Good morning,

A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Unfortunately, that is the situation we currently find ourselves in. No one could have predicted that a virus that began in Wuhan, China mere months ago, would have spread across the globe so quickly. There is no doubt that the economic and market impact will be significant.

The difficulty navigating these environments is that no one can predict how long the impact will last. There’s little doubt that the number of cases of COVID-19 will get exponentially higher, and with it, the death toll. The difficulty for investment manager’s is determining if the dramatic crash in the stock market has fully discounted the future economic impact. As of this writing, the main US stock market (S&P 500) is down 26% from its February high, while the Toronto Stock Exchange (TSX) is down close to 30% since its February high. This is the fastest bear market in history.

Our prior quarterly commentaries highlighted the fact that we were in the process of reducing exposure to equities, and replacing it with real assets such as infrastructure, private real estate, agriculture, private debt, etc. The main reason for implementing these changes was our view that longer term, these assets would provide better risk adjusted returns than equities. So far, that assessment has proven to be correct. 

The viral outbreak will lead to a global recession. The only question is: will it be short in nature, or a drawn out affair? Historically, recessions have occurred for several reasons: over-tightening by central banks (raising interest rates), leading to economic growth being chocked off; over-leveraged consumers/businesses ratcheting back their spending, leading to slower economic growth; black-swan events, etc.

Recessions that occur as a result of external shocks tend to be relatively short in nature (one to two quarters). Because COVID-19 fits the description of an external shock, and given the economic backdrop prior to the outbreak was improving, we believe the ensuing recession will be relatively short.

What we do know is the following:

• The global economic environment was improving as we entered 2020, which we believed would progressively get better.
• Global monetary stimulus was very accommodative (low interest rates), helping support global economic growth.
• Following the virus outbreak, the following is occurring, or will occur:
• China has implemented massive fiscal spending (mostly in infrastructure) to the tune of $3 Trillion dollars.
• We believe other Western nations will follow suit (the US has announced they would commit $500Billion).
• Monetary policy is even more stimulative with some central banks slashing interest rates.

If COVID-19 follows the typical life-cycle of other viruses, we should see a ramp-up of new cases outside of China (North America, Europe, etc.), a peak in new cases, and then a gradual decline (similar to what China has experienced). Unfortunately, because of our more open societies, it may take longer to see a peak in cases here in North America and Europe. This is the unanswered question. Regardless, when this does occur, given the unprecedented monetary stimulus, fiscal stimulus and build up in demand, a sharp V-shaped recovery (defined as a brief period of economic decline followed by a strong recovery) in both economic activity and the stock market should occur.

The team at Kinsted continues to closely monitor the situation and work diligently on preserving your investments to the best of our ability. Further information will be forthcoming as events unfold.

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