A recession is on the table, this fund manager says

The one-two punch of COVID-19 and a spat among oil-producing countries could genuinely be a tipping point that throws worldwide economies into recession territory, according to Jason Mann, chief investment officer at EdgeHill Partners.

Mann argues that the signs were there in the sky-high valuations for equities across the board prior to the coronavirus outbreak.

Stocks were up and down on a turbulent Tuesday in the markets as an early rally stalled and failed to take back the large losses suffered on Monday. Economic slowdowns caused by the worldwide spread of the coronavirus are now a reality as governments work to limit the outbreak, now listed at well over 100,000 cases globally and over 4,000 deaths.

For oil-producing countries like Canada and the United States, the ongoing OPEC spat and resulting drop in crude prices will cause more drag to the economy, prompting a reevaluation of economic prospects for 2020.

“It’s very possible that Canada in the first half of the year has no growth,” said Beata Caranci, chief economist at Toronto-Dominion Bank, said in a phone interview with the Financial Post, saying the drop in oil and COVID-19 together are “quite a lot to bear” if sustained.

Mann says the new reality has meant a change to his forecasts as well. Where just a couple of months ago he was favouring cyclical stocks in a favourable economic climate, the game plan is now vastly different.

“The economy was looking like we were going to get a 2015, 2016 macro economic improvement. It looked like Europe had bottomed on a macro basis. And really what you want to own in that type of environment is more cyclical value, value that had underperformed for so long. And we thought that was the setup,” said Mann, who appeared on BNN Bloomberg Tuesday.

“All that's been turned on its head, obviously. The coronavirus has if not deferred that, possibly impaired it for some time.” Mann said, “You know, we have to put a recession on the table now, whether it's a technical recession or not. I'm not sure what a technical recession is — if you've got two quarters that have shrinking growth, that’s a recession. And we have to put that on the table now, so the game plan has changed, and our own investment process has changed as a result of that.”

Mann argues that on a valuation basis, stocks at the end of 2019 were in territory close to what was seen back in 2000 during the dot-com bubble, with the onus this time around on governments to do what they can to steer the economy through the current crisis.

“So we were starting from a priced to perfection market, and now you've got this shock that is both a supply shock that is turning into a demand shock,” Mann said. “And frankly, the feds are doing what they can, but cutting [interest] rates isn't going to solve a supply problem. This needs to be a fiscal response from governments like in the US and we're not seeing it yet, and that's what the market is grappling with.”