As the new year approaches, hospitals are under increased strain, leading some governments to impose tighter restrictions on activity. This is contributing to pockets of weakness in economic data, particularly in the service sector. Despite these short-term concerns, our outlook for 2021 remains bullish as vaccine deployments, accommodative monetary and fiscal policy, and upbeat corporate earnings expectations continue to drive markets higher.
2020 was all about money supply and currency debasement, effectively driving speculation and narrow leadership in equity markets. With a large amount of investable money on the sidelines and elevated savings rates, we expect both lending and consumption to increase as economies reopen. In the end, we believe there is a fair chance that economies will deliver exceptional growth.
Positioning and opportunities
In our view, what will be different next year is which areas of the market drive returns. The spring and summer rallies were spurred by “stay-at-home” sectors, hence the strength of the tech-heavy, large-cap, U.S. equity market. Winners next year are likely to be “reopening” areas of the market. Even with their recent strength, valuation differences remain at extremes, suggesting we are still in the early innings of a rotation.
Within our portfolios we continue to trim fixed income and add to equities. While short-term interest rates remain low for the foreseeable future, long-term interest rates will likely trend higher over the next year. As a result, we have trimmed longer duration government bonds and added to corporate bonds. We expect lower default rates and an improving economy will lead to healthy returns from investment-grade and high-yield bonds next year. We have also added Treasury Inflation-Protected Securities (TIPS) to our portfolios. These bonds are backed by the U.S. government and linked to an inflation gauge designed to protect investors from the decline in the purchasing power of their money.
Looking at equities, we have been adding to “reopening” areas of the market. From a regional perspective, we are focused on Canada and Europe, markets that have more exposure to cyclically sensitive sectors such as energy and financials. We have also been favouring smaller companies over larger ones. Smaller companies are less expensive, and we expect they will have higher earnings growth potential in 2021. In summary, globally synchronized expansion will help revitalize “reopening” sectors and provide a positive backdrop for our portfolios.
Any disruptions to vaccine deployment or its effectiveness could push the hope for normalcy further down the road. However, we believe low interest rates will increase investors’ willingness to tolerate delays. In addition, we expect more stimulus to combat any hiccups in reopening; central banks will likely keep printing money and governments will extend support programs. Both will help to buy time and limit market downside.
Source: Bloomberg Finance L.P. and CI Global Asset Management as at December 22, 2020.
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