January 15, 2021

Financial letter, December 2020, 54^th edition

A surprising year

The year 2020 started off on a relatively calm note. With easing trade tensions, a strong labour market and an accommodative tone by the Federal Reserve, all the conditions were in place for another period of growth... until a virtually unheard of virus reared its head.

First and foremost, COVID-19 is a major human tragedy that has upended our day-to-day routines and cost the lives of far too many. However, the draconian measures imposed to limit the spread of the virus have also contributed to this tragedy. From an economic and financial standpoint, the shutdown of the global economy for a few weeks led to one of the worst economic and financial recessions in history and caused the main stock indexes to plummet more than 35% in just 4 weeks.

To temporarily offset the pause in economic activity, global governments quickly erected a fiscal and monetary bridge by distributing billions of dollars in emergency aid, lowering interest rates to zero and ensuring the smooth running of the financial system. Looking back, we can say that this strategy was effective. After hitting a low on March 23, the stock indexes have surprisingly recouped the bulk of their losses, and even more in some cases.

Our cautious approach to the portfolios at the beginning of the year helped rein in volatility in March. By reinvesting some of our cash in March and April, and rotating toward sectors that were harder hit by the pandemic over the summer, the portfolios were able to generate impressive returns despite the difficult circumstances. We will have a chance to discuss your performance with each of you in the coming weeks. The start of the vaccination campaign has given us hope for positive returns in the portfolios for the coming year.

Our 2021 scenario

The coming year promises to be a good one, as long as we can beat, or at least contain, COVID-19. The stock markets have appreciated substantially since the beginning of November, withstanding a US election that proved less tumultuous than expected and the announcement of the effectiveness and availability of COVID vaccines in quick succession. Investor sentiment is decidedly a little too positive, which could prompt a brief pause in the markets in the short term. Nevertheless, the distribution of vaccines seems to be unfolding fairly smoothly. With fiscal and monetary support measures remaining strong, the stock markets could outperform bonds within 12 months.

The extended holiday lockdown will have an impact

The restrictions announced around the world, while less significant than last spring, will hurt economic growth in the coming months and could have repercussions on the financial markets. We’re keeping our eye out for new opportunities in the 1- to 3-month range.

Vaccinating the public will allow for a gradual return to normalcy

We will begin to feel its effects around late spring. The resulting loosening of public health restrictions will lead to a recovery in economic activity and, by extension, in corporate profits. Within 3 to 12 months, we believe that the stock market will generate positive returns.

Interest rates will remain low

The central banks have made it clear that interest rates will stay low for some time. This will allow the economy to resume sustainable growth and inflation to move comfortably above the 2% target.

There are some key risks in our scenario

A mutation of the virus that makes the vaccine ineffective, issues with vaccine production or distribution, or, conversely, an overly rapid rise in inflation and interest rates could affect our scenario and force us to change course.

Portfolio positioning

Asset allocation

Overall, the backdrop is favourable for a continuation of the investment cycle in 2021. Therefore, in a balanced portfolio, we are opting for a target allocation of 40% fixed income, 45% equities and 15% alternative investments.

Fixed income

Interest rates will remain low for some time to come, but we recommend short-term maturities to limit volatility and protect the portfolios in the event of an unexpected hike in interest rates. Under these circumstances, we have to stretch our imagination to be able to generate returns in the secure portion of the portfolio. However, we believe that it is possible and that active management of our corporate bonds and the use of real return bonds will help us deliver a strong performance in this context.

Equities

Our position at the start of the new year is slightly more cautious than our target for 2021 due to profit-taking at the end of the year. The balanced portfolio currently consists of 40% equities. We are aiming to bring our weighting of equities back to the 45% target due to the weakness of the stock markets in the coming months in order to take full advantage of the return to normal economic activity.

Geographic and sector diversification

While the COVID pandemic and resulting restrictions have favoured a handful of securities related to work, consumption and home recreation, such as Microsoft, Amazon and Netflix, the next key trend to watch for in the coming months may well be the return to normalcy. The losers in the pandemic will most likely be the winners next year.

Geographic

The economic recovery and easing of trade tensions will allow emerging countries, with China leading the way, to take the initiative after a decade of underperformance against the US stock market.

Sector

Bank securities are favoured as interest rates have stabilized and the return to normalcy will limit losses and encourage demand for new loans. Healthcare is the preferred defensive sector given its weaker valuation, strong profits and solid growth. Other sectors to keep an eye on in 2021 include industrial companies, value-style securities and smaller-cap companies that should benefit from the return to normalcy we all want.

Alternative

Alternative investments will remain a significant portion of the portfolio's allocation. Diversification, reduced volatility and the regular income they provide are key assets in achieving your long-term objectives. Our gold will serve as a safe haven in case things don't turn out exactly as we hope, in addition to enabling us to benefit from any increase in inflation. The private infrastructure investments we will try to add to the portfolios in the coming months have all of these features.

As you can see, we are constantly working to identify opportunities, regardless of the economic situation. The year 2020 has once again proven that it's crucial to stay the course with your investment strategy, as a diversified portfolio is designed to meet your long-term objectives. Our dedicated team of professionals devotes the time and resources it takes to tailor their wealth management approach to your personal situation, your investment objectives and market developments.

Our priority is to be attentive to your needs. If you have any questions, please feel free to contact us. The entire team wishes you a happy and healthy new year!

Sources:

• BCA Research, Strategy Outlook – 2021 Key Views: Navigating a Post-Pandemic World, December 10, 2020
• Credit Suisse, U.S. Equity Research – Views from Around the Room: 2021 Outlook, December 18, 2020
• MRB Partners, Weekly Macro Strategy – Play the Cycle, Not the Countertrend Moves, December 18, 2020
• Desjardins Economic Studies, A Look Back at 2020, December 21, 2020