Covid-19, low oil prices pose challenges for Albertans looking to invest

By Derek Clouthier | October 20, 2020 | Last updated on October 20, 2020
4 min read
Edmonton downtown, James Macdonald Bridge and the Saskatchewan River at night
© mirco1 / 123RF Stock Photo

Daily life for many Canadians has been turned upside down by the Covid-19 pandemic, and no one is immune to the financial turmoil the virus has left in its wake.

This is particularly evident for those living in Alberta, where the coronavirus has teamed up with increasingly unstable oil and gas prices to disrupt what was once a booming economy.

Since 2015, when crude prices first plunged, Albertans have been eagerly awaiting the return of good times — but markets have refused to co-operate.

Couple that with the March lockdowns, and Albertans face challenges most others in Canada have neither experienced nor understand.

“Being in Alberta, low oil prices are a big concern,” said Walter Flores, portfolio manager and director of wealth management with The Flores Advisory Group in Calgary. “Not only that a great number of professionals worked in the sector, but also the sector impacts a lot of other businesses indirectly.”

Flores said businesses in the service industry, including restaurants, entertainment, business venues — and even personal services such as dry cleaning and hair salons — have been hit hard by low oil prices, as well as Covid-19 restrictions.

He believes government attitudes toward the energy sector have only compounded the issue.

“The slowdown started in 2015 and we have not yet seen a meaningful bounce-back,” he said. “The unfriendly stance of governments and policy[-makers] has made the lower demand for fuel a bigger problem in Alberta.”

Alberta is no stranger to volatile oil prices, but Flores said this most recent downturn is different due to the lack of federal government support.

David Fraser, an investment counsellor with Mawer Investment Management in Calgary, said his clients face several hurdles, such as job losses, lower incomes, closures or lower revenues for small businesses, and defaults on mortgages and rentals.

“Everyone in Alberta and the country is being stretched in that regard, and depending on what business you’re in, sometimes you’re more isolated than others,” he said.

Fraser said his clients are confused by the K-shaped recovery.

“The markets have really been gangbusters depending on where you’re looking,” said Fraser, “so we’re getting the question, ‘Why is there a de-coupling between the real economy, which is struggling, and the financial markets, which have bounced back quite quickly from the March lows?’”

In response, Fraser highlights two main reasons: historically low interest rates and massive stimulus spending by governments, including by those of Canada and the U.S.

“The fiscal side of things has really increased spending and reduced taxes,” said Fraser. “And depending on which governments you’re looking at, some have implemented [stimulus] more than others. That’s really what’s helped fuel markets.”

Echoing Flores, Fraser said that though Covid-19 has an immediate impact on businesses — like restaurants that were forced to shut down — the impact on financial markets is more long-term.

“We’re worried about cash flows over a far longer period,” he said. “Maybe 30, 40 or 50 years. We want to hold a good company indefinitely. If there is a dip in revenues, that’s only a couple of years over potentially a 50-year time horizon, so markets aren’t going to be that concerned over a short-term dip in revenues.”

Flores said clients should understand where the next risk event will come from in the financial markets, suggesting that both equities (particularly information technology firms) and fixed income are overvalued.

He is also wary about inflation risk as countries around the world spend heavily to shore up their economies.

While clients can’t control what governments and markets do, they can manage their own risks. Fraser said it’s important for clients to have an emergency source of funds in a short-term, low-risk savings account.

“A lot of people in Alberta working in the oil and gas industry have been laid off or are likely to be laid off as things drag on,” he said. “The general rule of thumb is three to six months of expenses in that stockpile.”

Fraser would also advise clients to reassess their asset mix to reflect any changes in their financial situation. Clients who have lost their jobs or been forced to sell assets to cover their costs may want to de-risk their portfolios.

Finally, it’s important people look at their investments in the same way as the markets — over the long term.

“Anything under two years, you probably want to keep on the sidelines,” Fraser said. “I’m sure there’s more volatility on the horizon in the short term, but as we look out further ahead — like five years from now — I’m more confident that it will return to some normalcy. Ten years out I’m even more confident that that period of time will be more normal.”

Derek Clouthier