November Monthly MAST Commentary: Reset at the White House and Good News on COVID-19 Vaccine

  • Removal of U.S. political uncertainty and positive news on a COVID-19 vaccine should ensure a robust economic and earnings recovery in 2021 even though mobility is likely to be restrained this winter.
  • The tailwind for equities should remain strong into 2021 with the virus, politics, and stimulus all heading in the right direction. We expect central banks to maintain their pledge to keep interest rates lower for longer in order to facilitate fiscal stimulus and ensure a prompt economic recovery.
  • Our portfolio positioning remains steady with a modest overweight to stocks versus bonds, but we are looking to add to risk on the back of recent developments around the vaccine and election. We continue to have a modest tilt toward bond duration and unhedged currency exposures to maintain some defensiveness in our portfolios.
  • We continue to prefer U.S. and Emerging Markets (EM) equities over Canadian and Europe, Australasia, and the Middle East (EAFE) markets as we continue to expect earnings outperformance. Tight spreads on corporate bonds and lingering financial stress in some sectors leaves us preferring Investment Grade (IG) over High Yield (HY).

When you reach the end of your rope, tie a knot and hang on.

Abraham Lincoln

While polls into the elections suggested a high chance of a Blue Wave, pollsters once again disappointed expectations. Trump victories in a handful of states, together with the heavy load of mail-in ballots, made the election too close to call on election night. While Biden’s eventual win was expected, Democrats failed to achieve a several seat margin in the Senate as well as gain 10-20 seats in the House. Instead, Republicans are likely to keep the Senate with a 52/48 margin after the Georgia runoff in January, as well as see a net gain of at least 10 seats in the House, leaving Democrats with a slimmer majority. We would note that there is still a small probability of a Democrat sweep, depending on the results in Georgia. However, against the unexpected red wave in the Senate and House, Democrats have a high hurdle to gain both Georgia seats to take the tally to 50 (with Vice President Kamala Harris being the tiebreaker), whereas Republicans just need to win one.  

A split congress is generally good for equities, with post-election annual gains averaging 14% for the S&P 500, as sweeping policy changes are unlikely, implying lower policy uncertainty. Notably, there is less scope for large-scale fiscal stimulus, while corporate income tax increases and higher regulatory burden, particularly for tech, is less likely. One sector that still loses out is traditional energy, in our view, as Biden can use executive orders to promote green efficiency and reign in fossil fuel production, such as banning federal land leases. Overall, U.S. equity leadership is likely to stay intact, as greater taxation and potential for anti-trust tech regulation under a Democrat sweep was its biggest threat.

COVID-19 Vaccine on Its Way

Investors welcomed the news that the Pfizer vaccine had 90% effectiveness in trials, giving hope that life could return to normal earlier than expected, which, combined with fiscal stimulus, would solidify our expectations for robust economic growth and earnings for 2021. The vaccine news reinforces our conviction on maintaining and potentially increasing our equity overweight versus fixed income. Because the healing of some sectors will take some time and lockdowns will probably intensify this winter, we think investors should remained focused on putting cash to work rather than try to play a sector rotation within equities.

Virus Second Wave and Election Anxiety Bring October Blues

Global equities (MSCI ACWI, -2.4%) fell for a second consecutive month as COVID-19 cases surged, most notably in Europe, while investors were bracing for a potentially chaotic U.S. election. The earnings season delivered solid results as economic activity registered a strong summer rebound, but investors were concerned that earnings expectations were perhaps too aggressive, especially given renewed regional lockdown measures. European equities (Euro Stoxx 50, -7.3%; German DAX, -9.4%; UK FTSE 100, -4.7%) fell the most on fear of a double dip because of the second wave, and weaker than expected earnings. U.S. stocks (S&P 500, -2.7%) roughly matched the global benchmark while Nasdaq 100 (-3.2%) slightly lagged for a second month even though earnings were quite strong. Asian markets fared better, with Japanese equities (Nikkei 225, -0.9%) barely down while Emerging market equities (MSCI EM, +2.1%) gained. Chinese shares led the index higher as the country remains largely free from COVID-19 in recent months. Finally, Canadian equities (S&P TXS, -3.1%) lagged on weakness in energy and tech (i.e., Shopify) sectors.

