COVID-19 Economic View: What’s Next?

[Soft Music playing in background]
[Title reads: COVID-19 Economic View: What’s Next?]
[Onscreen Text: April 3, 2020]

[Onscreen Text: Benjamin Tal, Deputy Chief Economist, CIBC World Markets]

Ok, so where are we in the trajectory of economic growth? The short answer, of course, is that we are in a recession. In fact, I think a deep recession. We expect real GDP to fall by around 25 percent on an annual basis in the coming quarter. The unemployment rate probably to rise to 12, 13, maybe 15 percent with no less than 1 - 1.2 million jobs lost in the coming three months. So it's going to be significant.

[We see a still image of a ‘closed’ sign in a store window, followed by a still image of an empty train station, followed by a still image of an empty city bus.]

That is almost a given. Now, the question, of course, is what about the period following the next quarter? I think that at this point it's reasonable to assume that given social distancing and the possibility of an anti-viral medication, the infection curve is likely to flatten in the coming few months.

[A still image of three people social distancing as they wait in line for a subway, followed by a still image of medical vials being filled with a serum in a lab, followed by a still image of a medical technician in a biohazard suit looking at a chest x-ray.]

That's the consensus among all the experts we have been talking to. Now, of course, the flattening of the curve is not a green light. And if we have to imagine our life two or three months from now, I think that the picture that is emerging is the following: older people and individuals with preconditions will be asked to stay home. Companies will be asked probably to maximize the number of employees working from home.

[A still image of a senior eating a meal at home by himself, followed by a still image of a senior sitting on a stairlift being carried up a staircase, followed by a still image of a young professional working at her desk in her home office, followed a still image of a professional sitting at her dining room table looking at a tablet as she works from home.]

Construction activity will proceed, but at reduced productivity, I think, as physical disengaging will be practiced. Same goes for factory workers. I think we'll see a resumption of activity, but with flexible hours, all kind of multiple shifts aimed at reducing close interaction among workers and of course, increased reliance on automation.

[A still image of a backhoe picking up some dirt, followed by a still image of a lone construction worker building a tall column of rebar, followed by a still image of a lone factory worker checking a machine, followed by a still image of the same scenario as previous, followed by a still image of a factory worker performing maintenance on a piece of machinery, followed by a still image of a large factory room with a complicated automated robotics setup.]

Many stores will be reopened, I think. But social distancing will be observed with people lining up outside, as we see currently in some food stores. I think that personal services slow like hairdressers, and dentists, and all kinds of other facilities will be very slow to open. Now given this scenario, we expect activity to start rebounding in the third quarter. It will not be a typical V-shaped rebound since we are still operating at very reduced capacity and reduced productivity and more of the same we see in the fourth quarter. So it will not be a V-shaped recovery, but we see a recovery in the third quarter. Now many people ask about comparing the current situation to the 1929 depression. That's a mistake. That's not the current situation and it's very important understand why. In 1929 or even in a very severe recession like 2008, you are in a freefall with no bottom. This situation is very different since this crisis - and that's crucial -this crisis as an end game. This end game is, of course, a vaccine. So what we are doing all of us - governments, central banks, banks, individuals and corporations - what we are doing is simply buying time between this point and the point in which we have a vaccine, and in between we have social distancing and, of course, anti-viral medications that will provide another layer of defence. So that's the way I see the situation. This is a temporary crisis. It will pass. And now what we are doing is simply buying time.

[Soft Music playing in background]

[Title reads: Economic policy response]

So what we are seeing now is clearly something that we have never seen in our lifetime, but also the policy response to this crisis is something that we have never seen in our lifetime. And I must admit that governments and central banks have been fantastic in the reaction function. Much better than we have seen in 2008. They basically learned from the 2008 experience. The move is quick and very, very significant in terms of size. The Bank of Canada is providing significant amount of liquidity into the system and basically the sky is the limit. They're basically telling banks: we can provide you with liquidity as much as you want; the sky is the limit.

[A still image of a pile of Canadian bills, with a focus on $100 bills, followed by a still image looking up towards the top of a set of financial district skyscrapers, followed by a still image of financial district skyscrapers on Bay street in Toronto.]

So that's a very positive reaction. So in terms of liquidity and the capital available for lending, we are there. It's not really a major issue at this point. Governments are spending a significant amount of money, something that we have never seen. In Canada, about $100 billion, maybe $120 billion, which is between 4 and 5 percent of GDP. This is a significant amount of money that is coming to the pockets of many small businesses and individuals through the EI system. That will help to ease the pain.

[A still image of the White House, followed by a still image of the Federal Parliament Building in Ottawa, followed by a still image of the bar area of an independent coffee shop, followed by a still image of two workers packaging some stock.]

