April 5, 2021

Financial Letter - March 2021

Here is a summary on macroeconomic trends and the outlook for the stock market in 2021 and onwards based on data collected by the independent firm BCA Research.

Economic growth: The global economy will rebound strongly over the next year and lead to a rotation of securities between U.S. and global markets.

Inflation: A rise in structural inflation is not a risk factor now, but could become a major problem by the middle of the decade.

Asset allocation: Investors should continue to overweight equities over a 12–18 month horizon. The return on profits is much higher than any bond yield.

Stocks: Stocks should continue to outperform. Investors should favour bank stocks and cyclical stocks.

Fixed income: We must continue to opt for shorter bond maturities overall and choose fixed-income securities that offer protection against inflation.

Currencies: Although the U.S. dollar may appreciate in the short term, it will decline over the next 12 months. A huge budget deficit, an increase in global growth and risk taking, a deteriorating balance of payments and a soft Federal Reserve stance are all factors leading to a decline in the U.S. dollar.

Resources: The recovery in demand for oil, combined with a limited supply, will support the price of oil in the medium term. Strong economic growth in China and the rest of the world will continue to support metal prices.

The year 2020 will be remembered for a long time to come—the kind of perfect storm that happens once in a century. History tends to repeat itself. When comparing this pandemic to the 1918 Spanish flu, we can already draw a parallel between the strong recovery expected in the coming years and the Roaring Twenties that followed World War I. Will we witness the Roaring Twenties 2.0, a period of economic prosperity that will change the face of Western economies? One thing is sure: there will be a pre pandemic and a post pandemic period. We have made an unprecedented technological leap that has transformed our lifestyles.

The recent rise in 10-year yields resulted in a stock market repositioning. This increase mainly affected technology stocks, which have experienced a frantic rise in the past decade. After a spectacular year in 2020, the tech sector is now facing some challenges. The combination of rising rates, slower year over year profit growth and a relatively high valuation, especially in the tech stocks that have benefited the most from the pandemic, is weighing on the industry. Over a 6 to 12 month horizon, other lagging sectors such as financials, cyclicals and healthcare should offer better returns. This does not mean, however, that we should abandon the technology sector.

The global economy is expected to rebound by the end of the year. For now, the United States is leading the way. The consensus is for a GDP increase of 4.8% in the first quarter. This is due to a vaccination campaign ahead of the rest of the world, allowing for faster lockdown lifting. In addition, their tax measures have been more stimulating than elsewhere. While the United States is lifting the lockdown, Europe is reinstating a lockdown. Strong growth stocks should favour the rest of the world in the second half of the year. Recent economic data from Europe shows that the service sector has likely bottomed out. Excess savings in Western households are at record highs. This will support consumption for the rest of the year.

Stocks generally outperform bonds when economic growth is strong and interest rates are low. The end of the pandemic and fiscal stimuli will support growth for the next 12 to 18 months, allowing the stock market to continue its ascent. With inflation slow to emerge, monetary policy will remain accommodative during this period. The recent hike in 10-year yields has destabilized the market, but as long as it doesn't cause a recession, the stock market can support higher rates. Stricter monetary policy only becomes necessary when inflation rises to a level that central banks deem unsustainable. We are far from such a level right now.