Financial Letter - October 2020

After a solid recovery from the spring shutdown, global economic growth hit some short-term snags with the second wave of the COVID‑19 pandemic and difficulties in the U.S. Congress to approve new stimulus measures. The prospect of a contested election in the United States injects further uncertainty. Market volatility is expected to grow until the elections, driven by short‑term risks. As usual, September saw markets hit pause, with the main indexes undergoing a slight correction.

Notwithstanding the possibility of an election contested by Donald Trump and his supporters, the election outcome is not expected to have a significant stock market impact in the coming months. With both parties supporting a new stimulus package, the only difference will be the name on the cheques. As a result, we see equities outperforming government bonds, whose real returns (after inflation) will be negligible over a 12‑month term. Economic growth is expected to regain momentum early in the year, fuelled by expansionary fiscal and monetary policies and the potential for effective vaccines against COVID‑19. We believe the portfolios’ exposure to equities should be maintained in a low interest rate environment. In the U.S., the Federal Reserve is committed to keeping rates close to zero until 2023! The lack of inflationary pressure from wages or production capacity is another conducive factor for low secular interest rates.

Despite favouring a neutral equity position, i.e., on target, we are inclined to overweight equities at the expense of fixed income, particularly in the event of a market pullback.

With a bias for the U.S. over other international markets, we generally prefer growth to value stocks, but are maintaining a sound balance between both, as while growth titles have outperformed since the pandemic, their value counterparts are expected fare better as the economy reopens. Optimism about an effective vaccine should prompt more cyclical shares to outperform defensive sectors, international to outpace U.S. equities and value to beat out growth stocks. That being said, the necessary conditions for a large‑scale rotation of recent market leaders to laggards have yet to materialize.

While we believe technology stocks will continue their growth run, we are resolutely against adding positions in certain market leaders, like Shopify, Zoom, Tesla and Netflix, which are trading at stratospheric levels. Shopify, Canada’s top-performing stock, has a market capitalization of $150 billion with only $4.5 billion in sales! It is trading at nearly 500 × earnings and more than 30 × sales for 2021… Pass!

Each Desjardins Securities advisor named on the front page of this document, or at the beginning of any subsection hereof, hereby certifies that the recommendations and opinions expressed herein accurately reflect such advisor’s personal views about the company and securities that are the subject of this publication and all other companies and securities mentioned in this publication that are covered by such advisor. Desjardins Securities may have previously published other opinions, including ones contrary to those expressed herein. Such opinions reflect the different points of view, assumptions and analysis methods of the advisors who authored them. Before making an investment decision on the basis of any recommendation made in this document, the recipient should consider whether such recommendation is appropriate, given the recipient’s particular investment needs, objectives and financial circumstances.

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