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Colum McKinley, managing director and global equity chief investment officer, CIBC Asset Management.
There’s a number of trends that we are seeing as a result of the global pandemic. The first is, interestingly, we’re hearing from companies, as we meet with business leaders, that they’re telling us many of the cost savings that they have had to enact as a result of the pandemic — many of those cost savings will be more permanent in nature. Not all of them, but a high proportion.
And this is very similar to what we saw during the global financial crisis. Companies had to react very quickly to a changing environment. They cut costs to maintain their profitability or to sustain profitability levels. And, post the global financial crisis, we entered a period where net margins and return on equities for businesses rose quite meaningfully and went to record levels. And so, what we’re hearing from businesses today echo that trend, where companies are cutting costs and they’re seeing some of those costs look to be more permanent in nature. And so, that will mean we’ll have coming out of the crisis — when we think about three to five years from now — an environment where companies will be generating substantially more cash flow than we had originally anticipated.
The second trend is we’re seeing an acceleration of secular themes. Themes that were in place prior to the global pandemic crisis — some of them are being forced to happen faster. I think one example of that is the decline in bricks-and-mortar retail. That was happening prior to the global pandemic, we were shifting more and more of our consumption onto online purchasing and spending less time going to physical stores. And, obviously, the pandemic has, in the near term, the majority of those stores are closed so we have shifted to, ‘What can we buy online?’ We’re going to open stores and we’re going to find a balance between how much we want to do online versus how much we want to do in a bricks-and-mortar store.
But that’s an example where it’s likely that we’re going to leapfrog and pull forward that secular trend, and we’ll do less in bricks-and-mortars, which will lead to some uncertainty and challenges for retailers. It’ll also ripple through to some of the owners of retail malls or retail, physical stores, and affect those businesses as well. So it’s a secular trend that is changing quite quickly.
The third trend is our daily lives are going to change. The pandemic has forced the majority of us to work from home and we’re hearing many, many businesses tell us that, when we go back to normal, many of their employees will continue to work from home. This has implications in a broad-reaching number of areas. It affects how we commute, transit ridership, or driving and commute times. It affects the amount of office space that a business needs in a downtown core. It affects the technology that we need to have available and access to at home; not only the telecom providers, but the software and technology that we have so that we can have the connectivity level to work effectively at home.
We’re very early in this trend, but we’re hearing from businesses that [the] Covid[-19] pandemic has forced them to run an experiment and that experiment is what would it look like if the vast majority of your employees didn’t come to a regular office on a day to day basis? Most companies are saying that, to their surprise, it is working much more effectively than they had anticipated. And so we’re going to see that change and become part of a more normal work stream and so that will have implications on different stocks in the Canadian marketplace.
The recovery that we’re going to see is uncertain. We are navigating a recovery from a situation that the world has never seen before, that we basically hit the pause button on the global economy. And so, we have no historical precedent on what comes next.
I think that’s one thing that investors need to keep in their mind. As we move through the recovery, and we’re seeing governments and companies now thinking about phased opening, we’re going to have periods of time of two steps forward, one step back from time to time. How the economy restarts will have an effect on the market. Since the bottom in the market, we’ve seen stocks move higher in anticipation of a recovery, starting to reflect the willingness of investors to look through earnings in 2020. Because we’re going to continue to have an environment where economic data and corporate results will remain quite low, and we’re starting to look to data points that suggest that the recovery, and the path to recovery, is unfolding at a reasonable timeframe. It will not be a quick fix; this is not something that will be contained within a quarter. This is something that is going to expand throughout 2020. But we expect that within 2021, we will be thinking about looking at businesses with earnings power and cash flow more representative of the potential of the underlying business — a true earnings power of those companies.
I think the biggest risk that we should be conscious of as investors throughout 2020, […] as we go back to work and back to a more normalized environment, is the risk that as we open up the economy, we see, unfortunately, a potential rise in the number of cases, and I think this is a risk that the market is aware of. Again, since this is an uncharted path for us, we’re simply watching and waiting for the data.
- CIBC Monthly Income Fund