September 2020 Portfolio Management Team Update

Zaw Tun

September 11, 2020

Market & Economic Environment

It was full steam ahead for the equity markets in August, as investors anticipated a return to global growth, alongside a slowing trajectory of new COVID cases. This enthusiasm combined with favorable central bank policies led U.S. indices to post their best August performance in decades. The Dow Jones Industrial Average and S&P 500 surged 7.6% and 7.0% respectively, their best performance for the month since the mid-1980s, while the tech-heavy Nasdaq climbed 9.6%, its best August showing in two decades. In contrast, the TSX gained only 2.1% over the month, weighed down by the consumer staples, healthcare and utilities sectors.

On the economic front, last week’s GDP report pointed to the steepest quarterly decline in Canada’s economy since 1961, with an 11.5% contraction between the months of April and June, or 39% on an annualized basis. Despite the abysmal backdrop, pent-up demand from Canadian consumers drove June’s retail sales to an unprecedented +23.7% over May’s numbers, led by spending in the auto sector (+53%), furniture (+71%), sporting goods (+65%) and gasoline (+26%).

South of the border, interest rates are expected to remain at their current levels for the foreseeable future, as the U.S. central bank announced its willingness to let inflation run moderately above the long- standing 2% target, in efforts to prioritize maximum employment and price stability.

(Data Source: NBIN Research, FactSet).

Our Strategy

While it seems that the equity markets are confident about the prospects for a V-Shaped recovery, we believe the current environment warrants a healthy degree of caution. The rally as it stands has been led almost entirely by the technology sector (year-to-date +36% for the S&P 500 and +72% for the TSX, based on FactSet data), with an extreme degree of concentration in the major tech firms such as Apple, Amazon, Tesla and Shopify. In fact, Apple’s unprecedented rally gave it a market capitalization of over

$2 trillion by end-August, exceeding that of the entire Russell 2000 Small Cap Index. Therefore, even in the face of such low interest rates, we believe that the deviation between equity prices and their underlying fundamentals continues to widen with each passing day. Given that we are entering the most volatile months of the year, the Portfolio Management Team (PMT) remains vigilant about current market conditions and will seek to tactically lower our equity exposure when opportune.