2021 Portfolio Updates – Page 2 – Frame Global Asset Management

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

¹World Bank. Global Economic Prospects. January 2021.

²Trading Economics. China Current Account. January 2021.

³Trading Economics. China Imports. January 2021.

⁴Trading Economics. Germany Exports. January 2021.

⁵FactSet. Earnings Insight. February 26, 2021.

⁶Trading 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, 2021. 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

¹Johns Hopkins University. National Public Health Agencies. January 18, 2021.

²Trading Economics. China GDP. December 2020.

³The World Bank. 2021 Global Economic Prospects. January 2021 (figures 1.10.C and 1.10.D).

⁴Trading Economics. Euro Consumer Confidence. January 21, 2021.

⁵Trading 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.