January 2021 Portfolio Management Team Update

Elvis Picardo

January 8, 2021

Market & Economic Environment

Global equities added to their record November gains last month, to cap a strong quarter and end one of the most volatile years in memory on a positive note. As the rollout of vaccines to combat Covid-19 commenced in December, optimism that economies would gradually return to normal helped prop up investors’ risk appetite despite soaring cases of Covid-19 around the world.

The TSX gained 1.4% in December, for a Q4 advance of 8.1%. Overall, the index was only up 2.2% in 2020 amid tremendous divergence in the performance of its constituent sectors. The technology sector (+80.3%) was the best performer by far on the TSX, with materials (+19.5%) a distant second, followed by industrials (+15.3%) and the consumer discretionary sector (+14.4%). Energy (-30.8%) was the worst-performing sector in 2020, followed by health care (-23.6%) and real estate (-13.1%).

After the record selloff in February and March triggered by the pandemic, U.S. equity indices posted an exceptional recovery over the rest of 2020, led by technology stocks in general and the FAANG stocks in particular. The S&P 500 rose 11.7% in Q4 for a gain of 16.3% in 2020, while the Dow Jones Industrial Average overcame its relatively slower recovery to advance 10.2% in Q4 and end the year up 7.3%. The Nasdaq Composite was the best performer of major indices worldwide, with its 15.4% gain in Q4 capping a 43.6% surge in 2020.

Other major indices also posted strong gains in Q4, although performances for full-year 2020 were mixed. While most European bourses recorded double-digit gains in Q4, indices such as the UK’s FTSE-100 (-14.3%) finished the year significantly lower, weighed down by Brexit concerns and record Covid-19 cases. In the largest emerging markets, India and China were the best performers with gains of 15.8% and 13.9% respectively. (Data Source: FactSet)

Our Strategy

 Equities have started 2021 on a strong note, with the TSX and U.S. indices hitting new highs on January 7, a day after a pro-Trump mob stormed the U.S. Capitol. Democrats are set to take control of the U.S. Senate – having won both seats in Georgia’s runoff elections – in addition to their majority in the House of Representatives and control of the White House; the Democratic sweep will make it easier for the party to push its agenda and inject more stimulus into the economy.

These political developments have rekindled the so-called “reflation” trade, with investors expecting faster economic growth in 2021 to translate into higher bond yields and provide a tailwind for cyclical and small-cap stocks. This bodes well for the TSX, as the index is dominated by cyclical sectors such as financials, commodities, and energy. These sectors are also full of value stocks that could narrow the gap with their growth counterparts as the global economy recovers. The rotation from growth to value that took off in November has continued for the past two months and shows few signs of letting up. These trends should favour our client portfolios in 2021, as they are balanced with an appropriate mix of cyclical and growth securities.

While the Portfolio Management Team (PMT) forecasts the year ahead to be characterized by modest returns and periodic bouts of volatility, it expects downside risk to be mitigated by stimulative fiscal and monetary policy, as well as a successful vaccine rollout. Negative Covid-19 headlines remain a risk that could deflate sentiment in some of the frothier sections of the markets. The PMT will continue to make tactical adjustments to portfolios as necessitated by changing market conditions.

Please contact any member of the PMT if you have any questions or concerns regarding your accounts.