Yields on long-term government bonds rose slightly as odds of a Blue Wave outweighed Second-Wave double-dip concerns. The yield on Canada’s 10yr bond ended the month at 0.66% (from 0.56%), a level also touched in August. Oil prices (Western Texas Intermediate, -11%, $35.79pb) were hammered by the Second Wave hitting mobility, dashing hopes for any near-term recovery in oil demand. Gold (-0.4%) was slightly down but held up well considering the move higher in U.S. interest rates. The loonie was unchanged and has been moving in a tight range since late July. Finally, the VIX volatility index spiked to 38% as investors braced for uncertainty because of the U.S. election, stimulus negotiations, and Second-Wave anxiety.

Equity Factors: Second consecutive month without dispersion

While regional equities experienced significant dispersion in October, global equity factors registered another quiet month. The performance of Growth, Small-Cap and Value all matched global equities (MSCI ACWI, -2.4%), while Low-Vol (-3.2) stocks continued to underperform. Momentum (-3.1%) stocks were down due to tech weakness.

On the news of Biden’s win but split Congress, Growth and Momentum gained vs Value and Small Cap as lower odds of significant fiscal stimulus mean less aggressive reflation. Positive vaccine news has since flipped this narrative with scope for an earlier-than-expected “return to normal”, which would support Value and Small Caps and help broaden breadth in the stock market. However, the durability of a Value outperformance trend might continue to face hurdles. The Pre-COVID-19 backdrop of New-Economy disruptions, low trend growth, and low interest rates, which all undermined Value performance, will not go away.

For investors eyeing tactical cyclical trades, Small Caps look more interesting as they tend to outperform early in economic recoveries (recent earnings also suggest this). We also think they are better positioned to face disruption than Value stocks and they may benefit more from fiscal stimulus.

In Canada, Low-Vol (BMO Canadian Low-Volatility Equity ETF, ticker: ZLB, -2.1%) outperformed the broad BMO S&P TSX Capped Composite Index (ticker: ZCN, -3.0%) in a month where the energy sector (BMO Equal Weight Oil and Gas Index ETF, ticker: ZEO, -4.6%) lagged the broad market. On a brighter note, banks (BMO Equal Weight Banks Index ETF, ticker: ZEB, -0.1%) were roughly flat in October as the economic recovery remains on track.

EM Equities Remain Attractive Diversifier During COVID-19 Recovery

Emerging market equities should continue to perform well under a Biden presidency. Trump no longer in office significantly reduces the geopolitical premium that has weighed on EM assets since 2018. Biden’s stance on China will remain tough, but trade wars are now unlikely, which should also help weaken the U.S. dollar. While investors are still underweight EM equities, the vaccine will support a faster 2021 global recovery, which should further weaken the U.S. dollar. China’s economic outperformance since COVID-19 has led to an EM outperformance in recent months and should any negativity around the vaccine surface, EM equities remain an attractive diversifier within equities while fully participating in the global recovery.

Outlook and Positioning: Vaccine moving closer to reality

Our portfolios remain positioned for very modest tilts toward a risk-on cycle. Looking into 2021, the Multi-Asset Investment Team believes the virus, the economy, and policy uncertainty are heading in the right direction for investors. We remain overweight to U.S. and EM equity markets, funded by Canada and EAFE and we are carefully weighing the extent of a full-cycle reflation trade that could favour more value oriented European or Japanese stocks, but we are not there yet.

We continue to prefer IG corporate bonds to riskier high-yielding bonds as spreads are back to pre-COVID-19 levels. While long-term interest rates have risen on the vaccine news, we continue to like Canadian bond duration as a hedge against downside surprises while believing central banks will not let interest rates rise materially. Similarly, we think the loonie has limited upside over the mid-term outlook while recognizing that a strong performance of global equities would continue to rhyme with a weaker U.S. Dollar and therefore a stronger loonie.


* The performance for (ZLB) for the period ended October 30th, 2020 is (as follows: -3.88% (1 Year); 3.73% (3 year); 6.41% (5 year); and 11.31% since inception (on October 21st, 2011).

**The performance for (ZCN) for the period ended October 30th, 2020 is (as follows: -2.19% (1 Year); 2.25% (3 year); 6.06% (5 year); 4.96% (10 year); and 5.96% since inception (on May 29th, 2009).

***The performance for (ZEO) for the period ended October 30th, 2020 is (as follows: -36.34% (1 Year); -22.46% (3 year); -13.17% (5 year); -9.57% (10 year); and -8.84% since inception (on October 20th, 2009)

****The performance for (ZEB) for the period ended October 30th, 2020 is (as follows: -11.98% (1 Year); -1.62% (3 year); 6.22% (5 year); 7.70% (10 year); and 8.45% since inception (on October 20th, 2009)

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