The tug-of-war between the virus and the global immunization effort intensified in March. The focus now will be on economic reopening. Every recession is different and the events that led to the great recession of 2020 were unique, as has been the response from governments and central banks. Through large-scale fiscal transfers and central bank actions in many economies, households and businesses have been supported through the crisis and are in a position to emerge with their balance sheets largely intact. Our twelve-month forward outlook remains three months of Growth, followed by nine months of Stagnation, as we have seen evidence of a stronger short-term recovery rebound but a lingering longer-term impact on employment and output.

Emerging Market Asia is being buffeted by a number of forces including the policy-induced downshift in China and the sustained pandemic drag. The Chinese economy advanced 18.3% year-on-year in the first quarter of 2021, accelerating sharply from a 6.5% growth in the fourth quarter of 2020.1 Exports from China soared 30.6% year-on-year to USD 241.1 billion in March 2021, slowing from a record 154.9% growth in February. Among major trade partners, exports were up to the U.S. (53.3%), the EU (45.9%), and Australia (23.1%).2

The Eurozone economy shrank by 0.7% in the fourth quarter of 2020, following a record 12.5% expansion in the previous three-month period. Among the bloc’s largest economies, France, Italy, and the Netherlands contracted in the fourth quarter, while GDP growth in Germany and Spain slowed sharply.3 For the year 2020 as a whole, GDP fell by 6.6%.4 The U.K. remains among the global leaders in vaccine distribution with nearly half of its population having received at least one dose and daily vaccinations reaching 0.8 per 100 population in late March. The consumer price inflation rate in the Euro Area was confirmed at 1.3% year-on-year in March 2021, the highest since January 2020.5

The U.S. is vaccinating its population and reopening its economy, while the fiscal response has also been more expansionary. The American Rescue Plan of $350 billion will be followed with higher tax rates, shifting interest towards more favorable asset classes including tax exempt municipal bonds. The U.S. economy expanded an annualized 4.3% in Q4 2020 but shrank 3.5% for the year.6 The U.S. dollar advanced and capped its first quarterly gain in a year, thanks to the U.S. growth dynamic versus its global peers. The Canadian economy expanded 2.3% in the last three months of 2020, following a record 8.9% growth in the previous period.7 Canada’s trade surplus narrowed to CAD1.04 billion in February of 2021 from a revised CAD1.21 billion in the previous month. Total exports decreased by 2.7% to CAD49.9 billion in February, a level 4.1% higher than that set in February 2020.8 On balance sheet policy, the Bank of Canada began its tapering at the end of April.

U.S. equities ended the first quarter of 2021 on a strong note, with the S&P 500 posting a gain of 6.2%. Smaller Caps outperformed, with the S&P Mid Cap 400 and the S&P SmallCap 600 up 13.5% and 18.2% for the quarter, respectively. Canadian equities posted strong gains in Q1, with the S&P/TSX up 8.1%. International performance was also positive. The S&P Europe 350 closed the first quarter of 2021 up 8.7%. The United Kingdom was responsible for 2.5% of the total while France was the second-largest contributor with 1.5%. Asian equities had a positive start to the year, with the S&P Pan Asia BMI up 2.7% in the first quarter. Early-2021 trends of rising government bond yields and strong equity markets continued in March, reflecting the brighter economic outlook and increased fiscal support, particularly in the U.S. In March, the MSCI All Country World Index gained 2.5%, led by the S&P 500 (4.2%) and the S&P/TSX (3.6%). International stocks also had a modest (1.8%) gain. By contrast, the MSCI emerging market benchmark shed 1.7%.

Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once populations are vaccinated. In April, we maintained the asset allocation that we established in March. Fiscal spending that funds local governments supports our exposure to U.S. treasuries and municipal bond exposure in the U.S. We continue to include some exposure to gold as a portfolio stabilizer.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, a wealth effect from rising asset values and lower consumption, healthy consumer balance sheets, and a healing labor market. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 Trading Economics. China GDP Growth. April 16, 2021.

