Genus Weekly In Focus – Addressing COVID-19 Concerns

Leslie Cliff: [00:00:00] So welcome to Genus, we have these quarterly videos that we record an e-mail out. But given what’s going on in the markets, Wayne and I thought it would be a good idea to do weekly contact with you, with our clients. So this is a Zoom recording. It’s a Wayne and I are in our home office’s. At the end of the day, it’s 3:30 on Friday, March 20th. And we’re going to do this weekly as we get through this. So please send in your questions, there’ll be in the e-mail. You got this. There’ll be questions@genuscap.com. So I’d love to use some of those next time. But this time we have a lot of my own questions. So we. And I thought we would just start with, is it possible to put what’s going on in the last month or so in some kind of historical perspective?

Wayne Wachell: [00:00:57] You know, it’s it’s it’s a natural, especially a natural disaster, in fact, you know. I guess in terms of looking at events, maybe the Japanese earthquake, about 10 years ago. But this is really big in terms of the impact to the globe. I mean, maybe, The Spanish flu in 1918 would be maybe better. Now, there’s been nothing in modern history I could compare. I could talk more about the market dynamics, but in terms of the debt that’s actually taking place, it’s just, you know, we’ve hit an air pocket in the economy and it’s it’s spurred a financial crisis. And we’re trying to deal with 2008 type crises coupled with a natural disaster.

Leslie Cliff: [00:01:40] Know, maybe I’ll ask you an impossible, all these questions are going to be impossible. But best guess about the economic damage having been done and some comments about the responses from the Fed and the central banks and the money, the fiscal responses of the different governments. Are they doing enough? What do you think of the damage and the programs to try to address the damage?

Wayne Wachell: [00:02:05] Ok. I’ll start with this number, they sort of best guess numbers we’re seeing in terms of forecast. This quarter is going to be probably down the first quarter, not much. Q2 it should be probably down to 4 or 5 percent; And then maybe a flat Q3; and maybe a positive 3 percent year in in Q4. So for all for the overall Euro, probably negative. But that’s sort of the best guess, in terms of we hit an air pocket. It goes through Q2 and sort of flattening out in Q3, and then a rebound as people come back into the market and start consuming things into Q4. Ladder latter part Q3 and Q4.

Wayne Wachell: [00:02:46] In terms of the response so far, all I can say is thank God we lived through 2008. Were the the central banks and the federal governments had to enact amazing things and did. And it was a bit of, a bigger disaster then because, when the banks, every single bank in the world was frozen out completely, European banks right now are in great shape.The American banks are in pretty good shape. The events are good shape.The Japanese are OK. So it was, there was nobody. It’s this. The banking system is better off now than it was back then, so we’ve learned a lot. The Fed has come in, and I think done everything they can do. They still have more to do, but it takes time. This thing is this has happened so fast, they can’t solve the problem in a couple of days. So they’re responding as best they can, and they’re on the case. They’re not going to go away. The job of Central Bank is to stabilize the economy and promote growth and no inflation. (We don’t have a foot inflation This is not a problem here); It’s promoting growth for the business. So the bank is on this and they’re not go away. There are gonna go down buy or moving in the missile mark outlying [inaudible] corporate spreads you’ll be buying things.

Wayne Wachell: [00:03:57] The fiscal responses, we’ve seen the fiscal responses in Canada, for example, spot 3, 3 percent of GDP, the US one expected to be around 4 to 5 percent of GDP, which should mitigate. They’ve got to get this money out there fast and they’re pushing it through the Senate now, it’s about a third of the way through the Senate. In terms of all the different programs they’re just taking piecemeal, approving them and pushing them through, and getting them out there, getting them done. They will get done probably, they’re shooting for a trillion to one point two trillion US from 4 or 5 percent of GDP. I believe it’s going to happen. There, they’re ready, they’re activated. They’re on it. It’s going to happen. So. But there’s so many things that are moving so fast. They have to, it’s a big. it’s a big, big problem, a massive problem, to get all that money out there into. They’re doing all the right things where they can’t push pushing back taxes.

