We hope you and your loved ones are healthy.  The arrival of spring and the warm weather certainly brings a renewed energy and hope for the entire population, which is gradually recovering from the consequences of the containment that happened so suddenly in our lives in March.


Stock Markets


Global equity markets have rebounded impressively so far in the second quarter. The rally continues to be fueled by the price/earnings expansion rather than profit growth. The speed and magnitude of the rebound in the American index S&P 500 multiple, just one month into a recession, is unprecedented. The Canadian equities have also been buoyed by global injections of liquidity.


So why are investors so keen to buy equities at such valuations when the unemployment rate is the highest since 1940s and capacity is likely to be permanently destroyed if the economy does not start to reopen? For one thing, government worldwide continue to respond aggressively with unprecedented measures to soften the blow of the economic contraction ordered by the health authorities. In addition, central banks remain as aggressive as ever in expending balance sheets and purchasing a wide variety of assets including corporate bonds.




Thanks to unprecedented fiscal and monetary policy stimulus, the current downturn is unlikely to be as deep as the Great Depression of the early 1930s. But there’s little doubt the 2020 coronavirus shock will have lasting impacts on the world economy. The seize up of global supply chains amid the pandemic will force a rethink among world governments, with industrial policy likely to be tweaked if not completely revamped to encourage reshaping of critical production, including that of health care equipment and pharmaceuticals. That, coupled with pre-existing protectionism, will give wings to the de-globalization movement and hurt emerging markets disproportionately.


Social distancing measures, while necessary to limit the rate of infections and fatalities, will also cap the expected rebound of growth in the second half of 2020 and next year. We expect world real gross domestic product “GDP” to contract 4% this year, but that assumes further downside risks do not materialize. And here we fear second round effects such as tightening financial conditions and cascading corporate defaults, and the possibility of a second wave of infections which could force desperate governments to once again consider growth-busting lockdowns.


All U.S. jobs created since 2011 were wiped out in the blink of an eye in April, courtesy of the coronavirus. Millions of those lost jobs will be recouped later this year as lockdowns are eased and economic growth returns, but the recovery won’t be complete considering the likelihood of permanent capacity destruction.


In light of a longer than expected lockdown, we’ve lowered our forecast for 2020 U.S. GDP growth to -6%. Things could be even worse if states are forced to backtrack on plans to further open up the economy or if mounting stress in financial markets are not quelled.


While Canadian provinces announced plans to reopen the economy, with activity already resuming in some sectors, easing of lockdowns in May is happening at a slower pace than we had expected. That, coupled with the energy sector shock, forces us to downgrade our estimation for second-quarter GDP, and hence for 2020 as a whole ─ our forecast for Canada’s growth this year is now pegged at -7.1%. Considering enhanced uncertainties, particularly with regards to virus evolution and capacity destruction, further downgrades cannot be ruled out.


Our Portfolio Strategy


To start off, we would like to mention that our portfolio management strategy is based on long-term fundamentals and adjusted for today's markets. We develop a personalized long-term strategic plan for our clients that evolves and adapts to changes, and it is the subject of ongoing monitoring on our part.


Through the unpredictable vagaries of the stock markets this year, what have we done in our portfolios?


  • At the beginning of the year, we reduced international equities to add to North American equities.  This decision has paid off since the EAFE International Index ($US) lost 19.4% from January 1st to May 21st, while the Canadian S&P/TSX Index lost 11.4% and the U.S. index fell 8.5% ($US). Note that we have no investment in emerging countries which was a wise decision. These markets have lost close to 19% this year and the outlook is particularly bad for these countries. 


  • We continued our green shift by reducing our allocation in the oil sector and made sectoral changes to better position ourselves in the context of the pandemic that abruptly changed the outlook for several companies and sectors.


  • A rebalancing was made in our portfolios on March 19th, when markets fell sharply from their peaks.  In fact, we bought at the lowest price of the year! The process involved reducing bonds that had risen significantly to add low-priced stocks. Since then, the stock markets have regained strength, making this rebalancing valuable. 


While we recognize the vulnerability of stock markets after their strong gains in recent weeks and the inherent uncertainty of the pandemic outlook, we believe we must take into account the unlimited strategic response of various governments and central banks that are ready to do whatever it takes to limit irreversible damage to the economy.


While we still see volatility in the coming months, we are comfortable with our current asset allocation.  To this day, we still have room to seize opportunities that may arise this year.


The Importance of Taking a Step Back From Current Events


Every prolonged stock market correction or bear market looks different when it occurs, because the causes are never the same, the speed of market reaction varies, and the duration of the payback period is almost impossible to predict. In this regard, the current stock market correction caused by the combined effect of the COVID-19 pandemic and the oil shock is similar. However, the speed and magnitude of the market crash are unprecedented.


Historically, such a market downturn has occurred over a much longer period of time, but the result is the same: an erosion of asset values, increased fear and, above all, a sense of uncertainty about the future. Markets hate uncertainty and react quickly with a "liquidate first and ask questions later" attitude, but they inevitably rebound.

The watchword remains patience as we are faced with an unpredictable situation. We are confident that our portfolios will recover well once this pandemic crisis is a thing of the past.


During this unprecedented period, we appreciate your confidence in the Duval Group and will continue to share our thoughts and perspectives on this evolving situation.


Looking forward to talking to you!


Cathy Duval and Sounda Ladouceur


514 871-3474

Sources :  Monthly Economic Monitor and Monthly Equity Monitor May 2020

Disclaimer: The opinions expressed herein do not necessarily reflect those of National Bank Financial. The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. National Bank Financial is an indirect wholly-owned subsidiary of National Bank of Canada. The National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX). National Bank Financial is a Canadian Investor Protection Fund member (CIPF)