Market volatility returned in September as China’s Evergrande debt crisis, the global prospect for higher taxes, U.S. debt ceiling uncertainty, and upcoming tapering by the Federal Reserve elevated risk. With these events considered, our outlook continues to expect the global recovery to continue. In September we maintained our twelve-month forward forecast of Growth (U.S. GDP greater than 2.5%) through the period.

The Chinese economy advanced 7.9% year-on-year in the second quarter of 2021, slowing sharply from a record 18.3% growth in Q1.1 A slowdown in factory activity, higher raw material costs, and new COVID-19 outbreaks in some regions weighed on the recovery momentum. China’s jobless rate of the population aged 16-24 fell to 15.3% from 16.2% in July.2

Eurozone quarterly economic growth was revised higher to 2.2% in the second quarter of 2021, a rebound following two consecutive periods of contraction, helped by the rapid pace of COVID-19 vaccinations. The Eurozone annual inflation rate was confirmed at 3.0% in August, well above the European Central Bank’s target of 2.0%.3 The unemployment rate in the Euro Area edged down to 7.6% in July 2021 from an upwardly revised 7.8% in June. Spain (14.3%) and Greece (14.6%) remained the two EU countries with the highest unemployment rate.4

The U.S. economy advanced an annualized 6.6% in the second quarter.5  The annual inflation rate eased to 5.3% in August from a 13 year high of 5.4% in July. A slowdown was seen in the cost of used cars, trucks, and transportation services while inflation was steady for shelter and apparel.6 Core inflation in the U.S. is on track to exceed 2% in 2021, fulfilling one of the conditions for raising interest rates. At the September Federal Open Market Committee meeting, the central bank indicated that it could begin tapering as soon as November, noting that the “liftoff” for rate hikes would likely not commence until after the taper process is complete. The U.S. unemployment rate dropped to 5.2% in August, the lowest level since March 2020, despite reports of labor supply shortages and concerns over the lingering threat of the COVID-19 resurgence.7 The Canadian economy shrank 0.3% in the second quarter 2021, ending three consecutive quarters of expansion. International supply chain disruptions have constrained imports of parts mostly for the auto sector and led to a decrease in exports. On a positive note, business inventories, government expenditure, business investment in machinery and equipment, and investment in new home construction and renovation were all higher.8 The unemployment rate in Canada fell for the third straight month to 7.1% in August of 2021 from 7.5% in July.9 The annual inflation rate in Canada accelerated to 4.1% in August from 3.7% in July. It was the highest inflation rate since March of 2003.10

In the U.S., the S&P 500 posted a gain of 3.04% in August, as the Fed’s dovish tone, combined with strong earnings reports, helped the market. While mega-caps led, mid and small-caps also posted gains, with the S&P Mid-Cap 400 and the S&P Small Cap 600 up 2.0% and 2.02%, respectively. U.S. fixed income performance was mostly negative. Canadian equities posted gains in August, with the S&P/TSX Composite up 1.6%. The S&P Europe 350 added 2.1% in August, for a seventh consecutive month of increases. The Netherlands accounted for nearly a third of the European benchmark’s return. Asian equities gained in August, with the S&P Pan Asia BMI up 2.5%. India was the top performing country.  Hong Kong and Korea lagged, as foreign investors redirected flows into Indian and other emerging market equities as a result of a regulatory crackdown in China. Globally, commodities posted losses, driven by weakness in Energy.

In September, we adjusted our asset allocation for all portfolio models. In the Conservative and Moderate Growth models we added exposure to Canadian equities while reducing exposure to Gold. In the Growth and Aggressive Growth models, we sold the entire exposure to Australian equities and replaced it with exposure to Canadian equities. This change was driven by the improving outlook for Canada as it emerges from the pandemic. Fiscal spending that funds local governments supports our exposure to treasuries and municipal bond exposure in the U.S. We continue to include gold in the asset allocation as a portfolio stabilizer during volatile equity markets.

Our outlook hinges on whether the sources of recent disappointment are transitory. The rapid spread of the coronavirus delta variant, supply-chain disruptions, the shortage of workers, and a cooling housing market are seen to be limiting full recovery potential currently. The changing picture of the economy comes with structural changes that will challenge some sectors while at the same time, the reopening is expected to lead to improved liquidity, healthy consumer balance sheets, and a healing labor market. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 Trading Economics. China GDP, National Bureau of Statistics of China. July 15, 2021.