Leslie Cliff: [00:04:46] Getting back to my question Wayne,you think they’re doing all the right things, you think.It’s just it’s time?

Wayne Wachell: [00:04:51] I think they’re doing, they’re doing whatever they can. It just takes time. But, you know, it’s the start of a month ago. Really. It’s been a it’s been a wild. It’s like.

Leslie Cliff: [00:04:59] I want to ask you a question, but I kind of want to answer it before, before you do. Because I think this is really important: when will the volatility and the panic come out of the market? For me personally, I would, the day that the globe has decreasing number of new cases, will be a big day for me. I think that that day, I think is months away, though.

Wayne Wachell: [00:05:25] I think the market’s going to do 40. I think the market is going to look through a lot of pain. I want to be you know, I do want to be a mercenary here, but the market generally looks through a lot of pain. There’ll be still a lot of pain on the street and the market will be looking for through it. It’s like a war. I don’t know when that day is, Leslie. I don’t know. I don’t know when it is. But it’s gonna happen one day. We’re it’s going to say enough. We can see our way through this, even with all the carnage on the streets and we’ll start discounting a recovery. I don’t know when that is, though. And it’s probably get worse before it gets better here, I’d say.

Wayne Wachell: [00:06:00] In terms of, just in terms of what we’re seeing in the market, in terms of this in terms of the market collapse over the over the past month, it’s been it’s been breathtaking. Getting kind of reminds me of 1987 sort of a little slower moving 1987. But many say they’ll happen in two, three days was over and you moved on. Here it’s been this, it’s been a month and whereas in 2008 it was like three months of getting meetings every day. Here it’s happened very quickly and the correlations across the market have been just amazing. The average correlation of stocks across the whole market have been around 90 percent, which means stock picking doesn’t do you any good. Things going down the same speed. Actually, the past couple of days, we’ve sort of seen, we’re getting down to the range that we’re starting to see some value players, bottom feeders come in and start picking away at the market. And today was the first day in actually a month where we saw value stocks start to outperform. They can so beat up, they’re starting to bounce. And so that’s a good sign. We can start getting at least a discussion going on internally in the market, in terms people saw it buying and selling different stocks. That’s a good thing, except, you know, part of every branch of the doors. That’s. I’m looking for a little bit of sunshine here. That’s what I’ve seen. Of course, the past couple of days.

Leslie Cliff: [00:07:17] So some rationality, some analysis coming back into the market.

Wayne Wachell: [00:07:20] Yes.

Leslie Cliff: [00:07:22] So, tell me about corporate bonds and this kind of environment. What happens there?

Wayne Wachell: [00:07:27] Well, corporate bonds right now, they’re going, they’re going no bid basically. People are kind of back in the way. They backed up. Rates are back up. Around…

Leslie Cliff: [00:07:38] Why doesn’t happen? Like, why doesn’t happen?

Wayne Wachell: [00:07:41] It’s, I think it’s a lack of liquidity. There’s no market makers. The market makers are going into their hiding holes, Leslie. They just. And and, it’s not a deep market. The corporate market in Canada is not a deep market. And and the dealers aren’t going to stand behind it. So we have to wait for this problem to the whole thing for the line. It will at some point time. We anticipate this big spreads will go a bit further here. Remember, rates, bond rates,  government bonds when falling. So they’ve been falling fast. And and the corporate bonds haven’t kept pace. That’s helped mitigate some of the losses on the corporate side. We still going to lose more  paid to come here, in terms of in terms of a buy for corporate bonds hasn’t happened yet, but the short end of the corporate bond curve has moved a little further out because there’s been more activity there, which is very unusual. So it tells you that maybe long it’s going to move further out in the coming weeks, I would say.

Leslie Cliff: [00:08:38] So what do you mean it’s gone further out?

Wayne Wachell: [00:08:40] The short term corporate spreads have moved further, the legal authority…

Leslie Cliff: [00:08:44] Sorry, the Spread.

Wayne Wachell: [00:08:45] The long term spreads.

