A Selloff, a Bounce and a Few Quirks Along the Way
Author: Mike Archibald
April 22, 2020
Equity markets that crash always end up rebounding, but certain aspects of the recent selloff and subsequent bounce in Canadian stocks haven’t been true to form, resulting in opportunities for investors as well as risks that could still lie ahead.
This may be especially true when looking at the sector performance of Canada’s key equity benchmark over the past few weeks. After falling close to 40% during the early part of the COVID-19 pandemic, the S&P/TSX Composite Index has climbed as much as 25% since late March with Utilities outperforming all sectors, followed by Real Estate Income Trusts (REITs), Energy and Materials, which have been bolstered by recent strength in gold mining stocks.
No doubt, this has been a huge relief to investors following the carnage that preceded it, but the rally reflects a relatively defensive rebound that runs somewhat counter to how sectors usually rank in performance coming off a market bottom. Historically, it’s been early cyclicals such as financials, consumer discretionary stocks and industrials that have led the way up, with defensive sectors such as utilities the laggards. As such, the rally may not have the same conviction as past turns and with oil prices plummeting again, a retest of the market bottom remains a possibility.
If this quirk in sector performance represents a potential risk, other nuances have been more rewarding. This includes the surprising resilience of technology stocks since the COVID-19 pandemic first took a stranglehold on markets in late February. Many of the names in this sector were either at or near all-time highs and seemingly ripe for a pullback in the event of a major crisis. But owing to their strong balance sheets and ample cashflow, most have held up better than the broad market and may continue to do so because they are less impacted by the economic shutdown than other sectors. In some cases, they may even be benefiting from it.
Of course, that doesn’t mean all quality stocks have gone unscathed during this crisis. One of the other unique aspects of the current environment is the breadth of the volatility across all parts of the market. In March, the CBOE Volatility Index (VIX) reached its highest level since the Great Financial Crisis and the speed and magnitude of price declines in high-quality, franchise Canadian stocks during the selloff were unlike anything experienced in the past decade—if not ever.
In other words, the selloff lived up to the “throwing the baby out with the bath water” idiom, and yet herein lies one of the opportunities facing investors. Even with the recent rally (and/or the prospect that markets retest recent lows) many of the highest-quality names on the TSX remain inexpensive at current levels and represent a good way to high-grade a portfolio regardless of what happens over the next few weeks and months.
Mike Archibald is a Vice President and Portfolio Manager at AGF Investments Inc. He is regular contributor to AGF Perspectives.
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