2 Trading Economics. China Trade: General Administration of Customs. April 13, 2021.

3 Trading Economics. Eurozone GDP Growth. March 9, 2021.

4 Trading Economics. Eurozone GDP Growth: EUROSTAT. March 9, 2021.

5 Trading Economics. Eurozone Inflation. March 16, 2021.

6 Trading Economics. U.S. GDP Growth. March 25, 2021.

7 Trading Economics. Canada GDP Growth. March 2, 2021.

8 Trading Economics. Canada Trade. April 7, 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. March 31, 2020. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The macroeconomic outlook continues to improve, and the recovery may be faster than one that typically follows a business cycle recession, as vaccination rollouts accelerate, and the US$1.9 trillion stimulus package has been signed into law. This has prompted a surge in inflation expectations and commodity prices and a bond sell-off. The latest round of global manufacturing PMIs have flagged rising input costs, growing order back-logs, and longer supplier delivery times. Commodity prices have increased sharply as seen in Bloomberg’s commodity price index, up 17.5% from December 1st to March 1st.1 Oil prices hit their highest level in more than a year in February with WTI crossing the US$60 per barrel mark.2 Higher shipping costs and input shortages will test central banks’ commitments to keep interest rates low for an extended period as pent-up demand could outpace supply. At this point in the recovery, households have used lockdown savings to pay down debt – particularly credit cards – while holding onto cash for precautionary reasons, causing demand to be suppressed.

Our twelve-month forward outlook remains at three months of Growth, followed by nine months of Stagnation, as we have seen evidence of a stronger short-term recovery rebound but a lingering longer-term impact on employment and output.

In China, an updated analysis shows that non-financial debt as a percent of GDP jumped 23% to 281% in 2020.3 The debt spike is likely to be temporary. China’s economy returned to its pre-pandemic growth path in the fourth quarter of 2020, which triggered an earlier-than-expected normalization in credit policy. In the Asia Pacific region, Australia’s economy grew at a stronger-than-expected pace toward the end of last year with a 3.1% non-annualized gain.4

The Euro Area has been hampered by lockdowns. The continent has been slow to ramp up vaccinations, with only slightly more than 5% of the population in major European countries having received at least one dose.5 The annual core inflation rate in the Euro Area, which excludes volatile prices of energy, food, and alcohol & tobacco, and at which the ECB looks in its policy decisions, slowed to 1.1% in February, from 1.4% in January.6 The U.K. is seeing a sluggish start to the year thanks to extended lockdowns and as the Brexit deal hit trade hard in January. A relatively speedy vaccine rollout that has seen 30% of the U.K. population receive at least one dose as of early March, should help the recovery beyond the current quarter.

The US$1.9 trillion stimulus package will add significantly to households’ purchasing power. Retail sales in the U.S. shrank 3% month-over-month in February of 2021, following an upwardly revised 7.6% jump in January.7 Housing starts reached the highest rate in 14 years in December as people moved away from the big cities due to the coronavirus pandemic but sank by 10.3% month-over-month in February.8 Prices for U.S. exports rose 1.6% from a month earlier in February 2021 while import prices increased 1.3% month-over-month.9 Canada’s fourth quarter GDP rose to an annualized 9.6%. The annual inflation rate remains low at 1.1% in February. Excluding gasoline, inflation was 1.0%, down from 1.3% in January.10

Despite a sell-off in the last week of the month, U.S. equities ended February on a positive note, with the S&P 500 posting a gain of 2.8%. Smaller caps outperformed, with the S&P Mid Cap 400 and the S&P Small Cap 600 up 6.8% and 7.7%, respectively. Volatility remained high, with the VIX closing the month at 27.95. U.S. Treasury performance was negative. Canadian equities ended February strongly, with the S&P/TSX Composite up 4.4%. Despite a sharp sell-off at month end, the S&P Europe 350 finished February with a gain of 2.7%, while the S&P United Kingdom rose 1.8% in pound sterling terms. Asian equities posted gains in February, with the S&P Pan Asia BMI up 1.7%. Government bonds sold off in February as investors digested a confluence of factors that look set to push inflation higher and could test central banks’ commitments to keep interest rates low for an extended period.

Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once populations are vaccinated. In March, we maintained the asset allocation that we established in February. We continue to include some exposure to gold as a stabilizer in this volatile environment. Shorter duration fixed income has been maintained as the U.S. economy normalizes and inflationary pressures are rising.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, a wealth effect from rising asset values and lower consumption, healthy consumer balance sheets, and a healing labor market. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 BCOM Index. December 1 to March 1, 2021.