2 Trading Economics. China Unemployment. September 9, 2021.

3 Trading Economics. Europe Inflation. September 17, 2021.

4 Trading Economics. Europe Unemployment. September 17, 2021.

5 Trading Economics. U.S. GDP, U.S. Bureau of Economic Analysis. August 26, 2021.

6 Trading Economics. U.S. Inflation. September 14, 2021.

7 Trading Economics. U.S. Unemployment. September 3, 2021.

8 Trading Economics. Canada GDP. August 31, 2021.

9 Trading Economics. Canada Unemployment. September 10, 2021.

10 Trading Economics. Canada Inflation. September 9, 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. August 31, 2021. Index performance is based on total returns and expressed in the local currency of the index.

 

 

At the start of the year, inflation was widely expected to pick up as the base effects of a collapse in energy prices in the spring of 2020 began to show up in year-on-year inflation readings. The magnitude of the increase now appears to extend beyond those effects due to the ongoing rise in commodity prices, persistent and more severe bottlenecks in manufacturing supply chains, and jumps in the price of certain items of the Consumer Price Index, such as used cars, travel, and accommodation. Looking ahead, most of these inflationary impulses are likely to fade over the next twelve months as supply bottlenecks ease. In addition, there is a sizeable pool of unemployed workers, unlike in most previous inflationary episodes, even if there is no precedent for the kind of shock the U.S. and other economies have undergone over the past 18 months.

In mid-July, our growth concerns were largely driven by the delta variant. Fortunately, the delta wave is not generating a high level of hospitalizations or fatalities to force the reintroduction of lockdowns in major Western economies. Currently, Chinese growth and regulatory risks and Fed tapering concerns in addition to retail sales contractions in the U.S., China, and the U.K. are our primary risk concerns. On the geopolitical front, the chaotic U.S. withdrawal from Afghanistan is ongoing. In August, we updated our twelve-month forecast to reflect our view that Stagnation is no longer a risk. Our current twelve-month outlook is for Growth (U.S. GDP greater than 2.5%) through the period.

China has centralized political power to move rapidly on reforms, creating new structural problems while antagonizing foreign nations. The Chinese economy advanced 7.9% year-on-year in Q2 of 2021. A slowdown in factory activity, higher raw material costs, and new COVID-19 outbreaks in some regions all weighed on the recovery momentum.1 The Eurozone quarterly economic growth was confirmed at 2.0% in 2021 Q2, following two consecutive periods of contraction. Among the bloc’s largest economies, Germany, France, Spain, and the Netherlands returned to growth.2 The Euro Area seasonally adjusted unemployment rate edged down to 7.7% in June. The U.K. unemployment rate fell to 4.7% in Q2 although the rate remained 0.8 percentage points higher than before the pandemic.3

The U.S. economy advanced an annualized 6.5% in Q2 2021. Personal consumption expenditures grew 11.8% as vaccinated Americans traveled and engaged in activities that were restricted before.4 U.S. CPI stood at 5.4% in July 2021, unchanged from previous month’s 13-year high.5 The U.S. unemployment rate was 5.4% in July. These levels remain well above their levels prior to the coronavirus pandemic (3.5% in February 2020).6 Fed officials expressed a range of views on the appropriate pace of tapering asset purchases, but most noted that it could be appropriate to start reducing the pace of asset purchases this year, provided that the economy was to evolve broadly. The Fed left the target range for its federal funds rate unchanged at 0-0.25% in July.7 In Canada, the annual inflation rate increased to 3.7% in July of 2021 from 3.1% in June.8 The unemployment rate fell to 7.5% in July from 7.8% in June.9 The Bank of Canada left its key overnight rate unchanged at 0.25% on July 14th but adjusted the quantitative easing program to a target pace of $2bn from $3bn per week.

U.S. equities generally ended  July in positive territory, with the S&P 500 posting a gain of 2.4%. S&P MidCap 400 posted slight gains of 0.4%, while the S&P SmallCap 600 fell 2.4%. The S&P/TSX Composite was up 0.8%. Asian equities declined, with the S&P Pan Asia BMI down 4.1%, led by heavy losses in China, as a result of Beijing’s clampdown on tech companies. The S&P Europe 350 continued to climb, marking new all-time highs, as it rode to a total return of 1.8%. With the U.K. lagging this month, Switzerland, France, and the Netherlands lead; contributing more than half of S&P Europe 350’s returns.

In August, we maintained our asset allocation from July for all portfolio models. The U.S. economy is slowly recovering. Fiscal spending that funds local governments supports our exposure to treasuries and municipal bond exposure in the U.S. The yield curve flattened in July. We continue to include gold in the asset allocation as a portfolio stabilizer during volatile equity markets.

