A Hot Summer in Perspective

 

Does a mild spring herald a hot summer for the economy? It seems so. The considerable savings surplus accumulated since the start of the pandemic highlights the potential for a strong recovery in aggregate demand in the quarters to come, provided consumer confidence is met. Judging by the latest figures on the matter, everything suggests that this will be the case.

The economic heatwave that looms this summer could prove uncomfortable at times, as markets doubt the transitory nature of the inevitable wave of inflation. We are in fact discussing the topic of inflation later in this blog.

 

Market Review: Highlights as of May 31st

 

Fixed Income

• The return on the Canadian bond market (FTSE CA Universe) has been in negative territory since the start of the year (-4.4%).
• Since the start of the year, we have seen a rise in interest rates on all maturities and this has undermined the performance of the bond market. This upward pressure on rates is rooted in growing fears of inflationary pressures.

 

Stock Markets

• Stock markets delivered good performances since the start of the year. Leading the list is the Canadian market (S&P/TSX) which posted a gain of 14.4%, followed by the US market (S&P500) with a gain of 12.6%[1], the global equity market (MSCI EAFE) with 10.4% and the emerging market (MSCI EM) with 7.4%.
• More cyclical[2] and value-oriented[3] sectors have outperformed their defensive and growth-oriented counterparts.
• The United States benefited from a particularly favorable earnings season, with 87% of S&P500 companies reporting better than expected results.

 

Alternative Investment

• The price of oil (US$) is up 37.4% year-to-date. Its recent gain is mainly the result of the economic recovery resulting from the easing of restrictions linked to the pandemic in many developed countries.
• Gold has risen well since March amid concerns about inflation and the weakening US dollar. Nonetheless, its year-to-date return stands at 0.4% (US$).

 

Forex

• The Canadian dollar has performed well since the start of the year, appreciating 5.3% against the US dollar.
• The value of the loonie in May was supported by the general weakness of the US dollar and the rise in oil prices.
• The Canadian dollar hit a 12-month high in May, but our data suggests it is getting closer to its final destination. Our economics and strategy department are banking on the Canadian dollar at 1.22 cents this year.

 

Our Portfolio Strategy and Investment Outlook

 

The acceleration of the vaccination campaign, combined with a powerful mix of accommodating monetary and fiscal policies, remains conducive to the outperformance of risky assets. Investors need to temper their expectations for returns, but growth in corporate earnings should be more than enough to allow stocks to outperform bonds over the next 12 months. We are confident in our strategy and our current asset allocation. We monitor our financial data so that we can seize opportunities over time.

 

Summary of changes made to our portfolios

 

• The drop in the US dollar over the past year has prompted us to increase its weight in portfolios.
• We have reduced our duration[4] to limit the downside risk in the fixed-income portion of the portfolios.
• We lowered the fixed income weighting across all our investor profiles in order to invest more in stocks which offer much better growth prospects on a long-term basis.
• We have decided to increase our investment in Canadian preferred shares. After underperforming for a year and a half, they have enjoyed a very good recovery since April 2020. We saw the opportunity to add to our current position to take advantage of the dividend yield of almost 4% and a potential appreciation of capital.
• The recent downward pressure on growth stocks created some opportunities that we seized.

 

What we are monitoring

 

• Inflation

We are closely monitoring any inflationary pressures that the process of "reopening" the economy after more than a year of restrictions and generous government aid may bring. There could be some imbalance between supply and demand in certain sectors which in turn exert upward pressure on prices. For example, our data indicates that a little more than half of the monthly increase comes from exceptional movements of sectors linked to tourism (airfares, tourist accommodation) and used vehicles and trucks (the shortage of semiconductors having affected the new vehicle offer). For now, we believe that the price increases in these three subsectors to are essentially transitional adjustments.

 

• The Evolution of the US Federal Reserve's Message

There simply does not exist a comparable episode in modern history to provide a relevant benchmark of a post-pandemic world. Nonetheless, the volatility following the announcement of high inflation figures last month has already dampened bullish sentiment in the market somewhat, suggesting a more limited downside risk for the stock market.

Going forward, the key thing to follow will be the evolution of the Federal Reserve's message in tandem with the recovery in the job market. At this point, bond markets appear to be doing exactly where the Fed wants them to be; real rates remain negative, long-term-expected inflation has recovered to levels consistent with its target, and the term premium remains relatively low. The next step for the US Federal Reserve should be to start discussing more openly / publicly about their intentions in terms of scaling back their asset purchase program[5].

 

Our portfolio management approach is based on a long-term strategic plan that is personalized for our clients, responsive to change and subject to frequent monitoring. Our investment decisions are derived from analysis of long-term fundamentals and adjusted for today's markets.

 

If you have any questions, we invite you to contact us.

 

We wish you a good summer!

 

Cathy and Sounda

cathy.duval@bnc.ca

514 871-3474

 

 

National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF), and is a wholly-owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA). NBF may act as financial advisor, fiscal agent or underwriter for certain companies mentioned herein and may receive remuneration for its services. NBF and/or its officers, directors, representatives or associates may have a position in the securities mentioned herein and may make purchases and/or sales of these securities from time to time on the open market or otherwise. The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed do not necessarily reflect those of NBF. I have prepared this report to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The opinions expressed herein, which represent my informed opinions rather than research analyses, may not reflect the views of NBF. The securities or sectors mentioned in this letter are not suitable for all types of investors and should not be considered as recommendations. Please consult your investment advisor to verify whether the security or sector is suitable for you and to obtain complete information, including the main risk factors. Some of the securities or sectors mentioned may not be followed by the analysts of NBF.

 

 

[1] The performance of the SP500, MSCI EAFE and MSCI EM is expressed in US currency.

[2] The share price of a cyclical company is highly correlated with economic conditions and economic cycles. Oppositely, it will be of the defensive type.

[3] Investors interested in value stocks are interested in stocks that appear to be undervalued. Growth investors look for companies that offer strong earnings growth.

[4] Duration is an indication of the level of volatility in bonds prices when interest rate movement arises. The longer the term, the more the price of a bond can fluctuate.

[5] The Fed injects about $ 120 billion monthly into the markets to support it.