An Eye on Cyclicals and the Imperfection of Markets
Author: The editor's desk
March 24, 2020
Plummeting stock markets and tumbling oil prices have contributed to one of the most violent bear markets in history, but how much longer will it last? Here’s the latest crisis roundup from members of AGF’s investment team:
Stephen Duench, Vice-President and Portfolio Manager, AGF Investments Inc.
As ugly as it’s been over the past few weeks, we have observed some positive movements within equity markets in recent days, including cyclicals outpacing defensives and netting their best one-day return in a decade this past Thursday. This does not mean markets are ready to reverse course and rally, but it may signal an end to the panic phase of the sell-off on the way to an eventual bottom. This sort of action tends to catch the broader market’s attention, and may entice the sustained buyers to deploy capital quicker. We are continuing to closely monitor the relative performance of the most-punished cyclicals, as well as any rotation away from low-volatility and defensive names.
Tony Genua, Senior Vice-President and Portfolio Manager, AGF Investments Inc.
In this difficult environment, we have seen certain companies outperform, as themes such as e-commerce stocks have been contributors. We also believe that themes such as video streaming, cloud, video conferencing, and online education are trends that were already in place, but could accelerate as people practice social distancing. Other long-term trends have also be unaffected and continue to report strong results. This is true both in the rollout of 5G technology and infrastructure as well as the continued growing importance of ESG to investment decisions.
Dillon Culhane, Equity Analyst, AGF Investments Inc.
Oil prices have fallen by over 60% year to date and prospects of a swift recovery remain low given the ongoing impact of two black swan events: The COVID-19 pandemic and the breakup in early March of the alliance to manage oil supply between Russia and the Organization of the Petroleum Exporting Countries (OPEC). The former has decimated oil demand worldwide due to flight cancellations, travel restrictions, lockdowns, and decreased commuting as people work from home, while the latter event has resulted in Saudi Arabia launching an all-out oil price war with Russia by lowering its official selling prices and planning to ramp up production immediately. Neither side seems interested in negotiating at this point and any supply cut if they did reach a deal would pale in comparison to the ongoing COVID-19 demand shock.
Regina Chi, Vice-President and Portfolio Manager, AGF Investments Inc.
It has taken two months to get China’s economy back on its feet since the Hubei province lockdown to contain the spread of COVID-19 started on January 23. Last week, the country reported zero new domestic infections of the coronavirus for the first time since the outbreak was first reported in late December and there are little signs of a resurgence as people go back to work. The spread of the pandemic continues to be one of the biggest risks facing markets, however, and it may be several months before the number of new cases similarly drops to zero in many other parts of the world where the response to the virus has not been as swift.
Martin Grosskopf, Vice-President and Portfolio Manager, AGF Investments Inc.
Themes that have exposure to essential services have had significant short-term relative outperformance during the market correction. This includes themes such as waste services, water infrastructure, and healthy living. More generally, we believe the current pandemic may accelerate a changing view of capitalism, with more acceptance of government intervention. This could possibly result in recognition that markets are imperfect at directing capital towards the areas of the most social and environmental benefit, and that government action through incentives and regulation are essential.
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