Our outlook hinges on whether the sources of recent disappointment related to the Delta wave, China policy, and global supply constraints are transitory.  Concerns remain about the global spread of the pandemic and an unbalanced recovery domestically. The changing picture of the economy comes with structural changes that will challenge some sectors. The economic reopening and the global stimulus that is underway will lead to improved household liquidity, healthy consumer balance sheets, and a healing labor market. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 Trading Economics. China GDP, National Bureau of Statistics of China. July 15, 2021.

2 Trading Economics. Europe GDP. August 17, 2021.

3 Trading Economics. Europe Unemployment, Office for National Statistics. July 30, 2021.

4 Trading Economics. U.S. GDP, U.S. Bureau of Economic Analysis. August 26, 2021.

5 Trading Economics. U.S. Inflation,  U.S. Bureau of Labor Statistics. August 11, 2021.

6 Trading Economics. U.S. Unemployment, U.S. Bureau of Labor Statistics. August 6, 2021.

7 Trading Economics. U.S. Federal Reserve. July 28, 2021.

8 Trading Economics. Canada Inflation, Statistics Canada. August 18, 2021.

9 Trading Economics. Canada Unemployment. August 6, 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. July 30, 2021. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The COVID-19 pandemic appears to be less dramatic and lethal than some historic plagues and vaccinations will limit impact. Unfortunately, after substantial progress, the world faces a new enemy in the Delta variant. This highly contagious form of the virus devastated the subcontinent in spring and has now spread to almost 100 countries including the U.K., Spain, Russia, South Africa, Indonesia, Thailand, Bangladesh, and Malaysia where it has sparked a resurgence of cases. Signs of accelerating inflation around the world may be transitory or more lasting. How central banks respond to price pressures during a post-Covid economic rebound will determine inflation’s impact. We have maintained our economic outlook of three months of Growth followed by Stagnation for the remainder of our twelve-month forecast horizon.

The Chinese economy grew by a seasonally adjusted 1.3% in Q2 2021.1 China’s economy sustained a steady recovery, with production and demand picking up, employment and prices remaining stable, market expectations improving, and major macro indicators staying within a reasonable range. In Europe, the improving health situation and ensuing continued easing of virus containment measures are putting the economies and tourism back in motion, which should also benefit from the new EU Digital COVID Certificate.2 These factors are expected to outweigh the temporary production input shortages and rising costs hitting parts of the manufacturing sector.

The U.S. economy continues to recover, following a Q1 expansion of 6.4% annualized.3 Household spending is likely to be the main driver, with business investment also contributing to growth. Residential investment is expected to slow from its recent pace, and the labour market is expected to take more time for the upside effects of reopening to be fully absorbed. The Fed is expected to keep its monetary policy extremely accommodative in the coming months.

The IMF has predicted that U.S. GDP will rise above the level expected before the pandemic, at least temporarily. Forecasts are driven by four current positive factors. 1) Business finances are healthy. Most recessions in the past had financial causes. The current recession was met with firm government action that bolstered the financial system and most businesses’ balance sheets. That leaves businesses ready, willing, and able to spend once they get the signal that they can do so safely. 2) Households, particularly higher income, are sitting on savings of about US$2.8 trillion more than in Q1 than under “normal” circumstances before the pandemic. Since consumers in aggregate didn’t take on more debt, balance sheets are healthy. 3) The pandemic accelerated productivity trends, particularly telecommuting and e-commerce, that were already underway, forcing managers and consumers to adopt new technology with little notice. 4) Government spending is expected to continue to support growth. The pandemic relief bills were instrumental in keeping the economy poised for growth once vaccinations are widespread—even if not every expenditure was an effective use of money.4

The Canadian economy has already recovered nearly 80% of the jobs lost during the Covid-19 induced recession.5 The rollout of vaccines got off to a slow start in Canada but picked up in the spring when availability improved. The increase in vaccinations has enabled provinces to loosen restrictions. Jobs for lower income Canadians remain well below pre-pandemic levels.

U.S. equities ended Q2 strong, with the S&P 500 posting a gain of 8.6%, despite inflation concerns and uncertainty over the future course of the Fed’s stimulus efforts. In a reversal from Q1, the S&P MidCap 400 and S&P SmallCap 600 underperformed, up 3.6% and 4.5%, respectively. Canadian equities posted gains, with the S&P/TSX Composite up 8.5%. After reaching a new all-time high at the start of the quarter, the S&P Europe 350 continued to set new records through Q2. The broad-based index finished with a 1.7% total return for the month, making it 6.7% for Q2, and 16% YTD. Switzerland, France, and the United Kingdom made the biggest positive contributions over the quarter, with each adding more than 1% to the S&P Europe 350’s returns. Asian equities rose in Q2, with the S&P Pan Asia BMI up 3.2%.  All Asian single-country S&P indices posted gains.

