The accelerated spread of COVID-19 and the drastic measures that had to be introduced to reverse the trend caused the markets to fall sharply during the month of March. Without a doubt, the events of the past few weeks are, for the vast majority of us, unprecedented in social and economic terms. The response from monetary and fiscal authorities around the world has been equally astounding. As we wait to see the ultimate effect that such measures will have in concrete terms, let’s take a look at how one of the barometers of future economic activity, the financial markets, have reacted.
Despite the continued downward movement of the yield curve, the Canadian bond market was unfortunately unable to generate a positive return over the period. The positive contribution of lower sovereign yields was offset by the negative effect of wider risk premiums for non-government securities, such as corporate bonds and asset-backed securities. As for equities, no sector was spared. While the Communication Services sector limited its loss to about 3%, Real Estate and Energy were the worst-performing sectors, returning -34.4% and -29.9% respectively. As measured by the MSCI Canada Index, the Canadian stock market as a whole returned -16.7%, the lowest of the group.
The U.S. stock market fared slightly better than average, returning -12.7% in local currency, as measured by the MSCI USA Index. Once again, the strength of the U.S. greenback absorbed some of the loss, such that the return on the month was -7.4% in Canadian currency. The Health Care and Consumer Staples sectors managed to make gains, while Energy and Financials continued to be the hardest hit.
The situation in Europe fell somewhere in between. The European market also saw Health Care and Consumer Staples stay in positive territory. However, their resilience did not prevent the overall performance from ending in negative territory, particularly due to the poor performance of Financials and Real Estate. As measured by the MSCI Europe Index, the market ended the period with a loss of 13.5%. The exchange rate effect was beneficial, however: in Canadian dollars, the performance was -9.2%.
Asia is the region that has best weathered the March meltdown. Thanks to positive contributions by Consumer Staples, Health Care and Communication Services, Asian markets recorded a slightly more modest decline of 10.7% in local currencies, according to the benchmark MSCI Asia Pacific Index. When expressed in Canadian dollars, the performance was -6.2%, notably because of the appreciation of the Japanese yen, a safe haven currency, like the U.S. dollar. As in the rest of the world, Energy and Financials lagged behind.
Despite their riskier nature, emerging markets delivered a performance comparable to that of developed markets. In local currency terms, their return, measured by the MSCI Emerging Markets Index, was -12.9%. Currency fluctuations contributed positively to the performance, which was -10.3% in Canadian dollars. While all sectors subtracted value, the stars and dogs were the same as in the other regions of the world.