Activity restart

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 several weeks, we will delve more deeply into each of these themes and discuss their relevance to Canada.

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.

New daily COVID-19 cases, 2020

Source: BlackRock Investment Institute, with data from Refinitiv Datastream, the World Health Organization, and the World Bank, as of 21 July 2020.
Notes: The chart shows the number of new daily coronavirus cases per million members of the population, starting from the day new cases reached 1 per million. The data is smoothed using a 7-day moving average.

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).

Google mobility trends by region, 2020

Source: BlackRock Investment Institute, with data from Google, as of 17 July 2020.
Notes: The chart shows the percentage change in the number of visitors in places categorized as "retail and recreation activity" according to Google Maps. Data is smoothed using a 7-day moving average. Full dataset can be found here:
https://www.qoogle.com/covid19/mobility/.

Canadian employment, 2005-2020

Source: BlackRock Investment Institute, with data from Refinitiv Datastream, Statistics Canada, and the National Bureau of Economic Research, as of June 2020.

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.

Canada and U.S. equity returns, 2020

Source: BlackRock Investment Institute, with data from Refinitiv Datastream, as of 21 July 2020.
Notes: The chart shows the total return of the S&P/TSX Composite Index (TSX) and S&P 500 Index in local currency and Canadian dollars. It is not possible to invest directly in an index. Past performance does not guarantee future returns.