Liquidity is an important characteristic to consider when aligning security selection with investment objective. The need for capital protection and ability to convert an investment holding to cash is essential for shorter or unpredictable time horizons, but it is less important when investing for a retirement goal 30 years out.
With the Democrats taking both Georgia seats on the U.S. Senate, on January 5, 2021, the major political uncertainties of 2020 were behind us. With only the narrowest of majorities, in the senate and a reduced majority in the house, a unified Biden administration can be expected to push for greater fiscal spending, limited tax increases and regulatory burden and an overall easier political nominations process. But there is no mandate, nor likely majority support for, the more ambitious elements of the progressive policy agenda.
Without a doubt, 2020 was a “loss” year. Individually, we lost the ability to live our normal way of life. Globally, currencies lost their purchasing power as central banks added US$9 trillion to the system (leading to price increases in almost everything, including stocks and properties), and over 1.8 million people lost their lives due to COVID-19.
It’s pretty much a no-brainer to suggest that economic growth in 2021 will be better than what we experienced in 2020. A combination of accommodative monetary and fiscal policy, and the deployment of COVID-19 vaccines will help continue the economic rebound from the March 2020 lows.
Looking at their fixed-income portfolios, investors will no doubt be wondering where returns are going to come from in 2021. Bond yields are extremely low by historical standards. The yield of a diversified Canadian bond portfolio is set to finish 2020 at just 1.2%, the lowest since the bank began tracking Canadian bond yields in 1996 and over half a per cent lower than any previous year.1 In this environment, what role does fixed income play in investors’ portfolios?
As the new year approaches, hospitals are under increased strain, leading some governments to impose tighter restrictions on activity. This is contributing to pockets of weakness in economic data, particularly in the service sector.
Looking back at our 2020 outlook from December 2019, it would be fair to say that we didn’t foresee a global pandemic that would have impacts across the world and keep us trapped at home. Thankfully, our flexible mandate and ability to use a range of capital preservation tools helped us through the initial market plunge and then re-invest once it became more attractive, leading to a strong year for growth equity returns.
Our outlook for 2021 is that the delivery of a vaccine in the first half of the year should lead to economic recovery in the second half due to pent-up demand. Similarly, travel and leisure will likely improve in the back half of 2021, with domestic and regional travel improving ahead of international.
We are emerging from a year that saw the steepest economic decline in the U.S. since the government started keeping records. The path to recovery is centred around two currently approved vaccines, with potentially more to come. The current timeline is for the vast majority to receive a vaccine by mid-year.
Wow, what a year 2020 was! As we close out a historic year and look ahead to 2021, there is certainly a confluence of factors to consider that could impact the economy and our investable opportunities.
Recent months have seen a reversal of the outperformance in large caps versus small caps from the last few years. We have been calling for this and believe we are still in the very early days of this rotation.
We expect the Canadian economy to improve in 2021 as vaccines are distributed and individuals are both permitted and feel comfortable resuming a more normal life. Overall, Canadian consumer and business balance sheets have been spared the full economic impact of the COVID-19 pandemic, supported by generous government support and accommodative financial markets.