Second-Wave Headlines Make Investors More Nervous than Consumers

Some people don’t like change, but you need to embrace change if the alternative is disaster.

Elon Musk

Since the middle of June, the world has seen a spike in COVID cases in some cities and U.S. states, which has caused renewed market volatility. We continue to believe we will not experience large national lockdowns again. Most countries have ample healthcare facility to absorb new cases, medical progress continues with better protocols and drugs in treating the illness, and the median age of new cases has progressively declined to younger cohorts. Regions with outbreaks have also taken action with localized closures (bars, restaurants) and even mask mandates. Moreover, consumers in Canada and the U.S. have not shown signs of fear from a second wave and we expect a continued recovery of consumer spending into the summer as income support programs have been extended and workers are called back.

Fear of COVID and Central Bankers Driving Gold to Highest Since 2011

Since the Fed has hit the economy’s speed limit to handle higher interest rates in 2018, gold prices have risen almost 50% (Chart 1). While fear of a second wave is creating massive uncertainty, the biggest tailwind to gold prices is probably central banks that have cut interest rates to zero while their balance sheets are ballooning. Although this aggressive policy mix will support the economic recovery, we think it will be even more supportive for real assets, such as gold and equities, as the path of least resistance for policy makers will be to run the economy hot until unemployment is back near pre-COVID lows.

Chart 1: Gold Prices Rising on Fear and Cheap Money

Chart 1: Gold Prices Rising on Fear and Cheap Money

Source: Bloomberg, BMO GAM (as of June 30, 2020)

Post-COVID Thoughts: Rise of new giants disrupting old established blue chips

Shopify recently became Canada’s most valued public company in a little over 10 years after emerging as a start-up company in Ottawa. COVID has fast-forwarded the world into digitalization. Interestingly, an old industry – the auto market – is also undergoing dramatic changes and earlier in June as Tesla momentarily was the most valuable car company in the world, before giving back the crown to Toyota (Chart 2). The other new kid on the block is Nikola, which has yet to produce a vehicle, is nevertheless valued more than Ford at about $25 billion. Although its possible investors are paying too much for growth and disruption within the car industry, the rapid ascension of new leaders and technologies is undoubtedly accelerating. As much as we expect the economy to normalize over the next couple years, the post-COVID world will probably look different with several firms closing downs while news ones emerge.

Chart 2: Disrupters are shaking old industries too

Chart 2: Disrupters are shaking old industries too

Source: Bloomberg, BMO GAM (as of June 26, 2020)

Portfolio Update: Adding gold to our Retirement Portfolios

With the collapse in yields on government bonds, their attractiveness has diminished for investors that seek yield and portfolio diversification in times of heightened uncertainty. The backdrop remains ideal for gold as Fed Chair Powell has been loud and clear on the future of policy accommodation: “For as Long as Needed”. Because of their more defensive nature, the addition of gold to our family of Retirement Portfolios will help strengthen them in a world of sub-inflation interest rates.

Portfolio Update: Exiting Preferred Shares in Select Portfolios

We exited a small remaining holding of the Preferred Share Fund in the Select Portfolios. The nature of the rate-reset market is not one that is conducive to anchored low interest rates or extreme volatility. We prefer more predictable sources of yield through investment grade and high yield credit, especially with central banks buying corporate bonds.

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