When uncertainty hits society, we can expect stock market volatility. This is absolutely the biggest catalyst for activity and the greatest risk for traditional portfolios. And as we all know, during the past few weeks we have seen incredible uncertainty with fear of the unknown driving many decisions – including investment decisions. While we do not know how long this will last, we have begun to see some dramatic stimulus measures from central banks, aimed at keeping financial markets working.
Last week Bank of Canada dropped its target interest rate again by 0.5% following the U.S. Fed’s earlier drop of 1%. In addition, both countries are beginning to inject liquidity into the fixed income market by buying bonds. In reality, central banks are not really motivated to prevent a recession, but rather to keep a stressed market working properly. This is an important lesson that was learned from the financial crisis in 2008 and should provide investors with some comfort.
Also of positive significance, with respect to all of the Capstone mortgage portfolios, we were pleased that the province of Ontario deemed residential construction to be essential. While we are seeing fewer workers on-site (social distancing), a few weeks or even months of slowdown should not place significant strain on the portfolios. Additionally, many projects’ interest payments are pre-funded for several months (within an interest reserve) which should provide developers with some breathing room. Ideally, this will get us through the peak of this situation. At this point, we have not received any requests for payment relief and are not expecting any in the short to mid-term.
Once we turn the corner on this shock there will likely be some real energy in the real estate sector with all the liquidity, cheap credit, and stimulus being poured into the market. Obviously, unemployment will be relevant, but due to the nature of the shock, the unemployed may find work much more quickly than following historical black swan events.
Good portfolio management principles are important in both good and bad times. Here are a few reminders.
Firstly, stick to the plan. Do not panic but remember your timeline and the reasons why you have accepted the risks of your exposure.
Diversify! Even the people of old knew this was the best way to protect themselves as we see the principle reiterated in Ecclesiastes 11:2, “Give a portion to seven, or even to eight, for you know not what disaster may happen on earth." Often the high cost of not following this investment principle is paid when you can least afford it and when you cannot easily change your approach.
Be diligent. As portfolio managers, we are taking the time to contemplate the situation, collaborate with team members and continuously monitor all our positions.
Lastly, be patient. Uncertainty is challenging at the best of times, but constantly thinking and worrying about it may not be helpful. Use some wisdom as to how frequently you should be reviewing your portfolio positions and the markets, while keeping a long-term perspective whenever possible.
We recognize that everyone’s situation is unique and if you have specific questions or concerns, please contact your Portfolio Manager directly. We will continue to provide regular updates and please feel free to submit questions if you wish them to be answered in this forum.