It has been a crazy month in global equity markets as investors try and figure out just how bad the economic impact of the coronavirus pandemic will be. Two weeks ago, markets dove as they began to price in the worst-case scenarios, but then later last week they posted their best three-day rally since the 1930s after the U.S. passed a US$2-trillion economic stimulus package.
That kind of volatility has become the norm, with stock indices seeing five to 10 per cent daily swings on numerous occasions, breaking all kinds of records. We’ve witnessed panic selling during the big drawdown days and then panic buying as investors worry about missing the recovery.
For those who aren’t following the daily ups and downs in the market and don’t have any risk-management in place, quarter-end statements that are due to arrive over the next few weeks will be a real eye-opener: Despite the recent recovery, global equities still remain 20 to 25 per cent off of their highs.
It’s a double whammy for Canadians as the Western Canadian Select oil price has fallen to as low as US$3.80 a barrel compounding the problem for our economy.
This doesn’t necessarily mean that markets will continue to sell off, as no one, not even the oft-quoted pundits, know how they are going to react. History has shown that bottoms are impossible to predict as most happen for no apparent reason other than the selling simply stops. For example, take a look at the markets during the SARS outbreak, where markets bottomed a good three months before the health situation stabilization.
That unpredictability is why it’s especially important to have a game plan during such times. To help, here are three ways to take advantage of the current environment that don’t involve calling a bottom.
Now is a great time to determine what the ultimate goal of your portfolio is, by asking exactly what you are trying to achieve. For example, if you are someone in retirement looking for tax efficient income to fund your lifestyle, suddenly dividend yields have exploded higher. For example, utilities companies are yielding 5 to 8 per cent and many of the Canadian banks and telecoms are yielding 5 to 6 per cent.
If the drop in your portfolio has impacted your lifestyle, then you have likely overestimated your ability to take on risk and therefore need to have another look at your overall financial plan to determine the ultimate impact.
Reposition and rebalance
This could mean taking advantage of the rallies to reduce those fundamentally weaker positions in your portfolio while using the sell offs to buy positions that you always wanted to own but thought were too expensive.
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If you are fortunate enough to have some surplus cash or an excess position in government bonds then perhaps it’s worth putting some of that money to work into equities or even investment grade corporate bonds especially during those large drawdown days.
For those overweight Canadian equities, surprisingly the Canadian dollar has held up well only losing 7.5 per cent of its value this year compared to oil prices that are off a whopping 65 per cent. This means there could still be some room to convert and diversify into higher-growth markets like the U.S.
Risk and reward
This isn’t the time to be taking excessive risk but rather look at every potential position as to how much risk is associated with the return potential. For example, through the use of options we recently identified a strategy to own the Canadian banks in a much safer way than simply buying them outright with a bit of a buffer should there be further downside.
It is also a good idea before adding a new position into a portfolio to examine cross holding correlations as this will help improve the overall pattern of returns.
Finally, taking a patient approach is recommended, which means not giving into the fear of missing out during those large uptick days as we think there will be plenty of buying opportunities over the next couple of weeks.
Martin Pelletier, CFA, is a Portfolio Manager at Wellington-Altus Private Wealth Counsel Inc. (formerly TriVest Wealth Counsel Ltd.) a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.