While the coronavirus pandemic is continuing to shape global markets following a tumultuous 2020, institutional investors are looking beyond the crisis, says Rob Almeida, portfolio manager and global investment strategist at MFS Investment Management Canada Ltd.
“It’s no different how we thought about it last year, it’s just that the environment has changed. It’s about sharpening the pencils and really trying to understand the business and how the industry in which you operate has changed. . . . We’re looking past the euphoric sentiment of the pandemic’s end, when everyone’ vaccinated and flush with cash — that’s our focus.”
Last March the mood among investors was anything but euphoric. The World Health Organization declared the coronavirus a global pandemic just over one year ago on March 11, 2020. By the end of March 2020, all Canadian provinces and territories, along with most of the world, had declared some form of a state of emergency and lockdowns.
At the onset of this once-in-a-century public-health crisis stock markets were, like the rest of society, rattled. In the lead-up to and the immediate aftermath of a global pandemic being declared, the value of Canadian firms trading on the Toronto Stock Exchange fell sharply in February and March 2020. The S&P/TSX Composite index dropped by 37 percent between February 19 and March 23, 2020 — the date the index hit its lowest point during the coronavirus crisis, according to the Bank of Canada. But, the TSX and other stock markets have since mostly recovered, with the Bank of Canada noting in an October 2020 article: “Surprisingly, global stock markets, including the TSX, have recovered most of their losses. By the end of August 2020, the TSX index showed a decline of around less than 10 percent since February.”
Amid this uncertainty, investors have looked to the past for lessons this time around. Almeida says while investors are weathering the pandemic similar to past catastrophic global events such as the 2008/09 financial crisis, the last 12 months have resulted in an acceleration of existing trends including e-commerce, the cloud, digital streaming and remote working. In addition, Almeida says the pandemic has also provided investors with greater insight into how companies treat their employees during a crisis, a consideration among the many investors who are increasingly focused on environmental, social and governance factors.
While the TSX in Canada and the Nasdaq composite and S&P 500 in the U.S. all hit record highs this February, there was deep economic damage wrought by the pandemic. According to the International Monetary Fund, the global economy contracted by 4.4 per cent in 2020, the worst decline since the Great Depression.
An although the pandemic created approximately US$20 trillion in new debt worldwide, Almeida says it’s a sign of better days to come for the economy. “Debt is a pull forward of future capacity. Corporate balance sheets were highly indebted before the pandemic and the central banks’ response was to unfreeze credit markets and create liquidity to give companies the chance to replace income that’s been lost or destroyed with income via debt creation. All of that has helped paper over what would have been enormous profit and capital losses.”
And while markets have performed better than expected with growth in 2021 estimated to reach as high as six or seven per cent, Almeida says the decade ahead will look a lot different from the last 10 years. “Some of the returns have been pulled forward and a lot of the optimism has already been priced into stocks, but debt is a stock. That has to get paid back and there’s a lot of things that should weigh on operating margins, as costs come back online such as labour. These things aren’t for free so if real returns are going to be lower, then alpha, or a company with a material real return on capital, should be worth more.
“In hindsight, what the market knew was that we’d get 90 per cent-efficacious vaccines in record-breaking time as well as [economic] stimulus. . . . I don’t disagree with the directional magnitude [of projected 2021 growth] and at the end of the day, you’re investing in a project and investors consider whether that company generates value for shareholders and stakeholders. That’s never unchanging — that’s all that matters.”
This is the third part of a series of articles running this month that’s diving deep into how the benefits, pensions and institutional investment industries have changed in the year since a global pandemic was declared.
Read the first story in the series here: One year later: How the pandemic sped up the shift to virtual mental-health care
Read the second story here: One year later: Why employers should create ‘water-cooler’ moments for employees amid the pandemic
Read the fourth story here: One year later: The AIMCo, Caisse and OPTrust on lessons learned during the pandemic