- The vaccine rollout is accelerating, and further U.S. fiscal stimulus remains on track to be delivered soon, which is helping lift growth expectations. Our highest conviction call remains the overweighting of equities versus fixed income (Source: Bloomberg).
- Because the rise in long-term interest rates has been largely driven by fast improving expectations for economic growth rather than hawkish central banks, we think equities can endure some upside in interest rates.
- Within equity factors, we continue to prefer small-cap stocks to benefit from fiscal stimulus and the strong position of households, most notably in the U.S.
- We remain overweight to strong economic growth markets such as U.S. and Emerging Markets (EM) equities over Canadian and Europe, Australasia, and the Middle East (EAFE) markets, while overweighting IG corporate bonds versus low-yielding government.
I’d throw dollars out of helicopters if I had to, to stimulate the economy.
Global Markets: Upside despite storming bond yields
Global Equity Factors: Reflation hope giving Value a shot in the arm
Can too Much Bond-Yield Optimism Derail the Equity Rally?
While equity prices were quick to recover from the pandemic lows, North American bond yields only found their V-shaped recovery since last August and mostly surged since late January as improving expectations of economic growth have stoked fears of accelerating inflation. An even more pronounced move has taken place in the slope of the 2-30yr North American yield curves as central banks are not expected to raise their policy rates for a long time while economic activity is expected to run hot into 2022 given the aggressive fiscal stimulus, especially in the U.S.. Unlike cycles where bond yields are pressured higher by hawkish central banks (e.g., 2018), this time around the move in yields is entirely driven by good economic news, which is why we believe the equity rally can endure some upside in interest rates.
Gold: A dimmer outlook but still room to shine
Gold has struggled in the face of rising interest rates and despite of higher inflation fears. While gold can be viewed as an inflation hedge, it is its correlation with real yields that matters more. We have flagged higher real yields as the greatest threat to gold performance given its relatively high correlation since 2018. Negative interest rates sharply reduce the opportunity cost to holding gold, and even though real yields are still negative, reflation hopes are raising concerns that they may soon turn positive. We think these concerns are overdone as the labour market is unlikely to rebound sharply back to pre-COVID-19 levels even with the lifting of mobility restrictions this year. The Fed’s dovish stance—with a QE taper unlikely to be announced until the end of this year– is therefore likely to keep real rates capped in negative territory for now.
Should Investors Fear the Warning of Buffet’s Favourite Stock Market Indicator?
The stock-market-cap-to-GDP ratio, known as the Buffett Indicator, is analogue to the price-to-sales ratio for the entire country. The Buffet Indicator for the U.S. equity market has been steadily rising in the past year as the economy shrank and stock prices surged to record highs. Meanwhile, the ratio for Global or Canadian equities also rose in recent months, but they remain well within their historical norm, suggesting U.S equities are in rich territory vs Canadian or Global equities.
Outlook and Positioning: Staying the course on the recovery
* The performance for (ZLB) for the period ended February 26th, 2021 is (as follows: 3.09% (1 Year); 7.29% (3 year); 7.93% (5 year); and 11.75% since inception (on October 21st, 2011).
**The performance for (ZCN) for the period ended February 26th, 2021 is (as follows: -14.90% (1 Year); 8.77% (3 year); 10.35% (5 year); 5.38% (10 year); and 7.22% since inception (on May 29th, 2009).
*** The performance for (ZEO) for the period ended February 26th, 2021 is (as follows: -2.42% (1 Year); -6.93% (3 year); -4.38% (5 year); -7.79% (10 year); and -5.38% since inception (on October 20th, 2009).
**** The performance for (ZEB) for the period ended February 26th, 2021 is (as follows: 17.73% (1 Year); 6.48% (3 year); 13.09% (5 year); 9.44% (10 year); and 10.52% since inception (on October 20th, 2009).
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