More is coming, I believe, from the government. I think that we are going to see some significant increase in loan guarantees provided to banks or credit will be able to flow into the system. That's missing now, and it will be a partial loan guarantee, so banks will have skin in the game. But we need more credit in the system. That's something that is coming. We need to make sure that renters and landlords are protected. We're still missing some initiatives there. But overall, the government response and the Bank of Canada has been extremely important; add to it the response from commercial banks through debt payment deferral - which is very, very significant, especially in the mortgage market and small businesses - and we have a recipe to ease the pain in the short term until we get to the point in which there is a vaccine. So, again, the next three months will be very significant in terms of the slowdown in economic growth. The unemployment rate will rise. Unfortunately, many people will be losing their jobs. But here again, it's extremely important to understand that a rise in the unemployment rate now is very different than the rise in the unemployment rate during a recession. Why? Because many of the people that are losing their jobs now are losing it on a temporary basis. When the economy starts recovering, they will regain that job, because it was not lost. It is simply on hold. So this cubicle, this office, this position is waiting for you - at least for many of those people who are now collecting EI insurance.

[A still image of a busy city street filled with people walking shoulder to shoulder, followed by a still image of a worker in a warehouse pushing a stack of cardboard boxes on a dolly, followed by a still image of workers sitting at a row of computers in a call centre, followed by a still image of four young professionals huddled over a table discussing a project.]

So that's something that we have to take into account. So what's important is not the number of people losing their jobs. It is the duration of unemployment, how long they would be unemployed. And if the nature of this crisis is temporary, I think the duration will be shorter. Very different than the reaction function of an unemployed in a significant recession where you lose your job and you don't know what to do.

[Soft Music playing in background]

[Title reads: Navigating markets]

So the question is what to do when it comes to investment and how markets react. As we know over the past week or so, we have seen some reaction - positive reaction in the market; there was a mini rally in the market and people are getting optimistic about a V-shaped recovery. I think it's important to discuss with clients the nature of this recovery, because if you look at where it's coming from and the environment in which this recovery is taking place, it is happening in an environment in which the VIX Index, namely volatility, is still at about 60, 65 percent, which is very, very high. Never before have we seen a significant lasting rally when volatility is so high. Second is, we have to remember that even in 2008, during the dark days, there was a period of six, seven days of a stock market rally up by close to 20 percent, and then it fell again by 28 percent. So it's very difficult to establish a bottom in this environment. Also, remember that corporate Canada and corporate America started this recession, this crisis with a relatively low earning trajectory. Clearly, we are not seeing dividend increases at this point, and not stock buyback activity. So therefore, I think we have to be careful declaring that this is the bottom. We are definitely close to the bottom, but it's possible that there will be another wave, something that we have to discuss with clients. Hopefully it will not be very significant. Maybe I'm wrong, but this is something that we have to be very clear about, because if this bear market ends now, it will be the shortest and the most volatile bear market ever. So we are not sure that this is 100 percent over. But we are clearly closer to the bottom. And if I'm right, or even semi-right about the trajectory of the recovery - namely third quarter, fourth quarter reduced activity, but some sort of positive numbers coming - I think that the market will start reading between the lines and realizing that many, many sectors and many, many stocks are oversold at this point, and there are some opportunities in the market. And that's where I expect a more reasonable and lasting rally.

[Soft Music playing in background]

[Disclaimer reads: “This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this video are as of the date of publication unless otherwise indicated, and are subject to change. ®The CIBC logo is a registered trademark of Canadian Imperial Bank of Commerce (CIBC). The material and/or its contents may not be reproduced without the express written consent of CIBC.”]

HOW COVID-19 PANDEMIC COULD EVOLVE: A MEDICAL TAKE

 

Just to begin, I think it will be useful for the audience to understand some basic facts as it relates to SARS-CoV-2 causing a disease called COVID-19. This virus belongs to a family of coronaviruses and just like all human relevant coronaviruses, it causes of upper respiratory tract infection, which can be just similar to a common cold or some more severe cases can cause severe case of pneumonia.

 

This specific virus has been fairly well characterised. It's genetically quite similar to the virus that also belong to the family of coronaviruses that cause SARS. We understand the mode of transmission quite well, which was through droplet transmission. It can spread from person to person when one individual coughs and droplets are being transmitted from the airways of one person to another. In this specific case, we do have a relatively good understanding of the actual rate of transmission, which ranges between 2 and 3. In other words, one individual, generally speaking, without any restrictions, will be in in the broader population infecting approximately 2 to 3 other individuals, causing a relatively logarithmic increase in the number of cases. The actual fatality rate, which is, of course, gravest of consequences of contracting this infection, is significantly lower than SARS. However, probably higher than the regular annual flu. And it is currently estimated at approximately 2%, but with the adjustments for the actual number of cases that are asymptomatic or mildly symptomatic is probably well under 1%.

