In a closely contested election, it appears as if the best outcome for global capital markets has occurred. Removing Trump from the Presidency will almost certainly mean future official US policy will be more consistent and measured. Gone will be President Trump’s random and bombastic approach which often roiled capital markets. Furthermore, the status quo has been preserved in Congress (Republican Senate and Democratic House) so some of the Democrats’ less business-friendly election platform, such as higher capital gains and corporate taxes, is unlikely to materialize for at least the next two years. Under these circumstances, all major global stock markets have rallied sharply.
The biggest single factor affecting capital markets in 2020 has been and will continue to be the worldwide economic fallout from the COVID-19 pandemic. Following the unprecedented shut down of all major economies this spring, the G7 countries responded with unprecedented fiscal and monetary policy including zero or near zero interest rates and historically generous government benefits to both individuals and businesses. In fact, the closest comparison in scale to government action during the global pandemic would be that of a “wartime” economy. Recently, a combination of preventative social measures, effective therapeutic treatments and the promise of mass inoculation suggests that the pandemic’s financial threat will continue to wane over the next 12 to 18 months allowing societies, on a worldwide basis, to return to normal. In the meantime, interest rates will stay historically low and government fiscal policy will continue to be generous.
This economic scenario is very positive for global equities and neutral to negative for fixed income investments. US equities, led by technology and technology-associated sectors, have significantly outperformed all other global equity markets including Canada over the past 10 years. We do not believe that this experience will continue during the post pandemic recovery. As such, coming out of the pandemic, our allocations to international (including emerging) and Canadian equities will be overweight and US equities neutral relative to your benchmark. Fixed income will remain near minimum allocations with slightly below average duration and minimal credit exposure.