Multi-Asset

Bracing for bad earnings, not necessarily bad news

The earnings season kicked off last week and we are unsurprisingly seeing many firms facing steep contraction in revenues and earnings because of COVID.
July 2020

Your success in investing will depend in part on your character and guts and in part on your ability to realize, at the height of ebullience and the depth of despair alike, that this too, shall pass.

Jack Bogle

The earnings season kicked off last week and we are unsurprisingly seeing many firms facing steep contraction in revenues and earnings because of COVID. But investors probably won’t be intimidated unless we get negative surprises for the mega tech kings which have been driving the equity performance post-COVID.

Across regions, analyst estimates saw the steepest downgrades in Canada and (Europe, Australasia, and the Far East (EAFE), whereas U.S. and Emerging Markets (EM) equities have held up relatively better (Chart 1). This relative dynamic of earnings estimates has evolved along the lines of our relative positive positioning favouring U.S. and EM while underweighting Canada and EAFE on expectations of greater economic and earnings damages from COVID. We expect this trend to continue over the remainder of the year as the economic normalization proves uneven across regions where the U.S. tech leadership continues.

Chart 1: Forward Earnings Estimates have Stabilized After a Steep Fall

Chart 1: Forward Earnings Estimates have Stabilized After a Steep Fall

Source: Bloomberg, BMO GAM (as of July 15, 2020)

How Far can the Stock vs Bond Dichotomy Go?

While stock prices have recovered much earlier than the economy, interest rates on U.S. Treasury yields have remained well anchored. With many investors that remain unconvinced of the sustainability of the ongoing market rally, coupled with central bank buying, demand for safe haven government bonds has been strong. The divergence between stock prices and Treasury yields has been persistent since April (Chart 2) and could continue until investors have greater conviction that the degree of long-lasting economic damages is minimal. Until we are on an obvious path to getting the unemployment rate to below 6-7% in the U.S. and Canada, we think central bankers will be keen to signal the status quo on interest rate outlook. This means policy rates could remain on the floor until at least 2022.

Chart 2: Fed Anchoring Long-Term Yields and Letting Stocks Take Off

Chart 2: Fed Anchoring Long-Term Yields and Letting Stocks Take Off

Source: Blomberg, BMO GAM (as of July 15, 2020)

Governor Macklem Shapes Policy Outlook on First Policy Decision

Last week we also saw Governor Macklem deliver his first monetary policy decision and he took the opportunity to change the Bank’s policy communication by giving investors a clear guidance about future interest rates and policy outlook: “If we have to do more, we’ll do more”. The BoC’s policy stance, coupled with our expectations that Canada will be slower than expected to recover from COVID and the oil-price shock, leaves us sticking to overweighting interest rate duration (Chart 3).

Chart 3: Canadian 30-yr Interest Rates Decoupling from U.S. 30-yr Treasuries

Chart 3: Canadian 30-yr Interest Rates Decoupling from U.S. 30-yr Treasuries

Source: Bloomberg, BMO GAM (as of July 15, 2020)

Portfolio Update: Summer calm after the spring storm

After navigating a tumultuous few months navigating the COVID storm and steering our portfolios to cautiously benefit from the long road to economic normalization, we did not implement any changes during the past couple weeks as economic data and markets are largely evolving as we expected.

Disclosures

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms. 

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