In July, we maintained our asset allocation from June for all portfolio models. The U.S. economy appears to be losing momentum again as the delta variant is spreading through the primarily unvaccinated population in America. Fiscal spending that funds local governments supports our exposure to treasuries and municipal bond exposure in the U.S. The yield curve flattened in June, and Treasuries have outperformed corporates and high yield. We continue to include gold in the asset allocation as a portfolio stabilizer during volatile equity markets.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, healthy consumer balance sheets, and a healing labor market. Concerns remain about the global spread of the pandemic and an unbalanced recovery domestically. The changing picture of the economy comes with structural changes that will challenge some sectors. Investment in structures—especially office and retail buildings—is likely to lag while businesses are expected to double down on technology investment. Growing e-commerce will mean growing demand for light vehicles and medium-weight trucks for delivery services along with a demand for drivers, gasoline, and related products. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 Trading Economics. China GDP Growth Rate, National Bureau of Statistics of China. July 15, 2021.

2 European Economic Commission. July 7, 2021.

3 Trading Economics. U.S. GDP Growth Rate. June 24, 2021.

4 Deloitte Economic Outlook. 2021.

5 The Conference Board of Canada. July 6, 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. June 30, 2021. Index performance is based on total returns and expressed in the local currency of the index.

 

 

Section 1: Q3 2021 Outlook

 

Despite the robust underlying strength in the global economy, COVID remains a threat. With the Delta variant spreading more easily, it now looks likely that global infections this quarter will push well above the second-wave peak. The recent surge in infections in high vaccination rate countries is a surprise. In the past four weeks, U.K. infections have approached their January highs and a clear upturn is also underway across Europe and the U.S. While vaccines are important for minimizing the damage, the projected surge in case counts among the unvaccinated could still overwhelm health care systems.

 

How Will Canada Fare in the Recovery?

In this Q3 Outlook, we are taking a closer look at Canada and the opportunities that position the country for recovery. Canadians have responded very positively to vaccine rollout and there is little sign of a new outbreak in Canada. New COVID-19 cases have trended up across the border in the U.S. in recent weeks due to the more contagious Delta variant, mostly in states with low vaccination rates. Recent data for Canada are highly encouraging as the share of the population that has received at least one dose is one of the world’s highest. The vaccination campaign has seen about 70% of the population inoculated with at least one dose and about two-thirds of Canadians fully vaccinated. The number of daily new cases is the lowest in 10 months and new cases are concentrated in younger age groups, whose vaccination rates are lower (no vaccines are authorized for those less than 12 years old).

Hospitalizations have been falling in recent weeks, allowing an easing of public-health restrictions. In addition, the government has now permitted fully vaccinated citizens and permanent residents of the U.S. currently residing in the U.S. to enter Canada beginning August 9th. Provinces are easing local restrictions gradually, and high-frequency mobility indicators from Google and Apple have trended up in recent weeks. Hurdles to overcome include vaccine resistance among some segments of the population and the persistence of COVID-19 variants that continue to pop up.

 

Canada Emerging from 2020

Canadian household wealth rose in 2020. Households’ net worth climbed to a record level in 2020 as government supports and price appreciation pumped up asset balances. Currency and deposit holdings increased a whopping $205 billion over 2019, the latest indication of the exceptionally large store of household savings that were accumulated over the pandemic.i

Government transfers to households increased by $117 billion.ii Mortgage debt rose by $110 billion over 2019, but house prices rose more as residential real-estate markets roared back following spring lockdowns. Net household equity in real-estate rose by a whopping $531 billion in 2020. Non-mortgage household debt (e.g., credit cards) actually declined last year with households prudently using some excess cash to carry smaller debt balances. The debt-to-income ratio remains exceptional high at 175.0% albeit still well below 2019 levels.iii

Wages and salaries fell a cumulative $36 billion through 2020 relative to pre-shock (Q4/2019) levels as unemployment spiked. Resurgent stock markets boosted end-of-year financial asset holdings by $291 billion from year-ago.iv

 

Canada in 2021

The Canadian economy expanded 1.4% in the first three months of 2021, slowing from a downwardly revised 2.2% rise in the previous period but still marking the 3rd consecutive quarter of growth.v Government transfers to households and businesses continued, and an improved labour market continued to support housing investment and household spending. Housing investment expanded 9.4% but rising input costs heightened construction costs. Also, household spending increased 0.7%, with the biggest increases seen for information processing equipment (+18.7%), major tools and equipment (+13.8%), and games, toys, and hobbies (+25%). On the other hand, business investment in machinery and equipment fell 2.7%, because of a sharp decline in investment in aircraft (-98.7%), as a large number of used aircraft were disposed of through international exports. Export rose 1.5% and imports 1.1%.

