How this Year’s Investment Themes are Playing Out in Real Time
Our market outlook going into 2021 was for ramped up vaccine deployments, accommodative monetary and fiscal policy, and upbeat corporate earnings to drive equity markets higher. We also projected an increase in interest rates and inflation. So far, these investment themes have been playing out as expected – we have seen strong performance, particularly from cyclical sectors such as energy, financials and industrials, and fixed income sold off sharply as the benchmark U.S. 10-year Treasury yield almost doubled from 0.91% to 1.74%.* But what does all of this mean for the economy and markets?
Vaccines, fiscal stimulus and the consumer
Monetary and fiscal policy remain supportive. President Joe Biden signed a US$1.9 trillion American Rescue Plan into law, and Canada also unveiled additional stimulus in it’s federal budget. While the Bank of Canada is set to cut the pace of its asset purchases, they have not altered their commitment to keep interest rates low for the foreseeable future. The world is still battling a third wave of the pandemic that could prolong tight economic measures to contain the virus, but countries further along in their vaccination campaigns offer a glimpse of what is to come. Thanks to increased vaccinations and massive fiscal stimulus, U.S. consumer prices increased by the most in more than eight years, albeit off a low base.
What are we looking out for?
The biggest risk to the market, outside of a virus mutation, is if rising growth and inflation leads to rising bond yields, which could disrupt equity markets. One reason for this is that the value of a financial asset is equal to the sum of the present value of its future cash flows. But higher interest rates mean lower present values for financial assets. Companies that are expected to earn cashflows in the distant future – many of which are in the consumer discretionary and information technology sectors – are particularly vulnerable to this phenomenon.
Where are we optimistic?
With the U.S. Federal Reserve’s shift toward average inflation targeting, we believe the risk is low that central banks will feel compelled to tighten monetary conditions. Moreover, any overshoot in inflation is expected to be temporary. Remember, inflation is being fanned by stimulus payments, pent-up demand and supply chain disruptions. Many of the long-term structural deflationary forces, like automation and demographics, have not reversed.
Rising interest rates that are accompanied by a healthy economy are normal and we expect the recovery in growth to outweigh the drag from rising bond yields. We still prefer equities to bonds, and each portfolio is weighted accordingly. We remain bullish on small caps, the value factor and other beneficiaries of a strengthening economy, as well as a pickup in inflation. Inflation is a real threat to investors’ savings and our flexibility to make asset allocation changes is crucial in this environment.
By Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer
Marchello Holditch, CFA, CAIA, Vice-President and Portfolio Manager, CI GAM | Multi-Asset Management
Source: Bloomberg Finance L.P. and CI GAM | Multi-Asset Management as at April 10, 2021
This document is intended solely for information purposes. It is not a sales prospectus, nor should it be construed as an offer or an invitation to take part in an offer. This report may contain forward-looking statements about one or more funds, future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. CI Assante Wealth Management and its dealer subsidiaries, Assante Capital Management Ltd. and Assante Financial Management Ltd. (collectively “Assante”) are affiliates of CI GAM | Multi-Asset Management, which is a division of CI Global Asset Management. Evolution Private Managed Accounts are managed by CI Global Asset Management under the United Financial brand and are available exclusively through your Assante advisor. Neither CI Global Asset Management nor its affiliates or their respective officers, directors, employees or advisors are responsible in any way for damages or losses of any kind whatsoever in respect of the use of this report. Commissions, trailing commissions, management fees and expenses may all be associated with investments in mutual funds and the use of the Asset Management Service. Any performance data shown assumes reinvestment of all distributions or dividends and does not take into account sales, redemption or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the fund prospectus and consult your advisor before investing. CI Assante Wealth Management is a registered business name of Assante Wealth Management (Canada) Ltd. CI Global Asset Management is a registered business name of CI Investments Inc. This report may not be reproduced, in whole or in part, in any manner whatsoever, without prior written permission of CI Assante Wealth Management. Copyright © 2021 CI Assante Wealth Management. All rights reserved.
