MARKET COMMENTARY

Looking Beyond A Year Of Extremes

With global equities closing out a turbulent 2020 on a high note, we look at fourth quarter performance and share our thoughts on what may lie ahead in 2021.

02.15.2021 - Scott Guitard, Vice President, Portfolio Manager

Global equities ended 2020 on a high note, capping off a year that was extremely challenging, yet also generated investment opportunities. In the fourth quarter, the approval and initial delivery of COVID-19 vaccines overshadowed ongoing pandemic woes and US election disarray. In this edition, we will discuss the end of a very volatile 2020 and our thoughts on what this new year may bring.

Money Market/Cash Equivalents

In the fourth quarter, policymakers once again opted to keep rates unchanged. We expect short-term interest rates to remain anchored to zero throughout 2021, until economic recovery is seen to be well in hand. We remain neutral on cash, waiting for fixed income yields to move higher, or for an unwarranted pullback in equities.

Fixed Income

The portfolio’s bond component benefited from robust corporate bond performance as corporate yields moved another step closer to government yields. We continue to believe that Canadian investment grade corporate bonds represent a more attractive risk-reward profile relative to government bonds. We anticipate longer-term bond yields to grind higher, despite ongoing central bank involvement and as the global economic outlook improves in 2021.

Equities

Global equity markets topped fixed income returns in the fourth quarter. Positive vaccine developments and diminishing political risk set the tone. We expect corporate earnings to get another “bye” in 2021 as COVID-19 vaccines are more widely distributed and economies and businesses move towards a more normal environment. Monetary and fiscal policy should also continue to support equities. For these reasons, we increased our overweight to equities and corresponding underweight to bonds.

Fixed Income Sectors

Canadian Investment Grade Corporate Bonds

In the fourth quarter, strong security selection led to positive relative performance. Cyclical sectors, like Energy and Financials, were amongst the best performers. We expect this trend to continue well into 2021, which should bode well for the portfolio’s corporate bond holdings.

Government Bonds
After significantly outperforming in the first quarter of 2020, government bonds underperformed for the third quarter in a row. We expect inflation to tick higher in 2021 and longer-term bond yields to head in a similar upward direction. Government bonds are the most sensitive to changes in inflation and interest rates, so we will maintain our lighter-weight approach to these assets.

Global Bonds

We have not yet returned to global bonds since eliminating our exposure last quarter. We continue to monitor this asset class and are assessing various strategies that will provide the diversification and capital preservation attributes that we want for this segment of the portfolio.

Equity Markets

Canadian Equities

Economy-sensitive sectors like Energy and Financials began catching up to growth sectors such as Health Care and Information Technology in the fourth quarter. Given their cyclical nature, this theme benefited Canadian equity holdings; however, due to conservative positioning in the portfolio, the component underperformed the S&P/TSX Composite Total Return Index. During the period, we reduced our underweight to Canadian equities as our outlook has improved in step with our more cautiously positive view of the global economy.

US Equities

US equities recorded another impressive quarter, but this time it was not the megacap Information Technology stocks leading the way. Financial and Energy stocks performed well from an absolute return perspective. Our underweight to Financials led to underperformance against the S&P 500 Index. Although we see this upward trend in the Energy and Financials sectors carrying on for the near term, we believe the Information Technology sector will continue to play a key role in US equity markets and others. Our overweight to US equities remains intact entering 2021.

International Equities

Regional performance also bucked the trend of previous quarters as International equities outperformed their US counterparts. Our Emerging Markets exposure strengthened relative returns as they outperformed International Developed markets. We enter 2021 neutral on International equities, as we think the US equity market is best equipped to sustain performance in the current environment and as the transition out of the global pandemic unfolds.

Asset Allocation Process

Asset allocation decisions result from ongoing discussions within our Private Client Investment Strategy Committee. We begin by making strategic investment decisions against an internal benchmark— for example, the Balanced Growth Benchmark Portfolio—that is based on a neutral asset mix and stable market conditions.[1] The difference between our investment strategy and the benchmark portfolio reflects our active commitment to effectively managing risk and delivering on our long-term return objectives. In updating our investment strategy, we review our investment portfolio and benchmark and complete any required trades.

 

 

NOTES:

1. The Balanced Growth Benchmark Portfolio is comprised of 40% fixed income assets and 60% equity assets.

 

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