Global Markets Insights: Rental slump, back-to-school retail challenges, USD swings

October 2, 2020

Dropping rental rates and prices in Toronto due to a supply-and-demand imbalance will likely continue to weigh on the real estate sector stocks until COVID-19 cases wane. On the retail front, the annual Scotiabank Back to School Conference, though focused on pandemic pivots, saw retailers expressing optimism around a return to normal. However, in recent days there has been a renewed concern amongst those in the retail and hospitality sectors over a potential second wave and the possibility of further restrictions impacting their businesses. South of the border, Washington needs to come to an agreement on a fiscal package to ease pandemic pain. Meanwhile, the US presidential election looms over the financial markets and the chances of a further, if only short-term, strength in the USD, driven by haven demand or short covering pressure, remain high as investors consider election risks and uncertainties.


Scotiabank analysts and economists weigh in on what the pandemic means for housing and retail markets, economies and foreign exchange.




  • Average apartment rent skidding in Toronto. While the Canadian real estate market is extremely strong, with both activity and prices surging, the rental market (apartments) is under pressure. The pandemic has caused some distortion in the supply-demand relationship. On the demand side, fewer foreign students, less immigration, people likely moving out of city centres toward the suburbs, and the rapid adoption of the work-from-home trend, which we believe is here to stay, could be issues for the sector. 

  • On the supply side, less tourism has also likely created an influx of short-term rental units (think of all the people unable to rent their condos on Airbnb anymore) on the long-term rental market (competing against apartments). The number of apartments listed in Toronto has sharply increased this year. All those factors pushed the average rent of a two-bedroom unit down 5.5% YOY in Q2, according to the Toronto Real Estate Board. However, another source providing more timely data (PadMapper) has the average rent for a two-bedroom unit off 12% YOY in September in Toronto (-14% in Vancouver). Until tourism/immigration/foreign students are back, the rental market could continue to face some headwinds, challenging top-line growth for RE stocks. In fact, the RE sector is one of the weakest performers YTD (-20%), trailing the TSX Composite (-4.8%) by a wide margin. We believe the real estate sector could continue to face some headwinds for the foreseeable future.

  • New U.S. fiscal package needed. Several factors have weighed on investor sentiment of late, but Washington’s failure to get a new round of fiscal support was certainly high on the list. While the odds of having a deal prior to the election had started to dwindle, Democrats indicated over the weekend that they would try to reach an agreement with the White House over a smaller package — something that would have more chance of going ahead. The legislation would include unemployment benefits, direct payments to Americans, and provisions to support small businesses, among others. 

  • Retail sales, and more broadly speaking consumer spending, have recovered strongly in the US, despite soft consumer confidence. Without fiscal support, Washington runs the risk of seeing further erosion in consumer sentiment, which could eventually lead to a sharp deceleration in consumer spending, slowing down the recovery process. Keep in mind that despite the solid job market improvements since March, 26 million Americans continue to receive unemployment benefits of all sorts. That number has started to decline, but it remains extremely elevated (from 1.5 million last year), and more support appears needed until the job market healing process is more advanced. 

 —  Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy; and Simone Arel, Research Associate, Global Equity Research


  • Pandemic pivots dominate conference. The 2020 Annual Scotiabank Back to School Conference was unlike any other. For the first time in 24 years, the conference was held virtually, and the normal discussions around strategic priorities were somewhat overshadowed by discussion around pandemic pivots. At the conference we hosted eight of our companies under coverage for a virtual fireside chat. Not surprisingly, the rise in online penetration and the experience of operating under COVID-19 lockdown challenges were common topics. In addition, each of the executives spoke to the current operating conditions and the outlook for their businesses. Capital allocation strategies were reviewed, and a number of the companies also addressed Environment, Social and Governance (ESG) policies. Broadly speaking, all experienced serious demand shifts over the past six months but have expressed optimism around an eventual return to a new normal. Amid all the doom and gloom in the retail industry, which is being rocked by record store closures and bankruptcies, we note that the tone from those attending the Back to School Conference was one of cautious optimism. The companies in attendance all have reasonable levels of liquidity, have pivoted very well to adjust to the demand changes, and are all seeing sales trends improving. Additionally, the challenges of operating under COVID-19 have strengthened each organization and have paved the way for faster decision making, both of which will hold them in good stead for the future.

  • Renewed threat from second wave. We note a renewed concern among those in the retail and hospitality sectors over a potential second wave and the possibility of further restrictions impacting their businesses. In recent days, Ontario and Quebec have seen alarmingly high COVID-19 infection rates that have prompted the Quebec government to impose strict new measures to curb the spread. These include mandated closures of restaurants and bars in Montreal and Quebec City from October 1st to 28th. Movie theatres, museums and other indoor public spaces will also be closed, along with a ban on private homes having guests. Clearly these measures and concerns on the rising rates will impact the willingness of consumers to shop physically. While Quebec is the first to reimpose shutdown, we may see other provinces follow. At this time of year, retailers would normally be focused on executing their holiday plans. This year there is tremendous uncertainty with respect to how the important Halloween and Christmas seasons will play out. All eyes will be on how Canadians adapt to celebrating Halloween in 2020 and how they spend with a view to try to foreshadow shifts for the most important retail season of Christmas.

—  Patricia Baker, Director, Retailing, Global Equity Research

Foreign Exchange

  • The broader rebound in the USD, underway through much of September, showed signs of stalling and reversing somewhat as the month and quarter end approached. US equity markets had been trading defensively for much of the month, driving the USD higher as “haven” demand put the squeeze on short USD positions. But a late month recovery in stocks on hopes of a last-minute agreement among Democrats and Republicans on US fiscal relief put the skids under the USD again, reflecting fluid market sentiment driven mainly by risk appetite rather than economic fundamentals. 

  • While risk sentiment will remain an important influence on currency markets, the US presidential election looms ever larger over financial markets. The presidential debate did little to ease underlying concerns over the prospect of a contested outcome. In addition, we are not fully persuaded that the USD’s recovery, which got underway at the start of September, has run its course. The rebound fits, more or less, precisely with the USD’s track record of rallying into previous presidential elections (since the 1980s).  Investors are running significant short USD positions and the USD has started to look somewhat oversold after its near 11% decline from the early March peak in the dollar index (DXY). We think the chances of a further, if only short-term, strength in the USD, driven by haven demand or short covering pressure remain high as investors consider election risks and uncertainties. For USDCAD, this may limit the scope for near term softness to the 1.32 area. Heightened market volatility leading into the US election could potentially see USDCAD rebound towards 1.34/1.35 in the next few weeks.

—  Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist


For Scotiabank, Global Banking and Markets Research Analyst Standards and Disclosure Policies, please visit www.gbm.scotiabank.com/disclosures.


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