Magnitude of recession 'likely to be staggering'

The magnitude of this recession is likely to be staggering but there remains hope the impact on the economy, while severe, will be short-lived.

That’s the view of Kevin McCreadie, chief executive officer and chief investment officer at AGF Management Ltd, who believes that, despite eye-watering growth forecasts, the market can shrug off the effects of the pandemic if it is contained.

However, he casts doubt on whether investors will see a V-shaped recovery, instead expecting more of a U-shaped scenario – or even W-shaped if there is a second wave to the virus. Once there are signs that the economy is truly getting back in line, markets will move with it, he added.

In between, volatility is expected to continue, with sentiment changing on stimulus information of COVID-19 data. McCreadie cautioned investors that this is not about to change.

He said: “It’s no coincidence that the rally of the past few weeks coincided with promising news about the number of new cases, first in China and then in parts of Europe. And over the past few days, the Centers for Disease Control and Prevention said the outbreak has stabilized across the United States and Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases in the U.S., said parts of the country may be ready to ease emergency measures in May.

“That’s all very encouraging and yet investors can’t be complacent. It’s still likely going to be months, not weeks, before economic activity is back to normal and even that is still in doubt if there is a second wave of the disease. Remember, China was reporting zero new domestic cases a couple of weeks ago, but just locked down Harbin for 28 days due to a growing number of imported cases.”

Nevertheless, McCreadie told investors and advisors not to ignore economic data but to be more discerning about it and not get caught up in the headlines. He stressed that this is also true as Canada whirls into earnings season, warning that the big picture might be worse than many of the reports suggest.

“A lot of the numbers that will be reported in the next few weeks won’t reflect the severity of the current situation because the impact of the pandemic only really started to take hold at the end of the first quarter,” he explained.

“With some of the economic data rolling in, it’s less important what just happened and more important what’s in store down the road. Company guidance will be critical because it’s going to give investors an expectation for what to expect over the next few months, including whether companies are going to need to cut their dividends or take some other action to get through this storm.”

With low interest rates also in the mix, this presents another challenge – albeit one that investors should be used to given the rate environment over recent years. McCreadie said opportunities will be in credit markets rather than sovereigns.

He added: “Investment grade corporate bonds and select high-yield credit are starting to look more attractive after selling off earlier in the crisis. This is also true of emerging market debt.

“On the equity side, investors are going to have to pay close attention to dividend payers. A lot of companies are not going to be able to sustain their payouts, but those that will are offering a pretty attractive yield following the selloff. Ultimately, a low-for-longer mantra regarding interest rates is not going away in the near- to medium-term and it will be important that investors consider a range of different yield-bearing securities going forward.”