March 31, 2021

Financial letter, Spring 2021, 55^th edition

There is hope

Vaccinations are proceeding apace! South of the border, more than 40 vaccine doses per 100 people have already been administered. Canada and Europe are a bit slower, but the pace seems to be picking up and most people may get their first shots before the summer starts. What a scientific accomplishment for humanity, to have found an effective solution so quickly! It shows how collaboration can lead to wonderful things. There are still challenges ahead, but the hope of better days is rising.

Government assistance measures have staved off the worst on the economic front, and have even sped up the recovery. President Biden’s latest assistance plan, announced in March, has boosted market confidence, continuing the fall thrust and creating more gains. The TSX index did well, posting 8,1% growth since the beginning of the year, which is partly due to the 21,9% surge in the price of oil. The SP500 posted 4,5% performance and the international equities market index was up 3,4% for the same period.

Is inflation making a comeback?

Inflation should not be a problem in the short term. Several million jobs that were lost during the pandemic still have to be made up for. Despite everything, the average North American has never had so much disposable income. Desjardins Economic Studies estimates that Canadians’ excess savings have now reached $175 billion. That could lead to inflation in the next few quarters, but if so it will be temporary, just to give the supply chains time to reorganize and the stimulus package gains time to dissipate.

What will consumers do with all that available money? Will they spend it all, sparking an uncontrollable inflationary thrust? Or will they exercise prudence and sock it all away in savings? The answer probably lies halfway between those 2 options. Growing demand is causing shortages of goods and labour in several sectors. Just look at swimming pool installers, sports retailers and construction workers. But the scarcity of some goods and services could also force consumers to postpone some non-essential expenditures.

For the moment, even though some observers are concerned, we think it is too early to worry about galloping inflation. We can, however, affirm that both the governments and the central banks are aiming at a rapid return to full employment, even if that overheats the economy and spikes short-term inflation.

There is always the risk that the central banks will react too late, because inflation data takes time to affect the economy. When it does, it has sometimes proved hard to control. That is why we have to keep informed and treat inflation as a significant factor when making decisions about allocating portfolio assets. As always, everything depends on proportion and balance.

Portfolio positioning

Asset allocation

Overall, the backdrop is favourable for a continuation of the investment cycle in the next 12 to 18 months. Inflation should be moderate and interest rates should climb slowly in line with a solid economic recovery. In circumstances such as these, history has taught us that equities generate better returns than bonds. That is why, in a balanced portfolio, we are opting for a target allocation of 40% fixed income (bonds), 45% equities and 15% alternative investments.

Fixed income

Even in an inflationary context with rising interest rates, fixed income plays a major role in a well diversified portfolio. The key is to select suitable investments like inflation-hedged bonds in our portfolio. We are still recommending shorter maturity government bonds. That allows us to protect the portfolio and reinvest at better rates that rise with the economic recovery.

Equities

Our balanced portfolio is currently very close to its equities target. There could be some volatility, but the end of the pandemic coupled with low interest rates and the extensive tax measures deployed by our governments will boost global demand and the growth of corporate profitability.

Geographic and sector diversification

Geographic: we are taking a balanced approach to the geographic spread of our assets, with a preference for the international markets that should benefit from a more rapid pace of vaccinations and the resulting easing of confinement measures. The portfolio is already well positioned, with greater exposure to the European, emerging and Japanese markets. In those regions we focus on quality companies, those that negotiate at reasonable prices and should be able to take advantage of the economic recovery.

Sector: notwithstanding how well our bank holdings have performed since the beginning of the year and their overrepresentation in the portfolios, we continue to favour this sector which will benefit from the economic recovery and higher interest rates. We may add some more if there are market corrections, because it is a great opportunity to share in the economic recovery without being exposed to the volatility of more cyclical sectors like oil and base metals. Among the other sectors we favour, industrial companies should benefit from the desire of governments around the world to support the economic recovery by building environmentally friendly infrastructure. Engineering companies could be the first to profit from forthcoming infrastructure projects. Opportunities for growth for our clean energy sector holdings should multiply accordingly.

Alternative: we are currently working to add an alternative strategy akin to fixed income to our portfolios. As with all our alternative portfolio strategies, the objective would be to reduce volatility and investment interdependence while generating attractive returns, regardless of market trends or interest rate fluctuations.

As you can see, we are constantly working to grow our portfolios based on our view of the economic situation. Since what we want is to help you manage your wealth beyond managing your portfolio, we are preparing a virtual conference about protecting your wealth. Check your email, you will receive the invitation very soon.

In the meantime, our priority is to respond to your needs. If you have any questions, please contact us.

Sources:

• BCA Research Quarterly Portfolio Outlook, 1er Avril 2021
• MRB Partners Asset Allocation Strategy, 1er Avril 2021
• BCA Research Second Quarter 2021 Strategy outlook, 26 Mars 2021
• Desjardins Études Économiques, Prévisions économiques et financières, 19 Mars 2021