Wow, what a year 2020 was! As we close out a historic year and look ahead to 2021, there is certainly a confluence of factors to consider that could impact the economy and our investable opportunities. The most dominant will be the deployment of recently developed COVID-19 vaccines. The health care community has performed a remarkable feat in developing a safe and effective (based on known data) vaccine in record time. The manufacturing, distribution and receptivity of the vaccine is the next critical stage, which is underway.
From an economic perspective, the threat of repeated or prolonged lockdowns remains a critical risk. Lockdowns are implemented as health care facilities and personnel are overwhelmed. Therefore, the priority for vaccination will be those who would most likely require hospitalization if they contracted the virus, notably the elderly and those with identified pre-existing conditions. At this point, we are optimistic that we are in our final full stage of lockdowns and that vaccination will progress rapidly through the coming months. This would allow for a staged re-opening, such that by the summer, a majority of recreational and business activity will be allowed, although restrictions on proximity will likely continue.
Given the prospect of progressive re-opening throughout 2021 the next question is; what is the collective response to the opportunity to re-engage in activities that were curtailed or eliminated during the COVID-19 crisis? There are few true constants in economic activity, but human nature does seem robust and consistent. We are social beings and given the opportunity to interact, travel, and enjoy new sights and sounds, most will likely embrace as much as possible.
This brings up another question; what spending capability will be available? Business disruptions and the associated job losses have left uncertainty as to how quickly the employment picture will progress. However, we do anticipate governments and central banks are prepared to be as supportive as needed to ensure any crisis of confidence can be mitigated with additional stimulus. Of the many unprecedented experiences of 2020, the manner and magnitude to which governments have been willing to inject spending capacity, including depositing money directly into individual bank accounts, has opened the door for continued support. In the U.S., congress will likely pass additional stimulus bills and in Canada, with the Liberal Party in power and supported by the NDP, it is highly likely spending will continue.
Positioning and opportunities
Putting the pieces together, our base case is for a gradual re-opening facilitated by the uptake of the vaccine, with governments and central banks prepared to restart the economic flywheel by injecting spending capacity – with the expectation that business spending will respond. This would then lead to an improved employment picture, which will support expanded consumer spending and so on.
Based on these factors, we have started to tip our investments towards some of those areas that were curtailed during the lockdowns, including restaurants and travel-related opportunities. Given our view of improved spending, we are also increasingly comfortable with broader economic exposure, including owning several of the large Canadian banks. We will balance this opportunity set with companies that have benefited from the increased use of technology driven by work from home and the increase in home delivery. We do expect a slowdown in these trends, but not a reversal. As always, we will focus on the best businesses with robust balance sheets to ensure any disruptions to the economic picture can be navigated by our investee companies.
With the novelty of what we have experienced there are some potential risks as we emerge from the global pandemic. As the vaccine is the most critical dimension of our emergence, any disruption to its successful deployment will be consequential. Safety issues could emerge, either from the vaccine itself or the delivery. There may be large portions of the population unwilling to receive the vaccine creating ongoing health care risks. The virus could also mutate into a strain that does not respond to current treatments, although we believe this risk is low. The antibodies generated by the vaccine respond to the spike protein on the surface of the virus and that spike protein appears to be fundamental to the function of the virus. Further, government and central bank response introduces risk.
In the near term, with record high debt levels, there may be reticence to respond with the magnitude necessary to inspire consumer spending. Longer term high debt levels create their own risk as higher taxation is a likely possibility and any increase in inflation that requires higher interest rates in response could burden consumers and governments with significantly higher carrying costs. It is unlikely that this latter issue will be evident in 2021, but the anticipation of such events can certainly impact the stock market.
As we emerge from the unprecedented, we are progressing into the unknown. We are optimistic that human ingenuity and our social instincts will result in a progressively more robust economy through 2021. Risks are evident and will be monitored and responded to if, and when, they emerge. We wish you all health, wealth and happiness as we leave 2020 behind us.
Source: CI Global Asset Management as at December 22, 2020.
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