Turbulent but Potentially Profitable Times Ahead

The COVID-19 pandemic and the government policy reaction in response to it continued to be the biggest factor influencing global equity returns over the past six months.  We expect this to remain the dominant theme for the balance of 2020.  Only to be rivaled mid-quarter, possibly, by US election drama.  Public health policy prescription to the second wave of COVID-19, with its potential negative implications for the global economy, have created volatile market conditions, however, this is likely to subside as the virus runs its course.  Similarly, the US Presidential and Congressional elections in early November may also result in market fluctuations – albeit we believe only temporary.  In our opinion, nothing should derail the buoyant effect of generous fiscal and monetary policy on equity values.

The investment outlook for 2021 also looks positive as policymakers will likely err on the side of caution or in this case generosity.  Against this backdrop, we continue to expect that regional and sector rotation will become a more noticeable feature of the next leg up in equities.  Value-dominated equity markets such as Canada, Australia and Europe should outperform the S&P 500 and its FAANG stalwarts – suggesting a period of significantly greater market breadth than that which has been experienced in many years.  On sector rotation, long forgotten “no tech” sectors such as materials, industrials and financials should make their way to the top of the performance list as pent up consumer demand drives a rebound in global economic activity.  Commodity markets will remain tight due to increased demand for housing, autos and other durables, while gold should benefit from a decline in the US dollar and some rise in cyclical price inflation.

If our view of resurging economic growth over the next six to nine months proves to be correct, the global bond aggregate, with a current yield to maturity of 0.75% and a weighted average duration 7.5 years, will struggle to produce positive annual investment returns.  Consequently, we continue to hold minimum allocations to fixed income and will begin to dial down weighted average durations as an offset to rising interest rates at some point in 2021.