Tyler Mordy, president and CIO at Forstrong Global Asset Management
Focus: Exchange-traded funds

MARKET OUTLOOK

Bonds and cyclicals now priced for eternal stagnation

Yesterday, the widening coronavirus crisis finally pierced investor consciousness in a significant way. All major stock markets were down substantially and bond markets soared. Compared with two months ago, uncertainty levels for businesses (about supply chains, final demand, input prices) have risen considerably. The market is now starting to price in more easing by the Federal Reserve, while the Bank of Japan and European Central Bank will be hard-pressed to cut interest rates deeper into negative territory. This development follows a year when most major central banks have already eased (192 rate cuts globally). Meanwhile, the People’s Bank of China continues to be wary of dramatic easing. If Covid-19 is to be fought by easing rates, the Fed will have to lead the charge.

The market is now going all-in on the idea that the economic impact of COVID-19 will be deep and long-lasting and that the Fed will react accordingly. This is a big assumption. If it turns out to be wrong, the backpedalling for several asset classes including bonds could be vicious. In time, the coronavirus will likely come to be seen as the first “social media pandemic,” a scary disease made scarier by social media, fake news and the overreaction of governments compelled to be seen to be doing something. In this scenario, it is likely that yield curves will steepen again and that global equities will rally. This rally will likely be led by the beaten-up cyclicals (industrials, materials and the wider emerging market complex) that have suffered disproportionately on fears of a collapse in global growth.

TOP PICKS

Tyler Mordy's Top Picks

Tyler Mordy, president and CIO at Forstrong Global Asset Management discusses iShares Mortgage Real Estate ETF, SPDR S&P Emerging Asia Pacific ETF, and iShares MSCI Chile ETF.

ISHARES MORTGAGE REAL ESTATE ETF (REM NYSE)
Most recent purchase on Sep. 17, 2019 at US$42.12.

Mortgage REITs perform best when the yield curve is steep and market conditions are stable, allowing for attractive levered returns from a borrow-short, lend-long strategy. With the Federal Reserve pivoting dovish, a bear steepening (long rates increasing faster than short rates) is becoming increasingly likely. A reversal in the sharp compression of long bond yields makes sense if growth and inflation prove more resilient than expected. Short rates (anchored by the Fed) are falling, which decreases mortgage REITs’ borrowing costs and helps offset the impact of  increased prepayment activity emanating from the fall in mortgage rates.

SPDR S&P EMERGING ASIA PACIFIC ETF (GMF NYSE)
Most recent purchase on June 17, 2019 at US$56.88.

With deep integration into global supply chains, emerging Asian equities have faced the brunt of trade wars and the coronavirus. However, much of this is an over-reaction to shorter-term developments. Looking ahead, monetary easing combined with a rebound in growth should lead to a V-shaped recovery in earnings. Global investors are not positioned for this.

ISHARES MSCI CHILE ETF (ECH NYSE)
Most recent purchase on Dec. 16, 2019 at US$34.14.

Chilean assets have sold off heavily of late, as a socio-political uprising rocked the nation known for its stability in a generally tumultuous part of the world and the coronavirus hit cyclically-oriented economies. However, copper prices (a key Chilean export) should surge once uncertainty surrounding the coronavirus dissipates. This should lift the prices of Chilean stocks now trading at very attractive valuations. Chile’s public debt is among the lowest in the world (27 per cent of GDP) and thus has much room to fiscally stimulate.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
REM Y Y Y
GMF Y Y Y
ECH Y Y Y

 

PAST PICKS: SEP. 26, 2019

Tyler Mordy's Past Picks

Tyler Mordy, president and CIO at Forstrong Global Asset Management discusses his Past Picks: iShares Mortgage Real Estate ETF, iShares European Financials ETF, iShares South Korea ETF.

ISHARES MORTGAGE REAL ESTATE ETF (REM NYSE)

  • Then: $42.19
  • Now: $46.84
  • Return: 11%
  • Total return: 13%

ISHARES EUROPEAN FINANCIALS ETF (EUFN NASD)

  • Then: $17.48
  • Now: $18.03
  • Return: 3%
  • Total return: 4%

ISHARES SOUTH KOREA ETF (EWY NYSE)

  • Then: $56.51
  • Now: $56.07
  • Return: -1%
  • Total return: 1%

Total return average: 6%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
REM Y Y Y
EUFN Y Y Y
EWY Y Y Y

 

FUND PROFILE

Horizons Managed Global Opportunities ETF (HGM TSX)
Performance as of: Jan. 31, 2020

  • 1 month: -1.27% fund
  • 1 year: 4.42% fund
  • 3 years: 5.31% fund

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