Ryan Bushell, president and portfolio manager at Newhaven Asset Management
Focus: Canadian dividend stocks

MARKET OUTLOOK

Before looking ahead it is helpful to use history to put the present into proper context. Over the last 60 years, every major stock market crash of more than 15 per cent except for 1987 and 1998 took at least nine months to complete.

Both 1987 and 1998 were V-shaped corrections that did not coincide with a recession. A V-shaped recovery represents the best-case scenario for the current situation and indeed some market observers were pointing to the furious quarter-ending rally as evidence one is already underway. I am not as optimistic and feel that this downturn will coincide with a significant recession that will take many months if not years to resolve. Given this view, I believe we will at least test the lows of last week and could push through that level to the downside.

Rather than musing over the unknowable, I find it useful to start with what we do know:

COVID-19 infection rates in Europe and North America are still expanding at an exponential rate and as healthcare systems get more taxed, the mortality rate is climbing even faster in certain areas. A vaccine is at least 12 months away and because the disease is a new human virus it is remarkably stable and unlikely to vanish over the summer. COVID-19 is far more contagious than recent epidemics, including SARS and as such social distancing and stay-at-home measures are imperative to arrest the spread of the virus. Given current circumstances, we are a long way from relaxing social distancing measures which means the economy is likely to remain effectively shut down for an extended period. Our service-based, consumer-driven economy relies on a tremendous velocity of money (people exchanging funds for goods and services rapidly) in order to function properly.

Interest rates are now at record low levels and are likely to retreat further in the near to medium term, meaning sustainable dividend payers are likely to be even more attractive once confidence returns. Eventually, we will get through this and the businesses that provide the necessities of society will retain and potentially increase in value relative to providers of non-essentials.

I believe that social distancing measures that have shut down the economy, while necessary, are not going to be lifted soon enough to avoid substantial economic damage. Unemployment is likely to rise well above the 10 per cent peak we saw in 2009 and the economy is likely to contract at a record pace. All the while we will continue to be inundated with difficult news on the virus front which will shake confidence further. Virtually no business will be immune from this slowdown. At some point (hopefully later this year), the news is likely to get better as the effect of social distancing begins to show results and the prospect of more widespread testing allows the public to gradually resume their lives, albeit cautiously. Markets are likely to head lower in the near term, but the pace of the decline is likely to diminish and the bottom will only be evident in retrospect as markets tend to turn before the news does. Government and central bank measures are likely to be proven effective, but they will be increasingly tested the longer this lasts. I raised marginal cash for clients 10 to 15 per cent during the rally at the end of March and am patiently waiting for a test of the lows from just one week earlier.

TOP PICKS

PEMBINA PIPELINE (PPL TSX)
Most recently purchased at $25.

BROOKFIELD RENEWABLE PREFERRED SERIES E (BRF/PR-E)
Most recently purchased at $16.50.

ALTAGAS (ALA TSX)
Most recently purchased at $12.

PAST PICKS: APRIL 30, 2019

TD BANK (TD TSX)

• Then: $76.49
• Now: $57.76
• Return: -24%
• Total return: -22%

ARC RESOURCES (ARX TSX)

• Then: $8.51
• Now: $4.45
• Return: -48%
• Total return: -43%

NFI GROUP (NFI TSX)

• Then: $33.88
• Now: $14.16
• Return: -58%
• Total return: -56%

Total return average: -40%

WEBSITE: www.newhavenam.com