The global pandemic-induced GDP collapse has led to higher debt service burdens and lower ability to repay, resulting in an increase in non-performing loans and credit risk. We are now in a twilight zone of partial lockdowns. Fearful of rebellion, and of snuffing out signs of economic recovery, governments are opting for a hodge-podge of curbs. Financial intermediaries have become more risk averse, slowing the flow of much needed new credit and debt. These signs of cooling are consistent with our view to maintaining our Recession outlook for our forecast horizon of the next twelve months. Our outlook depends on what happens with fiscal policy and the spread of COVID-19 and we will continue to closely monitor these.

In August, China recorded a trade surplus of US$58.93 billion, down from US$62.33 billion the previous month.1 Exports rose 9.5% from the year before while imports fell 2.1%.1 In Europe, the ECB updated its GDP forecast to contract 8.0% in 2020 and grow 5.0% in 2021 and 3.2% in 2022.2 UK GDP rose at an average monthly pace of nearly 6% in the three months through July, re-tracing slightly more than half of the decline recorded in March and April.3

In the U.S., only 48% of the 22 million workers let go during the shutdowns have regained employment, with unemployment at 8.4%.4 In September, the Fed mapped out a longer road with low rates. The most important outcome of this review was a shift in the Fed’s monetary policy strategy from flexible inflation targeting to average inflation targeting. This indicates the Fed will make up for periods of below-target inflation with periods of above 2% inflation. Lower rates mean lower income as inflation is positively correlated to yields. Uncertainty remains about whether another stimulus package will be passed. The next federal government will need to start filling a deep budget hole. Fitch’s downgrade of the country’s credit outlook to negative (while affirming its AAA rating) is a warning that lawmakers will eventually need to craft a credible path to fiscal sustainability.

In Canada, monthly real GDP was down 6% from pre-COVID levels in July. Household debt-to-disposable income plunged by a record 17.2% to 158.2% in Q2.5 Unemployment rates remain high at 10.2% with only 63% of the 3 million workers let go during the shutdowns having regained employment.6 This is happening even as wage losses have been more than offset by government income supports. The funds needed to finance CERB and other support programs resulted in a record increase in government debt ratios surging in Q2 and the deficit ballooning to $343 billion this year (16% of GDP) after holding fairly stable over the past decade. Gross general government debt (includes all levels of government) pushed up to 132.5% of GDP, the highest since 1996.7

In August and early September, the strength of the recovery and policy support underpinned the rally in equities as the U.S. stock market retraced earlier losses and reached a new record high. In August, U.S. equities posted their best monthly performance since April. The S&P 500 gained 7.2%, while the S&P MidCap 400 and the S&P SmallCap 600 gained 3.5% and 4.0%. Canadian equities were positive in August, with the S&P/TSX Composite up 2.4%. The S&P Europe 350 ended the month with a gain of 3.0%. Germany and France contributed the most towards the total. The S&P United Kingdom finished up 1.5%. Asian equities rallied in August, with the S&P Pan Asia BMI up 5.6%. All Asian single-country indices posted gains with the exception of Taiwan. The decline in the trade weighted US dollar since March was supported by a number of structural, cyclical, and political factors. Quantitative easing is not as positive for currencies as for other assets that are bought directly by developed-market central banks. To date, all asset purchase programs have been domestic only, eliminating the need for purchases of foreign currencies.

In September, we maintained the asset allocation that was established in August for all models. We continue to be positioned in shorter duration fixed income due to larger-than-average duration supply from the Fed. Lower rates mean lower income as inflation is positively correlated to yields. With interest rates low or negative, we have maintained exposure to gold. 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.

The historic first half of 2020 collapse in activity will require sustained robust global growth to achieve a full recovery. The ongoing pandemic, depressed employment, profits, and inflation and fading policy supports continue to slow the recovery. Social distancing, civil unrest, businesses struggling to stay open, schools struggling to reopen, national elections, and the Federal Reserve rewriting the rules of monetary policy create an environment where little is as it was. We will continue to monitor developments. 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


Trading Economics. China Balance of Trade. September 7, 2020.

European Central Bank Staff Macroeconomic Projections. September 10, 2020.

U.K. Office for National Statistics. July GDP Growth. September 11, 2020.

Trading Economics. U.S. Unemployment. September 4, 2020.

Trading Economics. Canadian Household Debt to Disposable Income. September 11, 2020.

Trading Economics. Canada Unemployment Rate. September 4, 2020.

Trading Economics. Canada Gross External Debt. September 10, 2020.


Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. August 31, 2020. Index performance is based on total returns and expressed in the local currency of the index.