Martin Roberge of Canaccord Genuity thinks that investors must be very watchful in 2021 if they want to take advantage of market trends in these uncertain times.
In particular, he suggests a greater focus on firms in emerging markets and international equities. The North American portfolio strategist at Canaccord Genuity presented the outlook for capital markets at the conference organized by the Cercle finance du Québec and the Association des économistes québecois on January 19.
Matthieu Arseneau, from National Bank, also participated in the activity led by Clément Gignac of Industrial Alliance.
"We are already seeing some peculiarities in this economic recovery that stand out from the cycles of the past," Gignac says. Four factors explain the atypical nature of this stock market upturn.
Central bank intervention is certainly an important factor to monitor, Roberge says. Keeping key interest rates low is the best known method, but expanding balance sheets through massive purchases of government bonds has also been widely used by major central banks around the world. “These purchases reached record levels in 2020 and the trend should continue in 2021," he adds.
This credit easing stoked SME activity and household spending. "The economy will still need a bridge of support in the second half of 2021, until autonomous growth is achieved some time in 2022," Roberge continues.
China and goods
In China, during the 2008-2009 financial crisis, the recovery was driven by services, while manufacturing saw a serious slowdown in growth for a full year. This time around, the manufacturing production and consumer spending indices followed the same "V"-shaped recovery, probably due to the prolonged lockdown imposed on many sectors. All over the world, the recovery is thus driven by the consumption of goods and not by services, Martin Roberge explains.
The COVID-19 pandemic will not disappear in 2021, so it is important to keep this trend in mind when planning investments pegged to inflation.
Replenishing inventories
Another important factor to consider is the inventory cycle. Inventories were depleted because production idled for a few months, while consumption rebounded sharply starting in third quarter 2020.
"The shelves were emptied of manufacturing and retail goods. They need to be restocked. Since no change in monetary and fiscal policies is expected until the economy returns to normal, we must go through a full restocking cycle. The industrial growth index is still in the negative zone, and a gap remains between production and sales, so we still have a long way to go,” he said.
The US dollar
In the decade following the 2008 financial crisis, the US dollar maintained strength in the money markets. In fact, the economic recovery in North America had been slightly hampered by the high value of the US dollar, considered a safe haven currency compared with other currencies. For example, the euro was stunted by the problems of overindebtedness in Greece, Italy and Spain at the time.
This time, the US dollar is not as attractive due to the low policy and real rates of 10-year bonds. Negative real rates thus herald a prolonged depreciation of the US dollar. The DXY index, which measures appetite for the US currency, could approach the 80-point mark in 2022, although Martin Roberge anticipates a slight rebound in 2021. Speculation on the value of the U.S. dollar should be done in a very tactical way, he adds, because the trend is strongly bearish.
Review weighting
If investors want to make gains from their positioning at a time when the U.S. currency is losing its appeal and the markets are heading into a downward cycle, it is time to consider increasing the proportion of international securities in their portfolio, Martin Roberge continues.
The temptation to review weighting is heightened by the fact that in 2021, American companies will not be able to make massive share buybacks due to a lack of profitability. “Much of the outperformance of US indices over the past decade is attributable to these huge stock redemptions,” he points out.
This trend is not visible in large publicly traded companies elsewhere in the world. As a result, Roberge recommends focusing on positioning outside of US securities.
The strategist is monitoring three other markets: Canada, emerging markets (EM) and Europe, Australasia and the Far East (EAFE) securities. In a devalued US dollar environment, the Canadian stock market generally underperforms the EM index and especially the EAFE index. “If you believe in the ‘bear market’ theory, you have to buy stocks outside the US and choose the EAFE, then the EM, and finally Canada,” he says.
Private and public debt
The Canadian indices have been underperforming due to high corporate debt, Roberge continues. Currently, the average debt of public corporations is four times their earnings before taxes, interest, depreciation and amortization (EBITDA). That is less than the peak of 2015-2016, when Canadian stocks were affected by oil prices, but in his opinion, this debt is still too high.
Comparing state and household debt, Martin Roberge mentions that relative to disposable income, household debt in the BRIC countries (Brazil, Russia, India and China) is at 50%, versus 117% for households in the G7 countries.
In terms of the Debt-to-GDP ratio, BRIC governments have an average debt of 51%, compared with 144% for the G7 countries. Many strategists believe that the BRIC countries thus have more leeway to withstand the economic cycle.
A downward stock market cycle in the United States would have a negative impact on foreign stock exchanges. “Portfolios overweighted in U.S. securities could flounder in the second half of 2021. Short-term call options are at their average level, but long-term call options are at 393 billion USD on the S&P 500 Index, a level never seen before,” Roberge points out.
Commodities
Martin Roberge's preferred asset class is commodities or raw materials. Excess liquidity, measured by the money supply less economic growth, will expand sharply starting in July 2021. In addition, the variation of the CRB (Commodity Research Bureau) index, based on the price of raw materials, will be very close to 0% year-to-year.
The combination of these two factors favours a brief but very significant upturn in the value of commodity products. Roberge thinks this rebound will be comparable to the one seen between 2003 and 2008, when demand in China fuelled global growth.
Canaccord Genuity’s goal in 2021is to slightly increase the proportion of equities and commodities in the portfolio, while reducing the proportion of assets in bonds and currencies.
Bonds
The bond market will improve in 2021, but Martin Roberge predicts that US 10-year bonds will not exceed 1.25 % until the Fed's inflation target is reached. This target has been adjusted to 2.5 %. "I don’t think we'll reach it in 2021," he says. He projects that the rate for 10-year bonds should be at 1% by year end.
As for the interest rate on government bonds, Martin Roberge notes that the weight of debt repayment in relation to GDP is at 2% in the United States, down from 3% in the 1990s. The country is highly indebted, but it has been in worse shape before.
According to Roberge, the current stock market cycle, which rose while a recession was in full swing, has nothing to do with the tech bubble in 1999-2000. “At that time, the Fed's monetary policy was being tightened, and the tax rules were more restrictive. There was less liquidity in the system. This time it's the opposite," he says.
If the key rate starts to rise, which is unlikely in the next two years, Roberge expects the Fed to follow the lead of the Japanese central bank, which has capped the yield offered on long-term bonds.