Second quarter growth in Canada is coming in lower than in the U.S. because of more restrictive public-health measures. The Canadian economy shrank for the first time in a year in April, contracting 0.3% month-on-month.vi Given April’s showing, economic output was 1.1% below its pre-pandemic (February 2020) level. Statistics Canada also produced a flash estimate for May GDP, which again showed a 0.3% contraction for the month. This number pales in comparison to the whopping 18% drop over March and April last year during the first virus wave.vii

Weakness was concentrated in industries impacted most by virus spread/containment measures. Virus spread and re-imposed containment measures in ‘high-contact’ service-sectors pushed accommodation and food services sales down 4.6% from March. Retail sales also pulled back with stores either closed or operating at reduced capacity but remained about 2% above pre-shock (February 2020) levels. Manufacturing output dropped 1% with a shortage of semiconductor chips pushing motor vehicle production down over 20%. But construction spending increased, and mining output continued to surge alongside high commodity prices.viii

As we begin to recover, Canadians are poised to quickly deploy spending as the economy gradually reopens. June output is expected to look better as the economy opened up further and with vaccine distribution continuing to ramp up, the hope remains that this time the reopening will be more sustainable. The Canadian economy has already recovered nearly 80% of the jobs lost during the recession last year. That said, there are still a large number of Canadians unemployed – the unemployment rate was 8.2% in May, falling to 7.8% in June.ix As is apparent in many economies, jobs for lower income Canadians remain well below pre-pandemic levels. Fortunately, many Canadians have built up their savings over the past 14 to 15 months due to their inability to spend on services like travel and meals out.

 

A Closer Look at The Oil and Gas and Mining Sectors in Canada

As Canada moves towards a recovery, commodity demand and pricing will have a significant impact on Canada’s growth, relative to non- resource-based economies.

 

The Canadian Energy Industry

• Canada’s energy sector accounts for over 10% of nominal Gross Domestic Product (GDP).
• Government revenues from energy were $17.9 billion in 2018.
• Canada is the sixth largest energy producer, the fourth largest net exporter, and the eighth largest consumer.
• In 2019, Canada’s energy sector directly employed more than 282,000 people and indirectly supported over 550,500 jobs.x

 

Fed policy is important to the global economic recovery and capital flows but is secondary to global fundamentals in oil markets. Oil prices have climbed nearly 50% this year as key economies such as the U.S., U.K., and China have reopened, buoyed by mass vaccination campaigns. Crude stockpiles in China, the world’s biggest importer of crude, have dwindled to the lowest this year. As India emerges from a deadly coronavirus surge, an uptick in local fuel consumption has prompted the nation’s biggest refiner to boost production. Re-opening of major economies will boost refined-product demand in oil markets – e.g., gasoline and jet fuel – going forward, which will leave refiners little choice but to continue drawing on inventories to cover supply shortfalls in the near term.

While the forecasted rebound in global oil demand continues to drive expectations for higher prices, it is the production discipline of OPEC 2.0 and capital discipline imposed on U.S. shale producers that has and will continue to super-charge the recovery of prices. In July, the OPEC+ group reached an agreement to increase production by 400,000 barrels per day each month over the balance of 2021 as well as extend the cooperation agreement until the end of 2022. The group has agreed to higher reference production levels for all members, including the recalcitrant UAE. The group will meet again in September. We believe the agreement is in line with market expectations and that rising demand should absorb the planned increase in production.

OPEC 2.0 remains committed to its production management strategy that is keeping the level of supply below demand. Compliance with production cuts in May reportedly was at 115%, following a 114% rate in April. Core OPEC 2.0 – i.e., states with the capacity to increase production – is holding close to 7 million barrels per day of spare capacity, according to the IEA, which will allow it to continue to perform its role as the dominant supplier in our modeling. Earlier this year, KSA’s Energy Minister Abdulaziz bin Salman correctly recognized the turn in the market that likely ensures OPEC 2.0’s dominance for the foreseeable future including the shift in focus of the U.S. shale-oil producers from production for the sake of production to profitability. This is a trend that has been apparent for years as capital markets all but abandoned U.S. shale oil producers.

