your life insurance needs.
Final thought
What are the three things that you will do if COVID-19 is declared dead?
But if COVID-19 lingers on for 2020 and 2021, what do you plan to do during this period?
Please send me an email and let me know.
If COVID-19 allows me to travel abroad, I will walk a long distance again! Does 2,000 km sound crazy or ambitious?
If COVID-19 does not let me leave Canada, I will travel across the country!
Let me know if you have any questions. I love to see you online soon. Take care, and stay well.
Kam
Kam Wong, B.Sc.Pharm, MBA, QAFP
Financial Security Advisor of Freedom 55 Financial
Investment Representative of Quadrus Investment Services Ltd.
Ottawa Financial Center
112 Kent Street, Suite 710, Ottawa, Ont., K1P 5P2
Cell: 613-282-8901 Fax: 613-748-8220
Email: [email protected]
Website: Kam-Wong.ca
LinkedIn website: Public Profile ca.linkedin.com/in/kamwong1
"It's not what happens to you; it's what you do about it."
Sources:
Globe and Mail, South China Morning Post, The Financial Post, The Economist, The Financial Times, Wall Street Journal and various Investment house reports such as CI, TD, RBC, Dynamics, BMO, AGF, Franklin, Fidelity, and Mackenzie
