Post-pandemic portfolio tips

This time last year, the economy was still in the midst of a record-long expansion. While Covid-19 has since decimated growth, the global economy could generate some serious heat in the months ahead as vaccines are distributed.

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“There are a number of factors where we expect a sizzling hot economy,” said Luc de la Durantaye, chief investment strategist and chief investment officer with CIBC Asset Management, in an interview on Jan. 11.

His optimism is based in part on fiscal and monetary policy continuing to be generous.

“The Democratic party winning both houses of Congress makes fiscal spending more likely,” de la Durantaye said. “That’s an important point.”

President Joe Biden has already announced a US$1.9-trillion stimulus package that includes US$1,400 for most Americans. The package comes on the heels of $900 billion in stimulus announced last month. U.S. government spending overall in response to the pandemic has reached multi-trillion-dollar levels.

Canada has so far spent $270 billion in direct fiscal stimulus, and earlier this month Prime Minister Justin Trudeau gave his finance minister the green light to use “whatever fiscal firepower” necessary in the coming months. Spending of up to $100 billion stands at the ready in case of a first-quarter economic contraction.

Monetary policy will also remain accommodative, as inflation remains well below central banks’ targets, de la Durantaye said.

Last Wednesday, the Bank of Canada held its key interest rate at 0.25%, where it’s been since the pandemic began. Inflation likely won’t return to its 2% target until 2023, the central bank said. For this year, it forecast inflation of 1.6%. The central bank is also buying at least $4 billion in government bonds weekly.

The Federal Reserve said it, too, would keep its benchmark rate near zero through at least 2023, and would continue to buy US$120-billion worth of bonds monthly for the foreseeable future.

With government support helping to keep citizens financially afloat, once vaccines are widely deployed, pent-up consumer demand will help drive the recovery, de la Durantaye said.

However, risks can’t be ignored, such as hurdles for vaccine distribution and new strains of Covid-19.

Another risk is, ironically, too strong a surge of economic strength. Such a scenario could force central banks to turn off the taps of accommodative policy.

“They may have to realign their monetary policy earlier than expected,” de la Durantaye said.

CIBC plans to monitor these risks within the context of its positive outlook for 2021, he said.

Portfolio positioning

For investors, strong fiscal and monetary support means rotation into value, away from growth, as exhibited at the end of last year.

“We’ve seen non–U.S. equity markets outperforming the U.S. equity market,” de la Durantaye said. “We’ve seen small-cap stocks outperforming large-cap stocks.”

He expects that to continue in 2021.

A global recovery and low inventories support continued strength in commodities prices — “both metals and energy,” de la Durantaye said, which would be a boon to Canada’s resource-intensive economy.

He also noted that the Canada-U.S. exchange rate tends to strongly correlate with oil prices, to the loonie’s benefit when prices rise.

“We see continuing strength in the Canadian dollar versus the U.S. dollar,” he said.

In general, the U.S. dollar may see continued weakness versus several foreign currencies — “something to bear in mind as you continue to build your portfolios,” de la Durantaye said.

For yields, an economic recovery resulting in inflation would add positive pressure.

“Even if the central banks are anchored at the short end of the yield curve, the long end could continue to move up gradually,” de la Durantaye said.

“We could see the yield curve steepening, which is a positive environment for the banking sector.”

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