The “golden era” of globalization is behind us. A drive towards de-globalization, that began for many nations following the Global Financial Crisis, has intensified as the current pandemic has exposed some of the vulnerabilities from global supply chains. The risk is that the current recession becomes a global depression. Depressions entail a prolonged period of weak economic growth, widespread excess capacity, deflationary pressure, and a wave of bankruptcies. Accompanying this is a hiring cycle that is incapable of reducing the unemployment rate in the absence of demand. Central banks have removed price discovery, the ability to appropriately price risk in fixed income markets by bailing out managers of risk. In July, we maintained our current Recession outlook and continue to monitor developments regarding future large public deficits, debts, government intervention and regulation, reduced globalization and more localized supply chains, an end to just-in-time inventories, and greater taxation.

Fiscal packages have been implemented around the world to support companies and individuals during the lockdown periods. The scale of this fiscal effort is resulting in soaring budget deficits that are not about traditional shovels in the ground and the future multiplier effects on the economy. Rather, they are a transfer from future taxpayers to today’s household and business. The impact is a higher corporate cost structure per unit of output leading to lower margins and higher prices. There are concerns about possible inflationary consequences and disruptions to global supply chains compounding supply-demand imbalances.

China’s 10% quarterly contraction in Q1 was reversed in Q2, but the weakness in the rest of the world and continuing problems with full reopening would slow GDP in Q3.1 The ECB has recently increased the firepower of the Pandemic Emergency Purchase Program to €1,350 billion and extended the program’s horizon.2 The U.K. faces additional uncertainty related to the year-end Brexit transition deadline which could add another unwelcome shock.

The U.S. has long prided itself as the wealthiest, strongest, and most scientifically advanced nation in the world, and the it entered the COVID crisis in solid shape. In June, it led the world in both confirmed virus cases and related deaths, creating a different geopolitical backdrop. Fiscal and monetary policy responses intended to help households and businesses are set to expire, adding increased uncertainty around the recovery. In Canada, the recently extended government support package has lessened the shock to household incomes and laid the foundations for recovery. Business investment has been challenged due to the structural weakening of the Canadian energy patch and depressed oil prices.

U.S. equities staged a recovery in Q2 following Q1’s decline. The S&P 500 gained 20.5% while the S&P MidCap 400 gained 24.1% and S&P SmallCap 600 gained 21.9%. For June, the same indices returned 2.0%, 1.3% and 3.7%, respectively. U.S. fixed income performance was broadly positive. Canadian equities recovered strongly with the S&P/TSX Composite up 17.0% in Q2 and 2.5% in June. The S&P Europe 350 added 3.4% in June and 12.9% for the quarter, while it remains down 12.4% YTD. The S&P United Kingdom continued to lag broader European benchmarks, gaining 8.2% in Q2. U.K. stocks have disappointed for the year ending June, down 17.6%. Asian equities recovered strongly in Q2, with the S&P China 500 up 15.4% and the S&P Hong Kong BMI up 10.6%.

In July, we maintained the asset allocation that was established in June for all models. We continue to be positioned in shorter duration fixed income. We expect interest rates to remain low or negative across the globe and as a result, we continue to have exposure to gold which is a store of value in this environment and a preferred asset for central banks for the foreseeable future. Equity exposure to large cap across all models reflects our view that shifting business models during this pandemic have had a negative impact on bottom lines but that select businesses are benefiting from the shift. We are continuing to monitor the recovery in Europe following the Eurozone’s agreement on a stimulus package. Within FX, we are monitoring the US dollar, which tends to perform inversely with global growth. Independent shocks to risk including politics and the outcome of the U.S. election in November could affect dollar performance over the back half of 2020.

The scale of the economic damage caused by the pandemic led to an extended period of weak economic growth, excess capacity, deflationary pressure, and a wave of bankruptcies. Financial repression is likely to remain through our outlook time horizon (the next 12 months) as central banks continue to demonstrate their willingness to keep widening their safety net. Several geopolitical factors could upend the initial rebound, including global tensions regarding the future treatment of China technology firms (Huawei perhaps most important), China’s relations and influence in Taiwan and Hong Kong, and initiatives aimed at addressing China’s human rights violations. Another key dimension will be the future trade relationship between China and the U.S. and China’s relations with the rest of the world as the rising tide of nationalism, populism, isolationism, and socialism gain more momentum globally. Brexit-related risks, threats to European Union solidarity, and November’s U.S. presidential election continue to be monitored. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.


Deborah Frame, President and CIO


1Trading Economics, China GDP. July 16, 2020.

2Trading Economics, Euro Area Interest Rates. July 16, 2020.


Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. June 30, 2020. Index performance is based on total returns and expressed in the local currency of the index.