Canada and the United States are both in recession, the outlook is somewhat murky for equities and fixed income investors find themselves in an environment where security selection and careful credit analysis is of paramount importance, say the authors of Manulife Investment Management’s Q3 Market Intelligence report.

The report from Manulife’s capital markets strategy team looks closely at market drivers that affected Canadian equities, U.S. equities, international equities and fixed income during the first half of 2020, current conditions, and provides some advice for investing going forward.

In Canada, they write that the S&P/TSX Composite Total Return Index rebounded strongly from its March 23 low, returning almost 17 per cent in Canadian dollar terms during the second quarter. In the U.S., “following the fastest bear market in history, the U.S. equity markets had the strongest rally in history as the S&P 500, Dow Jones and the Nasdaq jumped 20.5 per cent, 18.5 per cent and 30.9 per cent, respectively, on a total return basis.” Overseas, meanwhile, international equities rallied 15 per cent. Asian equity markets were the first to start the comeback, they add, while European equity markets also experienced a strong about-face during the second quarter.

Global economic recession

All that said, they add that manufacturing activity is indicating that a global economic recession is likely underway.

“Canadian GDP (gross domestic product) fell 8.2 per cent in the first quarter of 2020,” they write. “Although the Canadian economy has not experienced two consecutive quarters of negative growth, the C.D. Howe Institute declared that the economy was in a recession as of March. The April month over month growth rate was the worst in history, as the Canadian economy fell 11.6 per cent.” The report goes on to say that the energy sector could be a drag on the TSX going forward. “Other areas within the TSX Composite are attractive though. We would suggest selectivity is the key to successful investing in Canada.”

In the U.S., the National Bureau of Economic Research has also confirmed that the U.S. economy is in recession. Around the world, the International Monetary Fund projects that many regions around the world could grow faster than the U.S. in 2021. “The near term economic downside could be worse,” they say, but “companies located in these growth regions should benefit from the strong economic rebound coming out of the various lockdowns.”

Finally, in fixed income, they say low interest rates are likely to remain in place around the world. “It is normal following a recession that the longer end of the yield curve steepens out,” says Manulife’s capital markets strategy team. “In this environment we believe credit does well and short-duration bonds outperform longer-duration.”