Our market outlook going into 2021 was for ramped up vaccine deployments, accommodative monetary and fiscal policy, and upbeat corporate earnings to drive equity markets higher. We also projected an increase in interest rates and inflation. So far, these investment themes have been playing out as expected – we have seen strong performance, particularly from cyclical sectors such as energy, financials and industrials, and fixed income sold off sharply as the benchmark U.S. 10-year Treasury yield almost doubled from 0.91% to 1.74%.* But what does all of this mean for the economy and markets?
Vaccines, fiscal stimulus and the consumer
Monetary and fiscal policy remain supportive. President Joe Biden signed a US$1.9 trillion American Rescue Plan into law, and Canada also unveiled additional stimulus in it’s federal budget. While the Bank of Canada is set to cut the pace of its asset purchases, they have not altered their commitment to keep interest rates low for the foreseeable future. The world is still battling a third wave of the pandemic that could prolong tight economic measures to contain the virus, but countries further along in their vaccination campaigns offer a glimpse of what is to come. Thanks to increased vaccinations and massive fiscal stimulus, U.S. consumer prices increased by the most in more than eight years, albeit off a low base.
What are we looking out for?
The biggest risk to the market, outside of a virus mutation, is if rising growth and inflation leads to rising bond yields, which could disrupt equity markets. One reason for this is that the value of a financial asset is equal to the sum of the present value of its future cash flows. But higher interest rates mean lower present values for financial assets. Companies that are expected to earn cashflows in the distant future – many of which are in the consumer discretionary and information technology sectors – are particularly vulnerable to this phenomenon.
Where are we optimistic?
With the U.S. Federal Reserve’s shift toward average inflation targeting, we believe the risk is low that central banks will feel compelled to tighten monetary conditions. Moreover, any overshoot in inflation is expected to be temporary. Remember, inflation is being fanned by stimulus payments, pent-up demand and supply chain disruptions. Many of the long-term structural deflationary forces, like automation and demographics, have not reversed.
Rising interest rates that are accompanied by a healthy economy are normal and we expect the recovery in growth to outweigh the drag from rising bond yields. We still prefer equities to bonds, and each portfolio is weighted accordingly. We remain bullish on small caps, the value factor and other beneficiaries of a strengthening economy, as well as a pickup in inflation. Inflation is a real threat to investors’ savings and our flexibility to make asset allocation changes is crucial in this environment.
By Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer
Marchello Holditch, CFA, CAIA, Vice-President and Portfolio Manager, CI GAM | Multi-Asset Management
Source: Bloomberg Finance L.P. and CI GAM | Multi-Asset Management as at April 10, 2021
This document is intended solely for information purposes. It is not a sales prospectus, nor should it be construed as an offer or an invitation to take part in an offer. This report may contain forward-looking statements about one or more funds, future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. CI Assante Wealth Management and its dealer subsidiaries, Assante Capital Management Ltd. and Assante Financial Management Ltd. (collectively “Assante”) are affiliates of CI GAM | Multi-Asset Management, which is a division of CI Global Asset Management. Evolution Private Managed Accounts are managed by CI Global Asset Management under the United Financial brand and are available exclusively through your Assante advisor. Neither CI Global Asset Management nor its affiliates or their respective officers, directors, employees or advisors are responsible in any way for damages or losses of any kind whatsoever in respect of the use of this report. Commissions, trailing commissions, management fees and expenses may all be associated with investments in mutual funds and the use of the Asset Management Service. Any performance data shown assumes reinvestment of all distributions or dividends and does not take into account sales, redemption or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the fund prospectus and consult your advisor before investing. CI Assante Wealth Management is a registered business name of Assante Wealth Management (Canada) Ltd. CI Global Asset Management is a registered business name of CI Investments Inc. This report may not be reproduced, in whole or in part, in any manner whatsoever, without prior written permission of CI Assante Wealth Management. Copyright © 2021 CI Assante Wealth Management. All rights reserved.