2 Bloomberg WTI Index. February 21, 2021.

3 Trading Economics. China Debt, BIS Statistics. March 2021.

4 Trading Economics. Australia GDP. March 3, 2021.

5 European Centre for Disease Prevention and Control. March 17, 2021.

6 Trading Economics. Euro Area Inflation. March 17, 2021.

7 Trading Economics. U.S. Retail Sales. March 17, 2021.

8 Trading Economics. U.S. Housing Starts. March 16, 2021.

9 Trading Economics. U.S. Trade. March 17, 2021.

10 Trading Economics. Canada Inflation. March 17, 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. February 28, 2020. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The global economy has experienced a type of regime shift in response to the pandemic, and the recovery that follows will not be typical of historic recoveries following periods of recession and stagnation. Since the pandemic began, our outlook has been influenced by virus-related developments and fiscal stimulus, with consumer spending particularly sensitive to changes in these developments.  With our focus on this, we have changed our current twelve-month forward outlook to three months of Growth, followed by nine months of Stagnation, as we have seen evidence of a stronger recovery rebound since the start of the year.

Governments around the world are signaling that they will maintain fiscal support, with the U.S. administration set to lead the way by turning its attention to a multi-year infrastructure package. At the same time, major central banks are expressing a willingness to maintain accommodative stances despite a near-term inflation bounce, as they encourage an inflation overshoot and a rebound in inflation expectations. Incoming reports raise estimates of global GDP growth to 4% in 2021.1

China’s current account surplus widened to 2.0% of GDP in 2020, amounting to US$298.9 billion, compared to US$141.3 billion (1.0% of GDP) in 2019.2 On the merchandise trade front, China’s export sector was boosted by PPE and tech-related products. The steep decline in oil prices also cut China’s import bill by US$67.8 billion (or 26.5%) in 2020.3 In Western Europe, industrial activity and construction have continued to expand even as a weak service sector depresses GDP. Strong manufacturing is largely driven by the export-oriented German economy, where the manufacturing output index jumped 3.2%.4

In the U.S., the new stimulus package should boost an economy that is already off to a better-than-expected start to the year. The U.S. earnings season has been very strong, with the Q4 2020 earnings growth rate for the S&P 500 at 3.9%.5 Retail sales surged 5.3% in January.6 Manufacturing output continued to climb rapidly through January and most housing indicators showed strong levels of activity.  The Canadian economy (outside of the hospitality sector) continued to show resilience through the second wave of lockdowns as households and businesses adapted to tighter restrictions and the number of new COVID-19 cases continues to trend down. Retail sales were impacted by new containment measures but have remained resilient relative to the collapse in the spring. Manufacturing has been less severely impacted by the second wave of lockdowns with sales gradually converging back towards year-ago levels.

Global central banks have effectively taken interest rates to zero, driving nearly all sovereign debt to negative real yields. With less opportunity for yield across fixed income assets – especially those of shorter duration or higher quality – investors will likely continue to shift exposure to riskier assets. The S&P 500 posted a loss for January of 1.01%. Smaller caps outperformed, with the S&P MidCap 400 and the S&P SmallCap 600 up 1.5% and 6.3%, respectively. U.S. fixed income performance was mostly negative, particularly in corporates. Canadian equities posted losses, with the S&P/TSX Composite down 0.3%. The S&P Europe 350 erased its gains in the final day of January, leaving the continental benchmark with a total return of -0.8%. The S&P United Kingdom was down 0.6%. Asian equities began 2021 strongly. The S&P China 500 was up 4.8% and the S&P Hong Kong BMI was up 3.4%. Australian equities managed a gain with the S&P/ASX 200 up 0.3%, continuing a recent strong run which has seen it gain 12% over the last three months.

Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once populations are vaccinated. In February, we shifted a portion of the gold exposure into U.S. Midcap Equities to reflect the updated outlook to near-term growth. Across the Conservative, Moderate Growth, Growth, and Aggressive Growth models, we added 8%, 10%, 12%, and 14% respectively. We continue to include some exposure to gold as a stabilizer in this volatile environment. Shorter duration fixed income has been maintained as the U.S. economy normalizes and inflationary pressures are rising.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, a wealth effect from rising asset values and lower consumption, healthy consumer balance sheets, and a healing labor market. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 World Bank. Global Economic Prospects. January 2021.