 

We currently are seeing global pandemic, meaning that the vast majority of countries in the world have been affected by the virus. The number of cases are now exceeding 350,000 were over 15,000 people die of this specific condition. It's important to put these numbers in a specific context. These are reported numbers. The actual numbers out there have to be adjusted for various factors: like time to actual diagnostic testing, the number of cases that are not presenting, and you know, the annual flu, where different government agencies will adjust the reported numbers to have a better sense of the actual percentage of the population that's being affected. And, therefore, these numbers sometimes have will have to be magnified by a factor of approximately five to 10.

 

There have been a number of predictions published in the early stages of this outbreak, stating that up to 70% of populations in affected countries could eventually be infected over the course of mostly this year. These predictions are probably painting a relatively unrealistic scenario, given two major developments: one of which, is the broad-based quarantine measures that have been deployed in a majority of the countries affected; And number two is currently wide availability of testing.

In most of the Asian countries the spread of the virus has been slowed down quite dramatically. There are some concerns of the so-called second wave potentially coming back as it’s being recycled from the west back into Asia. But we don't yet have any evidence for that. So, that's a significant development that is material for how we're thinking of the evolution of this virus in the West, where we're either at early stages or have not yet seen a significant inflection in the number of new infections. And that is the fact that for the original epicenters of the coronavirus outbreak, we've seen quite a successful implementation of the quarantine measures and control of the virus that would currently indicate peak numbers in a single digit percentage range in the worst-case scenario, excluding, again, the second wave.

 

So, to put this in a context, I would say that over the next few weeks we will probably have a better sense of the evolution of new cases in both the United States and major European countries. I think that the number of new cases will give us a very good indication of the progression of the so-called curve of infections, including the peak, and the total number of infected patients. That curve will be evolving over a period of several months. By the fall, given the range of scenarios, we will most likely be done with the vast majority of newly infected cases. Again, assuming that there will be no second wave, the virus and the pandemic will be coming to an end.

 

The key question really is what the shape of the curve looks like. And I think that most authorities right now would agree that with the implemented policies in place, we will be looking at numbers in totality of the patient population that is infected in the United States and most of European countries, that is going to be substantially lower than 50% in the most dire-case scenario. Some of the most realistic estimates will be placing this type of an epidemic in a range of a relatively severe flu season, where typically up to 15 or 20 percent of the population is infected with the virus. And with the measures in place, the optimistic scenarios are placing those numbers substantially lower.

 

The key point here, is that the currently estimated numbers of people being infected in the West, as well as in Asia, are probably higher or what we would consider to be in the range of realistic scenarios. Beyond just a natural evolution of the infection, in light of these developments and policy measures, I think it's also worth talking about a number of different developments on the pharma front, mostly related to novel therapeutics that may be getting into the clinic quite shortly, or vaccines. And what this really means for the treatment of, of affected patients or more importantly, from our perspective on the actual evolution of the disease.

 

So, I would say that the vaccine development, maybe starting from the end, is something that will take quite a long time, and it's unlikely to be really materially relevant for the current pandemic. Most of these vaccines will be available at the earliest next year. By then or we are projecting that the pandemic--without subsequent waves of infections for which we don't have any evidence right now--are going to be mostly prophylaxis that is highly hypothetical.

 

In the area of therapeutics, we have so far had mostly a number of misses, despite some excitement with several unique agents that are in development for COVID-19. There has been a study of a repurposed formulation of two drugs being used for the treatment of HIV. Those studies have so far been negative. In late stage clinical trials, we’re mostly looking at two specific agents. One is an old anti-malarial drug called chloroquine or hydroxychloroquine, which is a related molecule which has some anecdotal evidence of activity, mostly in China. I would say that a high degree of skepticism has to be applied as to whether this specific drug is going to be effective. We are seeing some pent-up demand in the United States, both with negative data potentially coming out of randomised trials, the utilisation of this product would very quickly diminish.

 

The second agent that it is worth mentioning is called the Remdesivir, which has been developed by Gilead Sciences, and it's currently in Phase 3 clinical trials testing. The data on whether the drug is efficacious or will be coming out very shortly in the month of April 2020.

 

This product is somewhat more promising them chloroquine because of its relatively early efficacy against the specific strain of coronavirus as studied in animal models. However, the chances of success in actual real-life clinical trials are in the range of 50% or slightly higher.

