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Amber Sinha, senior portfolio manager, global equities at CIBC Asset Management.
The current crisis is one that has come really quick. So I think that’s one thing unique about it, even compared to 2008-2009. The speed of the draw down in the market is one that no one was really prepared for. So I think that makes it fairly unique. If you want to be a glass-half-full type of person, you could read that as a quick fall could lead to a quick rebound as well. But again, the speed at which we’ve seen decline is definitely unprecedented. What’s also different this time around is, I mean in 2008/09 we had a crisis that was led by the financial services sector. That is not the case right now. Up until two months back, financials were in good shape as a generic statement. This time around, the crisis has been more, if you were to identify sectors, it would be more pronounced around the travel, transportation and leisure sectors as the world has kind of gone down the lockdown mode and self distancing.
So as a result, everything that has to go with people congregating, social activities, travel, that’s the areas of the market that we see the most stress in. The other thing is, you know what’s different from 08/09 is that the interest rates are already fairly low. So, what this means is that while the last time around governments and central banks throughout the world had a lot of fire power in terms of being able to use interest rates. This time they have to be, they have to resort to other measures. And we’ve already seen a lot of stimulus being talked about and a lot of asset purchases being done by central banks. But, interest rates being reduced, that’s not going to help us as much this time around as it did the last.
And what’s similar I think is, you know, debt is always a problem that quickly goes from bad to worse in a crisis. Last time around, in 08/09 it was debt in the financial service sector, debt on consumer balance sheets. Whereas this time around, we’ve seen a healthier financial system, healthier consumer balance sheet, but there is a lot of debt on the government balance sheets and corporate balance sheets. So I think that’s the area where we got to be a little bit more careful because that is debt in the system and that is something that really puts pressure on the system in a crisis. So, areas of the market that have seen stresses, if they do have debt at the same time, I think it’s just a situation that’s not very good. So this time around, again instead of the financial services, instead of consumer balance sheet, the real debt is with the government balance sheets and corporate balance sheets.
It’s fairly early in the crisis to kind of be looking for silver linings. But that being said, you know, there are a few. Once we go through the first part of the crisis, the first declines, then we get to a stage where we experience some forced selling in the market. So whether it’s portfolios or companies that have to make margin calls or have to sell stocks that they couldn’t otherwise sell but they have to sell for other reasons, you know, maintaining liquidity, maintaining cash. I think that is a state of the market where you actually see high quality stocks get sold as much as the market, sometimes even more. That I think is a silver lining that we’re seeing right now. Where we see good, high quality stocks actually going down a lot. In the bull market you really have high quality stocks and we’ve seen that in the last 10 years.
High quality stocks have done well. In the recent declines we’ve gone through a phase where high quality stocks did okay, but now we are seeing high quality stocks sell down as well. So I think this gives us a unique opportunity to actually back up the truck. You know, do our work and then be able to buy good quality stocks at attractive valuations. If I wanted to identify a sector, I would say aerospace is one that has seen a lot of stress. Now, aerospace is a fairly longterm, long tail cycle where decisions to buy aircraft are not taken based on, you know, what’s happening this month or this quarter. These are very long cycles. But if you look at the big aerospace companies today, they have seen massive declines because they are associated with the travel and leisure and transportation sectors. So I think those are some unique situations where the stocks have gone down more than they should.
And for the patient longterm investors, I think, you know, aerospace would be a good place to look at. Social distancing has led to pressure on a lot of stocks, you know, whether it’s restaurants or food service or facilities maintenance. You know, think of people who maintain our offices, you know, the cleaning, et cetera. Those stocks have come under a lot of pressure because essentially the economy is in a lockdown in large parts of the world. Again, if we assume that, you know, we do go back to our offices in a few months, then I think a lot of stock that has seen pressure for that reason, will eventually come back in a good place.