2 Trading Economics. China Current Account. January 2021.

3 Trading Economics. China Imports. January 2021.

4 Trading Economics. Germany Exports. January 2021.

5 FactSet. Earnings Insight. February 26, 2021.

6 Trading Economics. U.S. Retail Sales. February 17, 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. January 29, 2020. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The global economy remains dominated by the global pandemic. While the world was hoping to see a conclusion with the launch of vaccines as we entered 2021, rising COVID-19 cases and a more infectious new variant of the virus have created a renewed sense of caution. There have been over 94 million documented cases of COVID-19 and over 2 million deaths reported globally.1 The global economy has been plunged into its deepest recession since the Second World War. A combination of fiscal and monetary policy support will generate growth recovery, but we are maintaining our twelve-month forward forecast of Recession as we do not yet see the recovery overtaking the negative impact of the pandemic that currently prevails.

Growth in China decelerated to an estimated 2.3% in 2020 – the slowest pace since 1976.2 The recovery has been uneven as import growth lagged a rebound in exports, contributing to a widening current account surplus. Accommodative fiscal and monetary policies have resulted in an increase in the government deficit and total debt.3 The Euro area and U.K. economies are projected to contract as they implement more expansive lockdown measures, with sectors like tourism likely to remain depressed. Euro area consumer confidence dropped 1.6 pts to -15.5 in January, which left the survey low by historical standards.4

The U.S. economy is stronger than most other global economies while it continues to experience an uneven recovery. The fall in U.S. activity in the first half of 2020 was nearly three times as large as the peak decline during the global financial crisis, underscoring the depth of the recession.5 Substantial fiscal support to household incomes – far exceeding similar measures delivered during the global financial crisis – contributed to a robust initial rebound in the third quarter of 2020, which was subsequently cut short by a broad resurgence of the pandemic. In Canada, COVID-19-related metrics have been improving and vaccines continue to be rolled out. The Bank of Canada kept all aspects of monetary policy unchanged in January, including the policy rate (0.25%), C$4 billion weekly QE program, and the outcome-based forward guidance.

Despite the COVID-19 pandemic and the uncertainty of an election year, U.S. equities ended the year with the S&P 500 posting a gain of 18.4% for 2020. Smaller caps reversed course by outperforming in Q4, with the S&P MidCap 400 and S&P SmallCap 600 up 13.7% and 11.3% for the year, respectively. Canadian equities ended the year with modest gains, with the S&P/TSX Composite up 5.6% for 2020. European equities finished 2020 down 2.8% thanks to the United Kingdom, down 12.9% after agreeing to “Brexit”. The S&P Europe 350’s total return would have been a 2% gain were it not for the negative contribution of British stocks. The Euro gained 6% versus sterling and 8% vs the US Dollar during 2020. Asian equities recovered after being devastated by COVID-19 in March, with the S&P Pan Asia BMI up 20% for the year. All Asian single-country indices posted gains, with Korea and Taiwan in the lead. Rates on both sides of the Atlantic fell, pushing major sovereign yields further into negative territory across the Eurozone. European bonds outperformed equities, with risker credits top of the performance charts. U.K. bonds also performed well, more in local terms than euros.

In January, we maintained the asset allocation that was established in December for all models. Within Equities, we eliminated our position in U.S. MidCap Equities in the Growth and Aggressive Growth models and established a position in Australian Equities to replace it as the COVID-19 vaccine is being rolled out there quickly, the Government and Reserve Bank are pumping more stimulus into the economy, and the hardest-hit sectors are making a recovery. Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once the population is vaccinated. We continue to favor shorter duration fixed income. With interest rates low or negative, we have maintained exposure to gold.

The COVID-19 pandemic is a global crisis that necessitates a coordinated global response. It is likely to steepen the slowdown in potential growth, undermining prospects for labor productivity and poverty reduction. Limiting the spread of the virus, providing relief for vulnerable populations, and overcoming vaccine-related challenges are immediate priorities. Only when the pandemic is effectively managed in all countries will individual countries be safe from resurgence, allowing global growth outcomes to improve materially. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

Johns Hopkins University. National Public Health Agencies. January 18, 2021.

Trading Economics. China GDP. December 2020.

The World Bank. 2021 Global Economic Prospects. January 2021 (figures 1.10.C and 1.10.D).

Trading Economics. Euro Consumer Confidence. January 21, 2021.

Trading Economics. U.S. GDP Growth Rate. January 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. December 31, 2020. Index performance is based on total returns and expressed in the local currency of the index.