Interestingly, the split appears to be between “old economy” and “new economy” assets. COVID-19 accelerated our transition to a digital landscape, and at the same time reduced our dependence on companies rooted in traditional industries. For example, we’ve been aware that brick-and-mortar retail has been trending down in the U.S. and Canada for more than a decade, but social distancing rules have expedited the migration of consumers to e-commerce platforms like Amazon. These habits will not be undone once the pandemic is over. Even with some degree of normalization, we’re not going to see the composition of the economy spring back to what it was last year. Case in point: When Netflix introduced the world to streaming, Blockbuster outlets became extinct.
As another example, consider manufacturing as a share of the economy, which has been shrinking in North America for almost 20 years. From 30% in 2000 to approximately 10% today, it plays a much smaller role in the employment sector and that trend has only magnified since the pandemic began.
In terms of asset allocation, we typically separate our client accounts into fast and slow moving depending on the level of risk sensitivity in the portfolio. Given that the bulk of our Canadian business is slower moving, we’ve been overweight equities for the previous three quarters and would continue to hold that position until the election-related volatility has passed, at which point we would consider building more exposure of risk asset as we head into the new year.
Recommendation: Maintain overweight U.S.; slightly overweight emerging markets; underweight Canada, and Europe, Australasia, and the Middle East.