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After disastrous Q2, investors asking: What’s next?


July 20, 2020  


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A deep recession that cost millions of people their jobs.

Empty airports, restaurants and hotels.

Tens of thousands of people sickened by a virus that ripped through parts of Canada’s largest cities.

That was the story of the second quarter — an economic and health nightmare because of COVID-19. Starting next week, investors in Canada will get to see the extent of the damage to companies, according to Bloomberg News. More than that, they will be watching for clues about earnings power in the future, as cities and provinces try to restart their economies.

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Industry bellwethers such as Canadian Pacific Railway Ltd., Suncor Energy Inc., Rogers Communications Inc. and Teck Resources Ltd. report second-quarter earnings next week. For many firms, results will be bad. The important question is how robust are the signs of recovery.

While profit expectations are still at a four-year low, strategists have become more optimistic lately, according to data compiled by Bloomberg.

In the U.S., almost 10 per cent of companies in the S&P 500 have reported results and so far, a majority of them beat analyst expectations on sales and profit, according to data compiled by Bloomberg.

In Canada, three groups make up nearly half of the S&P/TSX Composite Index: banks, miners and energy firms. The latter two sectors report first; banks won’t report again until later in the summer.

Precious metals miners are a bright spot in a seemingly grim period. The flight to havens has boosted the price of gold. “I think that’s a sector that really could benefit from much better than expected earnings — and investors start to shift their portfolios accordingly and go, ‘Hey, over a longer-term basis, we need to actually be in the sector,’” Brooke Thackray, an analyst at Horizons ETFs Management (Canada) Inc., told Bloomberg News.

Oil and gas firms were reeling from low prices last quarter, but investors already know that. What matters is the production outlook “because that will determine the earnings potential for the energy sector over the course of the next six to 12 months,” Philip Petursson, chief investment strategist at Manulife Investment Management, told Bloomberg News.

With uncertainty lingering, Canadian investors should be “very, very selective” when choosing which individual securities they want to own, Petursson said. Companies may not come out with exceptional numbers, but beating forecasts, even by a small amount, can be seen as a win in the second quarter.

The Bank of Canada pledged to keep interest rates at historically low levels for years to help spur the nation’s economic recovery. In Tiff Macklem’s first official rate decision as governor, the central bank promised to keep the benchmark rate at 0.25 per cent until unemployment falls closer to pre-pandemic levels and inflation returns sustainably to a two per cent target. That would suggest rates won’t rise until after 2022, based on the bank’s new quarterly forecasts.

Other economic indicators announced this week include factory prices that rose 0.4 per cent in June compared with the prior month and a 63 per cent surge in existing home sales (prices climbed 0.5 per cent).

Next week, economists will keep an eye on May retail sales figures and June inflation data.

(Bloomberg News)


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