 

An interesting development is the use of human derived plasma from patients that are recovered from the disease. That can be used very quickly and effectively in the most severe of the cases. And potentially, some of these products will be rolling out over the next few weeks to months. Additional clinical development is mostly targeting the actual clinical management of the complications of the virus and therefore will unlikely have any impact on the actual evolution of the disease, and the spread and clinical resolution from that perspective.

 

Hopefully, that covers the very high-level of both the epidemiology of the virus, and some of the developments that are happening right now in the biopharmaceutical industry and within government agencies, that potentially would be addressing the current pandemic on a global basis.

 

[Onscreen Text: The views expressed in this video are the personal views Michal Marszal and should not be taken as the views of CIBC Asset Management Inc. This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change.

 

®The CIBC logo is a registered trademark of the Canadian Imperial Bank of Commerce (CIBC), used under license. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc.

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Transcript: COVID-19 – What Could Soften the Economic Blow?

March 17, 2020

 

[Soft music plays]

[Onscreen Title: COVID-19 – What Could Soften the Economic Blow?]

[Onscreen Text: Avery Shenfeld, Chief Economist, CIBC World Markets]

AVERY: This will be a recession in the sense that if you simply add up all the economic sectors that are either directly to government edict or indirectly due to consumer behavior,

 

[Onscreen Images: An aerial view of Parliament in Ottawa. A shopping cart moving through a supermarket. Empty escalators. An empty restaurant.]

 

AVERY: seeing massive falls in activity, that accounts for enough of GDP to send the US, Canada, Europe, the global economy into a recession for a quarter or two.

 

[Onscreen Images: The White House. Ottawa at night. A European skyscraper.]

 

AVERY: What financial markets are particularly struggling with is... the great unknown is not the recession, but how long this recession lasts.

 

AVERY: We don't really have any clarity on when we will be able to go back to normal living again. So that's one issue. There are some hopeful signs in terms of countries like China and South Korea having stabilized their caseloads and taking the first steps to get back to normal activity.

 

[Onscreen Images: Time-lapse of downtown Shanghai. Time-lapse of downtown Seoul.]

 

AVERY: But as yet, we don't know whether that turn can almost see will also lead to another spike in cases that have to be wrestled down. So, that's one of the big fear factors in financial markets.

 

[Onscreen Images: Wall St. street sign. An aerial view of a suburban neighbourhood. An aerial view of Parliament in Ottawa.]

 

AVERY: The second very important issue is that while the economy is hibernating, it will be critical to keep corporate health and personal financial health intact, which means that governments and central banks are going to have to be creative in making sure that we don't end up with a wave of defaults during periods where some companies have dropped to zero or near zero. So that we have an economy that's still intact to emerge when the dust clears on the virus issue itself. So, I think we're gonna be watching closely to see as governments around the world bring forward measures, whether they are lending schemes from the government to the central bank to support credit markets, because that's going to be critical to ensuring that the business sector stays strong enough, the household sector stays well-funded while people are at home, are unemployed, so that the economy can, in fact, bounce back. Whether that is in the fourth quarter of this year or next year or sooner, if you want to be optimistic on treatments for the virus. But whenever it is, we need a healthy economy.

 

AVERY: The direction of financial markets in the near term is likely to remain highly volatile. Certainly, a period of elevated risk in many assets such as equities, but corporate bonds as well. A time when advisers have to make sure that client portfolios have an appropriate degree of risk, not excessive given the potential volatility. But also, a time when as we get through the virus, there may be business opportunities and investor opportunities that will be worth watching for. So, for the time being, we're certainly staying a bit cautious in terms of making bold predictions until we really get a sense from the epidemiologists, from the experts on the fight against COVID-19. It's not really worth listening to too many experts on the financial markets because it's really a case of the disease and the course of that disease that's going to determine how the economy ends up doing in terms of how long this recession lasts.

 

AVERY: One lesson we learned from the financial crisis, even though that was a very different recession with a very different cause, was that there are a number of tools that can be used to, in fact, make sure that not only do we have low interest rates on government bonds, that but we don't have soaring interest rates or the lack of credit availability for the business sector or the household sector.

 

[Onscreen Images: Time-lapse of downtown Toronto at night. An aerial view of a suburban neighbourhood. The U.S. Federal Reserve.]

 

AVERY: We've already seen the Federal Reserve, for example, take a number of steps to ensure that commercial paper financing continues to flow. We've seen the Bank of Canada, for example, doing the same thing in the market for B.A.'s.

