CCFA Virtual Investment Seminar, May 7th, 2020
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Overview
On May 7th, CCFA Investment Forum held the first online investment seminar which discussed the current economic environment under the pandemic. This panel discussion was hosted by Yicent Chen, Vice President in BMO Capital Markets, and moderated by Michael Lu, Business Development Manager in RBC Global Asset Management.
Abstract
COVID-19 spread with unprecedented speed around the world, wreaking havoc on global financial markets. In this unprecedented time, we are honored to have Professor Luis Seco, Director of the Mathematical Finance Program in University of Toronto, CEO of the GGSJ Centre of Digital Management and Technology Innovation, and President of Sigma Analysis & Management, and Steven Wang, Investment Counsellor in Manulife Private Wealth to share their insights on the current economic environment. Note that the views and opinions expressed in the session are those of the speakers and do not represent official policies or positions of their associated corporations.
The coordinated global actions were reminiscent of the sweeping steps taken just over a decade ago to fight a meltdown of the global financial system, but this time the target is very different – a fast-spreading health crisis that is forcing shut-downs of entire societies, all the while with no certain end in sight.
In this unprecedented time, CCFA is pleased to invite you to participate in an online panel discussion with two accomplished and dexterous professionals on the current economic environment. We will leave time at the end for your questions.
Speakers
Steven Wang, Investment Counsellor, Manulife Private Wealth
Steven is an Investment Counsellor with Manulife Private Wealth. He has over 16 years of experience in the Canadian financial services industry, managing investments on behalf of institutional investors and high-net-worth families. He understands affluent families’ priorities and recommends appropriate solutions accordingly.
Professor Luis Seco, CEO, Centre of Digital Management and Technology Innovation
Director, MMF, University of Toronto.
President & CEO, Sigma Analysis & Management Ltd.
Director, RiskLab Toronto
Director, Fields CQAM
Michael Lu, Business Development Manager, RBC Global Asset Management
Panel Discussions
Current State
1. Is the recent market recovery overly optimistic?
Steven:
● Yes and No. The short recovery last week was driven by the medical research progress. However, the research can be divided into two levels – testing and drug development.
● On one hand, the public is more confident that the COVID-19 test is becoming more reliable and we have better chance to eliminate the virus;
● On the other hand, the actual recovery depends on the successful development of the vaccine for the virus which may take a long time.
Luis:
● Yes and no. The disruption in the supply chain has been massive and I don’t think the market is pricing that.
● However, I would like to focus on the negative side of things, the fiat currency now is worth little.
● For instance, instead of apple stock and the US dollar, people now prefer to hand sanitizer and toilet paper before all hard currencies. The rally occurs as investors don’t value currencies.
2. Many developed nations like Japan and Sweden are now under a negative interest regime. What does it mean to have negative interest rates and how does that affect these economies?
Luis:
● In a certain sense, there will be a redefinition of money and most asset classes.
● The concept of negative interest rate makes it hard to price an asset.
● A lot of mathematical models will be broken because they are built on linear assumptions which are now broken.
Steven:
● Negative interest rate regime would be bad for savers, for example the retired people.
● From the experience of Japan, it's not going to be beneficial for growth. And once you get into the trap, it will be hard to get out of it.
● I would recommend whoever interested in this topic search for “Oaktree Investment Memo” by Mr. Marks.
3. What is a “typical day” for you during the current quarantine period?
Steven:
● Mostly the same, a little bit different. I used to always conduct meetings with different mutual fund managers. Now all meetings are all conducted on Zoom or Teams. I also read a lot about the company and news and practice golf in my garden.
Luis:
● My operation is global, so I start my day with my European partners, then I move to North America and then Australia until midnight.
4. Do you think the pick-up from the eventual opening of the economy justify the current benefit deficit? How effective have the global central bank responses been so far?
Steven:
● I think the benefit deficit filled the gap from the missing productions and services.
● A lot of people are still working actively behind the scene, adding value to the economy. For example, utility, hydro, nature gas, telecom, transportation, trucking, etc.
● The government stimulus program is trying to save the small size businesses from bankruptcy and to save more people from unemployment. This is necessary.
Luis:
● I agree. It's true that a sector of the economy is slowed down, but another sector will be more productive. I think it's just a massive rotation that is happening right now and new things will be created.
5. Exxon Mobil revealed a quarterly loss of $610M last Friday, partly driven by a $2.9 billion write-down from a collapse in oil prices. Would oil prices ever recover? What’s your short-term and long-term view on the energy space?
Steven:
● I think the oil price in the near term (3-6 months) will recover. The oil producers earned money from the future and physical market, depending on their hedge ratio.
● Energy sector is capital intensive, hard to differentiate products without controlling the price, and could be easily impacted by geopolitical events.
● However, crude oil is crucial as fossil fuels and input materials. The world maintains its demand for this energy, and I don’t see any renewable energy could replace it.
Luis:
● The current level of oil price can be very temporary, as a lot of countries are still very power hungry.
