As earnings season ramps up, broad market consensus is seeking the middle way, suggesting the likelihood of a U-shaped recovery, as opposed to a roaring revamp or a genuine depression.
“I think what the market consensus is expecting is reasonable,” says David Souccar, portfolio manager for international equities at Vontobel Asset Management’s quality growth boutique.
But with a measured base-case scenario, shocks to market expectations about how, and how well, the economy will return to normal could still have a material impact on stocks, he says. Institutional investors are watching with gritted teeth after many saw negative first quarter portfolio returns
following years of steady gains.
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“If the markets start to see that the opening of the economy, if the consumer is hesitating to come back and they start to agree that things could take longer than 2020, I think there could be more downside. If they find the consumer is coming back faster, the economy is opening up faster, and by the fourth quarter of 2020 we could be back to where we were in the fourth quarter of 2019 — there could be upside.”
Sectors are starting to distinguish themselves, notes Souccar, because of how long different businesses will take to bounce back. Consumer discretionaries like fast food restaurants are expected to return to normal fairly quickly, while companies related to travel will have a harder time. “There is a degree of variation. The market expects some companies will come back earlier. If you are more on the defensive area like airlines, it’s going to be later.”
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The crisis highlights the need for a robust scenario analysis process, says Scott Lysakowski, head of Canadian equities and senior portfolio manager at Phillips, Hager & North Investment Management Ltd.
With a fire hose of information coming at investors, the range of potential outcomes for any given investment widens with that confusion and uncertainty, he says. “It’s a bit of a change in mindset, but using the same or a similar investment process: building up scenario analysis, thinking about what scenarios are possible for a business and understanding where a stock could trade in those scenarios and then thinking about the likelihood of those scenarios happening.”
New information means investors may be required to revise their thinking almost daily, as this crisis causes them to consider scenarios they’ve never encountered before. Key to this thought process is in seeking out the factors that the market may not have yet digested, adds Lysakowski. “What scenario is being reflected in the current share price? Is the market missing something? A good outcome? Or is it not contemplating a negative outcome as deeply as it should be?”
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