Leslie Cliff: [00:08:47] So that happened in 08 too, just remind our clients with they became enormous spread between governments and corporate says as. Risk was perceived to be really high, and we took advantage of that in January of 09. That’s when we started our corporate bond fund to take advantage of that. And, so we’ll hopefully add to our positions when the spreads get really wide. But that’s days away from now. I would like to just remind people that, nothing to do with the virus, but in January of 2020 we launched a global bond fund, really a US bond fund. Not because of the virus, but because of the Canadian election and the obvious dissatisfaction of the Albertan’s with the rest of Canada. And fear of succession talk, not succession itself. But we want to be at money out of Canada and not into more U.S. stocks. We had our full waiting in US stocks, so we launched a global bond fund in January. It’s only 5 6 percent of people’s portfolio, but it’s been the best performing part of our portfolio. So we’re happy about that. But we tell me more about what changes you’ve done in the portfolio in the last week or so.

Wayne Wachell: [00:10:06] Ok. Well, let me just back up back up here. You know, the when the, when the virus broke out of China, we started raising cash or equity funds. And that primarily, primarily came from the more economic sensitive areas obviously. We started reducing Canada (you’re concerned about oil ,obviously), we took some oil stocks off of, off the shelf. And we also remove some of it for some cyclicals, companies like Tech; reduce some companies, we had a Gibson and Barrett’s in the oil side. And start reducing some of the banking exposure, especially the the insurance companies reduced manual length, for example. It was when we reduced some MetLife as well, because those companies don’t do well when you have interest rates collapsing the way they were. So we reduced financials and energy in Canada, went about 5 percent underweight Canada, at that point in time. And when the market kept going down, we started picking away, we also sold a company out of Europe called Soffron that is involved. That was one of the vendors for Boeing going to be hit, obviously. And as the market came down, we started picking going back in and started picking away at companies that will do well instead of barn. Companies like Telus, Wal-Mart, Target, Horizon. There’s going to be companies that are going to go on to benefit from this move, this social distancing. And they’re all primarily companies that delivered food, infrastructure and technology. We’ve got we’ve been overweight. We’ve also been increasing technology companies. We have exposure to the 70s and we’ve also increased our exposure to Amazon as well. Tyson Foods. And so we’re looking at right now, we’re focusing on companies you’re going to win during this current environment. And one of my takeaways from this current environment is that this is going to change companies and society does business for a long time. I think it’s going to accelerate,  might won’t take away this going to celebrate the move to the digital economy. And what we’re doing here right now. We’re not going to stop doing this, folks. This is just the trend beginning. And so we’re going to focus on those winners is to be more digital digitization and more digital working, remote working. And our teams at Genus started using Slack, and we’re using Zoom using Hang Out and everything’s running just fine. Technology does work well. We’re as productive as we throw it.

Leslie Cliff: [00:12:46] Now, just for our clients to know, we have about 30 people working, Genus, 30 plus. And, we none of us go to work like none of us. And we haven’t had any operational problems. The, the switchboard operator, a receptionist, works from home. So you guys switchboard, you would know that. So, you know, it this would happen five years ago, I don’t think we could have done that. But a few more licenses for different things. But really, it’s been unbelievably seamless. So you see.

Wayne Wachell: [00:13:16] Yeah, that is true. And I’m really hoping that because of that, the impact of technology and Amazon delivering goods and things like this, that we might get a surprise on the upside here in terms of what expectations are crossing fingers.

Leslie Cliff: [00:13:31] We’re not social scientists that we shouldn’t dabble, but it truly is interesting what our lives will look like when we come out of this, because, I mean, really, I don’t want to say dabble in social science, but some is going to change for sure. And I think it’s going to be for the better and better for the environment. I want to keep this a relatively short Wayne, because we’re going to do it every afternoon, every Friday afternoon. And please, my. Please, please call your portfolio manager. Don’t suffer in silence. We’ve been reaching out to a lot of clients, but we may have missed you. You have an individual plan that works with all what’s going on. And we want to remind you of that. So please give your portfolio managers a call if you aren’t feeling comfortable. And we’ll talk to you next week. And please send in your questions. Thank you very much.Thanks Wayne