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April 29, 2021

The 2021 Playbook – How This Year’s Investment Themes are Playing Out in Real Time

Our market outlook going into 2021 was for ramped up vaccine deployments, accommodative monetary and fiscal policy, and upbeat corporate earnings to drive equity markets higher. We also projected an increase in interest rates and inflation. So far, these investment themes have been playing out as expected – we have seen strong performance, particularly from cyclical sectors such as energy, financials and industrials, and fixed income sold off sharply as the benchmark U.S. 10-year Treasury yield almost doubled from 0.91% to 1.74%. But what does all of this mean for the economy and markets?

Vaccines, fiscal stimulus and the consumer

Monetary and fiscal policy remain supportive. President Joe Biden signed a US$1.9 trillion American Rescue Plan into law, and Canada also unveiled additional stimulus in it’s federal budget. While the Bank of Canada is set to cut the pace of its asset purchases, they have not altered their commitment to keep interest rates low for the foreseeable future. The world is still battling a third wave of the pandemic that could prolong tight economic measures to contain the virus, but countries further along in their vaccination campaigns offer a glimpse of what is to come. Thanks to increased vaccinations and massive fiscal stimulus, U.S. consumer prices increased by the most in more than eight years, albeit off a low base.

What are we looking out for?

The biggest risk to the market, outside of a virus mutation, is if rising growth and inflation leads to rising bond yields, which could disrupt equity markets. One reason for this is that the value of a financial asset is equal to the sum of the present value of its future cash flows. But higher interest rates mean lower present values for financial assets. Companies that are expected to earn cashflows in the distant future – many of which are in the consumer discretionary and information technology sectors – are particularly vulnerable to this phenomenon. 

Where are we optimistic?

With the U.S. Federal Reserve’s shift toward average inflation targeting, we believe the risk is low that central banks will feel compelled to tighten monetary conditions. Moreover, any overshoot in inflation is expected to be temporary. Remember, inflation is being fanned by stimulus payments, pent-up demand and supply chain disruptions. Many of the long-term structural deflationary forces, like automation and demographics, have not reversed.

Rising interest rates that are accompanied by a healthy economy are normal and we expect the recovery in growth to outweigh the drag from rising bond yields. We still prefer equities to bonds, and each portfolio is weighted accordingly. We remain bullish on small caps, the value factor and other beneficiaries of a strengthening economy, as well as a pickup in inflation. Inflation is a real threat to investors’ savings and our flexibility to make asset allocation changes is crucial in this environment.

About the Author

Marchello Holditch

Marchello Holditch, CFA, CAIA

Vice-President and Portfolio Manager
CI Multi-Asset Management

Marchello Holditch, CFA, CAIA, Vice-President and Portfolio Manager, oversees CI's multi-manager, multi-asset investment programs. He is responsible for managing CI’s institutional and private client multi-asset portfolios and is a member of the CI Multi-Asset Investment Committee. Previously, Mr. Holditch led CI’s portfolio manager research and oversight function, where he was responsible for evaluating the investment managers of all CI funds. Prior to joining CI, Mr. Holditch worked at a major global consulting firm, where he assisted a wide variety of institutional clients with risk budgeting and asset liability modelling, as well as investment manager research and selection. He holds an Honours Bachelor of Mathematics degree in actuarial science from the University of Waterloo and is a CFA charterholder.

About the Author

Alfred Lam

Alfred Lam, CFA

SVP, Head of Multi-Asset
CI Multi-Asset Management

Alfred has more than 18 years of experience specializing in portfolio design, asset allocation, manager and fund selection, and risk management. While at CI Global Asset Management, Alfred has brought unique ideas and processes to the management of the team’s multi-asset strategies, including a mean-reversion currency management strategy, the concept of investing in concentrated and benchmark-agnostic portfolios, and a new approach to risk management. In addition to the Chartered Financial Analyst (CFA) designation, Alfred holds an MBA from the York University Schulich School of Business, and is a member of the CFA Institute and the Toronto CFA Society.



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Published April 21, 2021.