 

[Onscreen Images: The Bank of Canada crest on a building]

 

AVERY: The federal government in Canada has announced a program to buy insured mortgages off of the banks, that will give the banks effectively some low-cost funding, enable them to stay engaged in the market, in serving their clients.

 

[Onscreen Images: Time-lapse of a CIBC skyscraper at night. A stock ticker screen.]

 

AVERY: All of these things are key instruments that will be used to make sure that certainly viable businesses, viable households won't be cut off from much needed credit just because the financial market is in a state of worry or panic. And the additional steps I think we're looking for here and now, are to ensure that individuals and corporates, that may not look that viable in terms of financing in the near term, get some special assistance from the helping hand of government. So, we took a while to learn some of those lessons during the financial crisis that we went through a decade ago. And the fact of that experience being on hand has helped deliver some of those tools faster this time around, which is certainly an encouraging sign.

 

[Onscreen Text: This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this video are as of the date of publication unless otherwise indicated, and are subject to change.

 

®The CIBC logo is a registered trademark of Canadian Imperial Bank of Commerce (CIBC).]

 

The material and/or its contents may not be reproduced without the express written consent of CIBC.]

COVID-19 – What Investors Need to Know

Runtime: 03:50

 

COVID-19 Video

[Soft music plays]

[Onscreen Text: Avery Shenfeld, Chief Economist, CIBC World Markets]

 

AVERY: So, if I were a real doctor as opposed to a Doctor of Economics, maybe I would have a good chance of telling you where this is going. There's still a number of paths this could take in terms of how long it takes to see the peak in infections, how many people get ill, how much social distancing we have in terms of people avoiding activities and travel.

 

[Onscreen Images: An overhead shot of a train speeding down the tracks. A low angle shot of a plane flying.]

 

AVERY: But what's clear is that it is spreading in the US. Is going to have a dent in economic growth for at least a couple of quarters.

 

[Onscreen Images: A finger scrolls through a stock-graph on a tablet screen.]

 

AVERY: And therefore, that's why we're seeing financial markets gyrate as they try to figure out, which of those various stories from slightly negative to more significantly negative this ends up being.

 

[Onscreen Title: Economic impact on Canada]

 

AVERY: So, people often cite the SARS example in Canada as a mild instance of something similar. The difference here, though, is that SARS was only impacting a couple of Canadian cities.

 

[Onscreen Images: A time-lapse shot of the Toronto skyline at dawn]

 

It really wasn't a global story per say, and it was so deadly in effect that it petered out pretty quickly. People weren't walking around with it, giving other people the illness. But what we did see in SARS is we had a couple of months for Canada's economy actually declined, even though it was concentrated in a couple of cities. So, I think that gives you a sense that, yes, this is going to take a bite out of economic growth. I think the mild version of this story is that it's more of a problem abroad than in North America, that we slow the infection rate so that it still hits a lot of places, but it's stretched out over time and that the economy maybe has a negative quarter kind of muddles along a little bit after that. In the worst case, we could have multiple quarters where economic growth is severely hit. It takes too long for the transmission rate to slow and we're looking at something more damaging. Although I would say that one difference here from, say, a normal recession type outcome is we would know throughout that at some point this will pass and that the economy will rebound when activity gets back to normal.

 

[Onscreen Title: Advice for investors]

 

AVERY: I would be cautious about concluding that the worst is over. Remember, we've only had one or two days now, as I'm speaking, where we've known that this is spreading in the U.S., so I think there's definitely going to be some negative news on business disruption, on economic disruption that hasn't yet hit the market. And remember, the decline we saw also was from, in the case of the U.S. market, from a new all-time high. So, stocks are not low relative to they were a couple of years ago. I think the right advice for clients is to concede that we simply don't know how this is going to play out in terms of the course of the disease, and therefore the course of the economic impact and that a portfolio that's not too aggressive still makes sense.

 

AVERY: There's been a lesson here for investors, hopefully a lesson that we learned in previous episodes like this, which is that there's no better protection than a diversified portfolio. So, in this case, as stocks were selling off, the bond market was actually rallying. So, a balanced portfolio that it had a good position in long term bonds would have actually at least had some important offsets. And even within the equity market, you're going to have to go to the supermarket or at least order those groceries. There are some segments of the economy and therefore the financial markets that aren't going to be as affected as others. So, this is a lesson, if we needed one, that a well-balanced portfolio makes sense during good times and bad. And I think that's the lesson we still need to stick with now as investors.

 

[Onscreen Text: This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this video are as of the date of publication unless otherwise indicated, and are subject to change.

 

®The CIBC logo is a registered trademark of Canadian Imperial Bank of Commerce (CIBC).]

 

The material and/or its contents may not be reproduced without the express written consent of CIBC.]