● Some interesting rotation we can see from the energy space is that we can see the consumption of energy is moving away from developed to developing countries.
● Another interesting question would be the currency to value energy. Now the oil is priced by USD, but in the future, we are not sure about that.
Future Outlook
1. The Fed restarted QE because of COVID-19 and the stimulus program, what is your view for the equity market in the next 10 years? Another 10 years of bull market?
Steven:
● I believe the equity market would rally after the pandemic and it could possibly break the previous high in mid-February.
● The capital market is driven by capital inflows and outflows. Printing money could easily pump up the prices for equity and other real assets and move up the market.
● It's a similar scenario like 2019, but it is hard to say if this game can be played continuously.
Luis:
● In a macro view I also agree. For example, people used to think Toronto real estate market is a bubble, but we will probably see that bubble grow even further.
● However, we used to have a bull market without differentiation, but now differentiation begins to matter.
2. What’s the chance that the financial market will reach a level lower than what we experienced in mid-March? Any potential catalysts?
Luis:
● There is lack of information and misinformation in the market and the volatility has become even higher.
● I think the fear will come back and we might see lower lows.
Steven:
● It may or may not. The market might pull back, but not necessarily break the previous low. When everyone thinks that will happen, it may not happen.
● The short sellers have recorded a big loss recently and it might take them some time to recover, unless some catastrophic events happen again, for example a regional war.
● As a long-term investor, it is not relevant. We should never try to pick and forecast the bottom of the market.
● We should look at the intrinsic value and look beyond the horizon of pandemic.
3. Do you expect hyperinflation in the next 10 years, given that almost all the central banks around the worlds are pumping money into the economy?
Steven:
● Inflation will be felt in different areas in different magnitudes. But I didn’t see hyperinflation down the road like the extreme case in Germany and Zimbabwe.
● In the past 10 years, printing money has not necessarily caused high levels of inflation in their location country depending on where that money eventually flows in.
● This will also depend on how different countries define their inflation basket.
● Trump has mentioned bringing back the supply chain from China, which could possibly bring up the production cost and the level of inflation.
Luis:
● I think what we have right now is deflation, on a very short-term basis.
● We have a lot of money being printed, that means we would expect inflation. On the other hand, we have very big unemployment, which could cause deflation. Which one is going to win? My view is that we are not going to see inflation for the while
● There is a lot of money internationally in pension assets, which are looking for yield. It's going to be very difficult for them to find yield.
4. In terms of asset allocations, which asset class or sectors will outperform in the next 6 to 12 months?
Luis:
● We are going to see some new sectors coming out of this, a blend of technology and healthcare. I am not talking about biotech, it’s something completely different.
Steven:
● Hard to say, it really depends on the progress of human fight against the pandemic and the development of geopolitical drama.
● Normally, sectors being hit the most in the recession will recover faster and will incur higher return.
● In my perspective, the industrial sector has destructed during the pandemic, it will probably recover faster post pandemic. And maybe the banking sector, if the central bank flipped back the interest rate afterwards.
● Also, the technology sector might outperform due to the higher demand as companies striving to be more digital.
5. What is the general advice you have for our audience who are looking for investing right now?
Luis:
● I think what is going to be predominant in the future is differentiation.
Steven:
● Do not borrow money to invest in this kind of market, except that you are buying positive cash-flow rental properties.
● Investment Horizon should be the first thing you look at.
● Think about your skill sets before you invest. Only invest in something you are good at, otherwise buy ETFs. Most people don’t have the expertise to invest in individual stock.
● Think about how much money you are talking about, whether its registered account or general non-registered account?
● Think about what else you have as the rest of your portfolio? Do you have other passive rental income? What's your T4 income? What's your tax bracket?
● You can also delegate to investment professionals.
Q&A
1. As more and more AirBnB condos come to the long-term rental market, will it still be worth it to buy investment condos? Over the next 6 months, do you see significant rent reductions?
Luis:
● Depending on the city. I am very bullish on Toronto’s market as we will be an innovation hub going forward and people have to come to this city every year.
● But be careful with the AirBnB perspective. The tourist sector has been the hardest hit during the pandemic. It’s still unclear how AirBnB will come out of this.
Steven:
● The Toronto market is still good, but It really depends on the areas, condo vs. detached, buyers, and renters.
● There might be some behavior change in the future. For example, if “working from home” persists, companies might start to shrink their rental area in the downtown area and people wouldn't need to live close to the office. They might want to move out of the high-rise condos and to a detached house.
2. What are some sectors or industries that have been permanently damaged by this recession, and business models changed and will most likely not come back?
Luis:
● I think they will all come back, but we are going to see differentiations.
Steven:
● One thing I can think of, the booking/traveling agency that operates physically in the office. I don’t know how long it will take for people to build up the courage to take cruise again. And nowadays people can plan trips online by themselves.
● Some old business models might be disrupted due to this pandemic and some new business models might evolve into a mainstream or major practice, for example digitalization.
