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In our 2020 mid-year outlook report published in late June, we highlighted three themes – activity restart, policy revolution, and real resilience. These themes guide our investment decisions tactically for the balance of this year and strategically over the next several years. Over the next three weeks, we will delve more deeply into each of these themes and discuss their relevance to Canada, beginning with the restart in economic activity.
The number of new daily coronavirus cases in Canada rose more slowly as a share of the population – and peaked at a lower level — than in the U.S., Italy, and Germany. Encouragingly, like most of the developed world outside of the U.S., the number of new cases per million population remains substantially below the peak (see chart below). A phased reopening of the economy is now underway, but the extent of the restart hinges on continued success controlling the coronavirus both within Canada and internationally, as well as the pickup in oil demand.
Gauging the strength of the restart is tricky given the nature of the economic shock. As we’ve long said, we think the current economic situation is more similar to a global natural disaster than a traditional business cycle environment. The unprecedented speed of the shutdown and subsequent reopening renders traditional economic data stale before it arrives, while coincident readings fail to adequately capture the level of activity even if the pace is picking up. That said, retail sales, employment and purchasing manager survey data broadly confirm an upswing in the Canadian economy as the second half begins, with the low point centered in April and May amid the peak of the lockdown.
Canadian consumer mobility is improving in a similar trajectory as most developed countries, although still 10%-20% below February’s pre-Covid levels (see chart below). Consumer and workplace mobility data provide a helpful real-time snapshot of activity, but the relationship with economic data is uneven. We have found that consumer confidence and services activity have picked up more slowly as mobility improved than they fell during the initial lockdowns. This is likely a result of still high job losses and the greater difficulties restoring services activity amid ongoing social distancing measures (see charts below).
Canada’s restart comes with its share of risks, even if the current direction of coronavirus cases is moving in a positive direction. The July Business Outlook Survey from the Bank of Canada shows a strongly negative outlook, and only half of firms expect a full sales recovery over the next year. A slower reopening in the U.S. as cases mount could weigh on Canadian economic activity given that more than a fifth of Canada’s GDP is exported to the U.S. A more tepid rebound in U.S. travel could also hold back the recovery in oil prices. A renewed rise in Canadian cases in colder months can’t be ruled out as more people congregate indoors.
Amid this activity restart, we opted to close our underweights to cyclical assets, such as the value factor and Japanese stocks, as well as our upgrade of Europe to overweight. We have also retained an overweight to corporate credit on the view that spreads reflect a worse default rate than is likely to materialize. Second-quarter earnings results arrive at a fast clip over the next month and will be important for gauging how much of the earnings shortfall is already reflected in prices. Equally important for stocks is the cumulative economic losses from the coronavirus, which will be less for those countries that successfully contain the virus alongside reopening.
Canadian stocks reflect a 6% earnings shortfall in 2021 relative to 2019, according to I/B/E/S estimates, whereas consensus estimates assume S&P 500 earnings will return to 2019 levels in 2021, which we think is somewhat optimistic given the rise in U.S. cases. Canadian equities have performed well versus the U.S. since the March 23 lows (see chart below), especially in Canadian dollar terms, but are lagging since the beginning of the year. We think the improving trend for coronavirus cases in Canada, the steady reopening, the relatively more cautious earnings outlook, and the emerging policy revolution (next week’s topic) augur well for Canadian stocks in the back half of 2020.
Kurt Reiman, Managing Director, is BlackRock’s Chief Investment Strategist for Canada and is a member of the BlackRock Investment Institute (BII). Daniel Donato, Associate, Blackrock Canada, contributed to this article.
Notes and Disclaimer
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
© 2020 BlackRock Asset Management Canada Limited. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used with permission.
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