Positive vaccine news and the potential for an economic rebound have investment managers bullish on equities markets in 2021, despite renewed lockdowns in many parts of the world.
“The shock and awe of 2020 is now in the rearview mirror and I would expect to see more orderly markets going forward,” said James Robertson, senior portfolio manager, head of asset allocation, Canada and global head of tactical allocation with Manulife Investment Management in Toronto.
Last year was a year of extremes, with equities markets entering a tailspin in March before rebounding later in the year, largely buoyed by the resilient technology and health-care sectors. But will those sectors continue to outperform in the year ahead?
Candice Bangsund, vice-president and portfolio manager, global asset allocation, with Fiera Capital Corp. in Montreal, said value stocks should benefit from a reflationary environment driven by accommodative monetary policy and fiscal stimulus. These measures, she predicted, will spur a rotation away from defensive stocks to more cyclical sectors, such as industrials, financials and materials.
“We expect the laggards of 2020 to become the leaders or assume leadership in 2021 due to that reflationary environment,” Bangsund said. “There’s a preference for the cyclical-biased, value-oriented corners of the market, where we still see some compelling value and more room to run, versus the growth-oriented sectors, such as technology and health care, where outperformance has likely run its course.”
Managers expected Canadian equities to pull ahead of U.S. stocks this year, due in large part to the overstretched valuations in the U.S. market and Canada’s heavy tilt toward cyclical sectors.
In early January, Manulife forecast the Canadian market would post annualized returns of about 7.5% over the next five years, and that the U.S. market would return less than 3% over the same period. Also in January, Fiera predicted Canada’s equities markets would see returns of 12% over the next 12 to 18 months, but predicted the U.S. would gain only 0.3% in the current calendar year.
Europe and the United Kingdom also were expected to post positive results in their equities markets, although returns could be somewhat muted due to the headwinds of Brexit and the fact that many European economies rely on tourism.
“The restrictions that were put into place in October and November, and again in December, across different parts of Europe have taken their toll on the growth outlook,” Bangsund said. The U.K. entered a third lockdown in January.
Fiera expected international equities to see returns of 1.1% over the coming year.
In the U.K., despite a more transmissible mutation of Covid-19 that emerged late last year, a vaccine rollout offers hope for the economy. The big headline risk for the country is Brexit. On Dec. 24, 2020, the U.K. and the European Union reached an agreement that includes a no-tariff and no-quota deal for trade, although there will be additional red tape and border checks. The U.K. left the European Union’s single market on Jan. 1.
Managers also saw opportunities in emerging market equities — although investors need to be selective. For example, managers were positive about the growth prospects in China but divided when it came to opportunities elsewhere, such as in Brazil.
Robertson said he sees “nascent signs of attractiveness” in Brazil because of its diversified economy, which includes agriculture, oil production and mining, as well as the country’s strong trade relationship with China. “[Brazil is] an economy that is probably underappreciated in terms of how robust it is and, certainly from a valuation perspective, it is extremely attractive,” Robertson said.
Kevin Burkett, a portfolio manager with Burkett Asset Management Ltd. in Victoria, B.C., said he tends to stay clear of Brazil due to its political risk. Brazil’s government is headed by far-right populist president Jair Bolsonaro. Earlier this month, Bolsonaro declared that Brazil was “broke” and suspended the purchase of hundreds of millions of syringes, halting the country’s Covid vaccination campaign.
Burkett looks for high-quality companies that have indirect exposure to emerging markets. For example, he likes Finland-based Kone Corp., which builds and maintains elevators and escalators and has a significant amount of business in China.
China, which entered and emerged from the coronavirus pandemic first, is set to continue its quick pace of economic growth, Bangsund said, making the country attractive to equities investors. The Chinese economy is expected to grow by more than 8% in 2021, which “is positive for earnings expectations and stock prices,” Bangsund noted.
Despite the generally positive outlook for 2021, embers from the 2020 dumpster fire are still smouldering and pose a risk to equities markets. Burkett, for example, was not enthusiastic about persistently low interest rates, even though low rates typically benefit equities markets.
“We tend to take the view that low interest rates reflect the precarious nature of today’s global economy and [are] not a validation for higher share prices,” he said, adding that “2021 is a market that demands caution.”
One area of concern is how badly the pandemic has burned the global economy, Robertson said: “The big struggle we have is trying to assess whether the damage done to the economy is permanent or structural. At this point, the jury is still out.”
This is the first time the world has dealt with a recession caused by government-mandated shutdowns. As such, managers are monitoring whether indicators such as the unemployment rate will improve or remain at worrying levels.
Robertson said he’s keeping an eye on unemployment and labour force participation rates “to see if we have to rethink the new world order or the new normal.”
Geopolitical risks, ranging from the potential for civil unrest to continued trade disputes, also are a concern. Earlier this month, Donald Trump supporters stormed the U.S. Capitol building to protest the election of President Joe Biden. The Biden administration will likely be more predictable than the Trump administration was, but there are still questions about how the new president will handle trade relations with China, for example.
“We’re not likely to see more tariffs. Will tariffs come off? That remains to be seen,” Bangsund said.
Another trend for equities investors to monitor is the growing divide between the rich and poor. Income inequality, Robertson suggested, will be more persistent than other geopolitical risks in the years ahead, and could eventually end up forcing governments to change their tax policies.