Producers outside OPEC 2.0, the “price-taking cohort”, have prioritized shareholder interests as a result of this market pressure. Large producers are expected to shed production assets to reduce their carbon footprints, so as to come into compliance with court-ordered emission reductions and shareholder demands to reduce pollution. With the oil majors like Shell, Equinor, and Oxy already divesting themselves of shale properties, production increasingly will be in the hands of firms driven by profitability.xi

 

Income Drives Oil Demand

NOTE: SHADED AREA DENOTES FORECAST.
SOURCE: US EIA, OPEC, IMF, BCA RESEARCH.

 

The Canadian Mining Sector

• In 2019, Canada’s mining sector contributed $109 Billion, or 5%, of Canada’s total nominal GDP.
• Canada ranks among the top five countries in the global production of 17 minerals and metals.
• Valued at $106 billion in 2018, mineral exports accounted for 19% of Canada’s total domestic exports.
• The industry’s direct and indirect employment accounts for 719,000 jobs, accounting for one in every 26 jobs in Canada.
• Proportionally, the mining industry is the largest heavy industrial employer of Indigenous peoples and provided over 16,500 jobs to community members.xii

 

Copper and aluminum will remain well bid in the face of constrained supply and higher consumption ex-China. Despite China’s widely anticipated decision to release strategic stockpiles of copper, aluminum, and zinc next month into a tight domestic market, continued inventory draws will be required to cover physical deficits in these markets, particularly in copper.

As demand for industrial commodities increases and inventories continue to draw, forward curves will become more backwardated as material delivered promptly (next day or next week) will command a higher price than commodities delivered next month or next year. Consumers value current supply above deferred supply, and producers and merchants must charge more to cover inventory replacement costs, which increase when prompt demand outstrips supply.

 

Will Rising Resource Prices Lead to Inflation in Canada and Abroad?

Canada’s headline inflation rate was the highest in a decade in May. Headline CPI rose 3.6% year-over-year in May, 2.4% excluding food and energy components. Higher costs for homeowner replacement and passenger vehicles supported rise in core prices.xiii

Headline inflation rose 3.6% from a year ago in May, the highest in a decade. Energy prices were up 26.4% from exceptionally low year-ago levels and accounted for almost half of the increase, despite moderating slightly from April’s 32.7%. Growth for food prices rose 1.5% from already-strong levels last May and will probably continue to grind higher on the back of elevated agriculture commodity prices. Outside of food and energy, prices rose 2.4% from May 2020, faster than April’s 1.8% pace. Still, price growth has been increasingly broadly based. 58% of goods and services in the consumer index basket were up 2% or more (on a 3-month rolling average basis) in May, up from 54% in April and well-above the 40% trough in September 2020. The Bank of Canada’s preferred ‘core’ measures all increased again in May. There have been some early signs of easing in some of the supply chain disruptions that sent industrial production input costs soaring. Raw lumber prices, for example, have moderated sharply in recent weeks (albeit to still elevated levels.) But consumer demand is set to surge as the economy reopens, and that demand, particularly for purchases of services, is expected to take over as a key driver of price growth in the second half of 2021.xiv

In the U.S., inflation has been much higher. Three months to May core inflation reached 8.3% on an annualized basis, the highest rate since the early 1980s. In June the Institute for Supply Management’s index of changes in the prices paid by American manufacturers registered its highest reading since 1979, a year in which consumer prices rose by 13.3%. Inflation in other rich countries has been more modest. But it has still exceeded expectations. In the Euro area headline inflation year-over-year has risen from 0.9% to 1.9% since May, touching the European Central Bank’s target of “below, but close to 2%”.xv

Much of this is due to base effects; core consumer prices fell between February and May, as they did in Japan. Britain is an intermediate case. Headline inflation is roughly on target, but core consumer prices have accelerated. This is not just an issue for rich countries. A measure of aggregate inflation in emerging markets produced by Capital Economics, a consultancy, rose from 3.9% in April to 4.5% in May. Rising inflation has set off a cycle of monetary tightening. Since the start of June, central banks in Brazil, Hungary, Mexico, and Russia have raised rates.xvi

 

Has the Pandemic Enhanced Structural Changes to Inflation?

Many of the structural factors that have suppressed inflation over the past 40 years are reversing direction. Globalization is in retreat; the ratio of global trade-to-manufacturing output has been flat for over a decade. Looking out, the ratio could even decline as more companies shift production back home to gain greater control over unruly global supply chains.

