AGF’s CEO and Chief Investment Officer provides his latest perspective on the deepening bear market and what it will take to reach bottom and start the inevitable comeback.
How does the selloff of the past few weeks differ from the financial crisis?
This is the shortest, swiftest, deepest correction we've ever experienced from a market high to where we are today, but it's not your traditional breaking of a bubble or a structural event like in 2008 where the system was over leveraged at all levels—banking, consumer, and corporate—thus creating a systemic issue. This time, it’s really about fear and the demand shock to the economy as a result of the pandemic.
Is there any comparison to other severe downturns?
There is a similarity to the downturn following the 9/11 event. If you remember, air travel shut for a short period of time, but it didn’t take long before people were able to go back to work locally. Now, through social distancing practices, we are forcing ourselves to pull back on economic activity in order to get the public health crisis under control. So, it’s very different than anything we've seen. In many ways, the recession we fear is the solve for the pandemic we face.
What impact do efforts like social distancing have on the economy and the response required to keep it from collapsing?
Normally, stimulus is provided to spur economic growth by making goods and services cheap enough to make people buy them. But in this case, we’re telling people to work from home and not to go out to bars and restaurants, so it a very different situation. People are being told to hibernate in effect, but our financial commitments will continue to pile up. Therefore, the stimulus being announced around the world is more akin to a mountain of cash coming into the system to help keep markets liquid, but also provide temporary relief to people who may struggle otherwise to pay their mortgage and/or everyday bills.
Is a global recession inevitable?
The pullback in demand that we are experiencing will lead to a recession that will be significant. In fact, we’re likely already in one in many parts of the developed world. But if the overall situation is handled properly and the pandemic gets under control, it should be a pretty swift recovery on the other side given the amount of cash now swirling in the system. And remember, the stock markets will start to price in the recovery before it happens. We’re not there yet. We’re still trying to find a bottom and it may take some time, but we’ll get there eventually.
What factors are most important in the bottoming process?
First and foremost, we’re looking at the stimulus packages being announced that in some instances are as much 5% of the country's GDP. Those are big numbers, and to the extent that further stimulus is passed in the U.S. and other countries, that should be a good sign for the market.
"This is the shortest, swiftest, deepest correction we've ever experienced from a market high to where we are today, but it's not your traditional breaking of a bubble or a structural event like in 2008."
So, there’s more stimulus to come?
I think that's a given. If you listen to U.S. Treasury Secretary Steve Mnuchin, he is saying this is still in the second inning. I think you’ll see more efforts to support individuals and small businesses in order to limit the number of bankruptcies that could otherwise happen. Whether that’s interest-free loans, or mortgage holidays, or tax holidays, you’re going to see more aid of this kind in the days ahead. The second piece of stimulus we're seeing is from central banks injecting liquidity into the banking system. Global banks are so much better capitalized than they were during the financial crisis, but they still need liquidity in periods of extreme market stress like today and many of same tools used back in 2008-09 are still available to central banks. That will help in the speed in which these measures can be deployed.
What other factors are crucial to finding a bottom?
The biggest key, of course, is slowing the spread of COVID-19 around the world. I’m not a scientist and don't know the path that this will take, but it seems encouraging that some countries are now dealing with the second derivative of cases, meaning people are still getting sick, but they're getting sick at a slower rate. China reported zero new cases at one point this week and its economy is getting back to work. As a result, Chinese stocks have experienced a pretty good rebound of late.
How well have markets functioned during the past few weeks?
We've seen a relatively normal market reaction with some pretty significant volatility. We’ve talked a lot in the past about our concerns related to market structure and the growing absence of true market makers as passive investing and high frequency trading become more prominent. We’ve been worried that this could lead to even more frenzied selling than would otherwise be the case, but that hasn’t happened yet. Circuit breakers resulting in temporary trading halts have been effective in calming the market in the very short term and recent bans and/or restrictions on short selling in several countries may help on this front going forward as long as these bans are broadly adopted by more countries.
Why is it important to keep markets open?
Closing them would be an extreme move that I don't think would benefit markets. And you're hearing regulators say the same. This is very different than during 9/11 when markets did close. Back then, we needed to physically get traders to locations, but today we can all trade remotely, electronically and most of the desks can work from home. We may see trading sessions shortened, but I don’t believe the markets will shut down completely, nor would it be a good idea.
What opportunities do you see arising from the selloff?
In this vicious bottoming process, you're going to have the ability to buy very good quality companies at prices we have not seen in a long time. We are going to come through this. That’s not an if, but a when and if you are able to stomach the short-term fluctuations that we are bound to experience going forward, now is a good time to high-grade your portfolio with names that you can own for a long time to come.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.