MARKET COMMENTARY

Markets Respond To Reopening Progress

Vaccines are one of the important factors shaping the reopening of economies worldwide. Find out what else is driving change and how the mix is affecting various markets.

08.03.2021 - Vincent Tonietto - Vice President, Portfolio Manager

Across Canada and around the world, the COVID-19 landscape is changing as restrictions ease at varying rates. We are in a very different place than 12 months ago, and thanks in large part to massive vaccination campaigns we can focus on how “getting back to normal” might look. As the accompanying graph shows, the pace of economic reopening fluctuates according to countries and industries. However, in our role as investment managers, we know that while vaccination levels are critical, they are one of many important factors driving the reopening of economies and GDP growth worldwide. With that in mind, how is varying progress influencing markets? 

We know that from labour to microchip shortages, industries face different rising costs, but some underlying factors are consistent across sectors. Demand growth, for instance, has been very strong because it started at such a relatively low level and has been exacerbated by pandemic-prompted supply chain disruptions. Whether delays are caused by transportation or production, shortages combined with a spike in demand will take some time to work through. Right now, it remains to be seen how much of a price hike end-customers will be willing and/or able to absorb and for how long.

With this environment in mind, here are some of the ripple effects we are seeing in the markets. Rising inflation expectations and a subsequent boost in investor appetite for assets with inflation-hedging capabilities, like commodities, are supporting markets. Expectations for further global growth and a greater need to compensate for inflation risk—along with excess liquidity, historically low real interest rates and fiscal stimulus—have underpinned the commodities rally year to date.

At this stage, we expect cyclical stocks to likely benefit from the sector rotation out of technology, consumer discretionary and health care that began early in the spring. Canadian and International markets are well-positioned to capture this rotation as well. Given Canada’s exposure to natural resources, the domestic market is in a good position to capture reopening trends in the United States and Europe. That said, natural resource stocks are likely to remain volatile as any resurgence in COVID-19 would quickly put downward pressure on commodity prices. Looking further afield, we are seeing very attractive valuations offering compelling upside potential in International markets.

We rely on our underlying portfolio managers who build portfolios around companies that have better pricing-power prospects, benefit from secular growth trends, and have a higher degree of earnings, but trade at reasonable valuations. While rotations in market leadership are healthy and raise the sustainability of a bull market, we remain focused on a “growth at a reasonable price” approach when constructing our portfolios.

 

COVID-19 Vaccinations And GDP In Selected Countries chart

 

NOTES:

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

 

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