Despite a pandemic-induced bounce, underlying productivity growth remains disappointing. Slow productivity growth could cause aggregate supply to fall short of aggregate demand.

 

Short- and Long-Term Inflation Factors

In the short term, the factors pushing inflation higher are threefold. The first is a boom in demand for goods like cars, furniture, and household appliances set off by consumers splurging on things that made lockdown homes nicer and life outdoors more enjoyable. The second is disruption in the global supply of some of those goods. A shortage of microchips, for example, is severely curtailing the supply of cars. A higher oil price does not help. Disruption in the global shipping industry and at ports exacerbates things in various markets. The third—probably the most important, and the one only now fully coming to be felt—is a rebound in the prices of services. Consumers are returning to restaurants, bars, hairdressers, and other in-person businesses faster than workers are.

A sustained rebound in inflation would be bad news for two reasons:

1) Inflation hurts. Life-satisfaction surveys carried out in the 1970s and 1980s found a one-percentage-point rise in inflation reduced average happiness about as much as a 0.6-percentage-point rise in the unemployment rate. If it catches workers by surprise, it erodes their wages, hurting the lowest paid the most; if it catches central banks by surprise, they may have to slow the economy, or even engineer a recession, to put the beast back in its cage.

2) Inflation has the potential to up-end asset markets. The sky-high prices of stocks, bonds, houses, and even cryptocurrency rests on the assumption that interest rates will stay low for a long time. That assumption makes sense only if central banks do not feel forced to raise them to fight inflation. If prices rise too persistently, the financial edifice that has been built on years of low inflation could lose its foundations.

 

Inflation Threats Within Our One Year Time Horizon

In the U.S., 27% of the index is skewed by the re-opening trade and supply chain issues and the other 73% was not distorted by the pandemic. In Canada, the spike in May’s CPI – up 0.5% month over month – lifted the year over year pace to a decade-high of 3.6% from 3.4% in April. As was the case in the U.S., 27% of the index was skewed by the re-opening trade and supply chain issues while the other 73% was not distorted by the pandemic. The segment of the CPI (auto purchases and leases, home improvement, furniture/appliances, recreational services and the like) that is COVID-19-skewed saw prices soar 1.8% in May; the 73% share not being distorted was basically flat (+0.1%).xvii

Rising energy and commodity prices, production bottlenecks due to the shortage of some input components, and raw materials and capacity constraints vis-à-vis booming demand both at home and abroad are expected to put upward pressure on consumer prices this year.

 

Our Long- Term Inflation Outlook

• Outside of a few industries, wage inflation remains well contained. In those industries suffering from labor shortages, the expiration of emergency unemployment benefits, increased immigration, and the opening of schools should replenish labor supply.
• Bottlenecks in the global supply chain are starting to ease. Many key input prices have already rolled over, suggesting that producer price inflation has peaked and is heading down.
• A slowdown in Chinese credit growth could weigh on metals prices during the summer months, which would further temper inflationary pressures.

In 2022, we expect pressures to moderate gradually as supply constraints resolve, order backlogs clear, and demand growth moderates. The likely path of U.S. yields is central to a debate currently influencing markets: whether the signs of accelerating inflation around the world are transitory or more lasting, and how central banks will respond to price pressures during a post-Covid economic rebound. We continue to see high global inflation as a long-term risk rather than a short-term problem.

 

 

Section 2: Three Themes

 

Theme 1: The U.S. Economy is Recovering but is Subject to Setbacks

After an expansion of 6.4% annualized in the first quarter of the year, Q2 is expected to be stronger. As in recent months, household spending is likely to be the main driver. Business investment should also contribute to growth. Residential investment, meanwhile, could be set for a pause after several months of strength. It will take more time for the upside effects of reopening to be fully reflected in the labour market numbers.

Back in March, the Fed projected no hikes until 2024. The Fed jolted markets on June 16th after the FOMC signaled it may raise rates twice in 2023. The Federal Reserve began closing the door on its pandemic-driven monetary policy as officials projected an accelerated timetable for interest rate increases, opened talks on how to end crisis-era bond-buying, and said the 15-month-old health emergency was no longer a core constraint on U.S. commerce.

Signaling that broad changes in policy may happen sooner than expected, U.S. central bank officials moved their first projected rate increases from 2024 into 2023, with 13 of 18 policymakers foreseeing a “liftoff” in borrowing costs that year and 11 seeing two quarter-percentage-point rate increases.xviii A flattening in the yield curve that has continued since the fed announcement is a market signal of slower economic growth ahead.

 

Theme 2: China is Cooling

China’s economy, well-placed to benefit from strong international demand for merchandise, recovered rapidly from the initial shock of Covid-19. It is the only large economy that expanded in 2020. As the rest of the world is recovering from the pandemic, China has struggled with additional waves that have resulted in rolling shutdowns in primary industries.

Chinese credit growth and base metals prices are strongly correlated. Chinese authorities are not expected to embark on a new deleveraging campaign. Credit growth has already fallen back to 11%, which is close to the prior bottom reached in late-2018. To the extent that changes in Chinese credit growth affect commodity prices with a lag of about six months, metals prices could struggle over the summer months. China’s plan to release metal reserves into the market could further dampen prices.

 

Theme 3: Gold Continues to Be a Portfolio Stabilizer

Gold is sensitive to Fed policy and forward guidance. Its price will continue to be volatile as the widening dispersion of views evident in the Fed dots keeps markets on edge and pushes forward rate expectations in different directions.

Gold volatility will also remain elevated as markets factor in oil price volatility that will increase with steeper backwardation and base metals volatility that will rise as fundamentals continue to tighten.

 

 

Section 3. Investment Outlook

 

Global Pandemic Leads Us to a Growth Forecast for the Next Three Months Followed by Nine Months of Stagnation

SOURCE: FRAME GLOBAL ASSET MANAGEMENT

 

Frame Global Asset Management considers these trends and factors them into our outlook for the economy in our twelve-month forward period. We look back to periods of similar economic behavior and use this information to predict the future behavior of the asset classes that we consider. Our investment process allows us to adapt for non-traditional monetary policy and other exogenous variables.

 

 

Section 4. June 2021 Portfolio Models

The macroeconomic environment was a key focus in May. Massive fiscal support has been the glue that has held the economy together but the re-opening contribution to growth is for the most part completed. The question of whether the change in consumer prices is transitory or a regime shift will determine the sustainability of economic growth. We have maintained our economic outlook of three months of Growth followed by Stagnation for the remainder of our twelve-month forecast horizon.

In June, we maintained the asset allocation we established in May. Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once populations are vaccinated. The recent shift in the bond-equity correlation into positive territory appears to be a function of the persistency in inflation. Fiscal spending that funds local governments supports our exposure to treasuries and municipal bond exposure in the U.S. We continue to include exposure to gold as a portfolio stabilizer.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, healthy consumer balance sheets, and a healing labor market.

 

Deborah Frame, CFA, MBA

President and Chief Investment Officer

July 14, 2021

 

iTrading Economics. Canadian Household Wealth, Credit Market Debt to Total Income. June 2021.
iiTrading Economics. Canadian Government Spending. June 2021.
iiiTrading Economics. Canadian Household Wealth, Credit Market Debt to Total Income. June 2021.
ivTrading Economics. Canada Hourly Average Wages. June 2021.
vTrading Economics. Canada GDP Growth Rate. June 1, 2021.
viTrading Economics. Canada GDP Growth Rate. June 1, 2021.
viiTrading Economics. Canada GDP Growth Rate. June 1, 2021.
viiiTrading Economics. Canada GDP Growth Rate. June 1, 2021.
ixTrading Economics. Canada Unemployment Rate. July 9, 2021.
xStatistics Canada. Canadian Energy Data. June 2021.
xiBank Credit Analyst. June 17, 2021.
xiiStatistics Canada. Canadian Mining Data, Natural Resources Canada. June 2021.
xiiiTrading Economics. Canada Inflation Rate. July 28, 2021.
xivTrading Economics. Canada Inflation Rate. July 28, 2021.
xvThe Economist. July 11, 2021.
xviCapital Economics. June 2021.
xviiTrading Economics. Canada Inflation Rate. July 28, 2021.
xviiiThe U.S. Federal Reserve System. June 16, 2021.

 

 

 

 

 

 

The macroeconomic environment was a key focus in May. Massive fiscal support has been the glue that has held the economy together but the re-opening contribution to growth is for the most part completed. The question of whether the change in consumer prices is transitory or a regime shift will determine the sustainability of economic growth. We have maintained our economic outlook of three months of Growth followed by Stagnation for the remainder of our twelve-month forecast horizon.

China’s economic data came in weaker than expected in April. A fall in retail sales and industrial production contributed to the weaker result. China’s urban unemployment rate edged down to 5% in May 2021, the lowest in two years.1

The Euro Area economy shrank 0.3% in the first three months of 2021. Among the bloc’s largest economies, Germany, France, Spain, and the Netherlands fell back into contraction territory, while Italy’s economy posted modest growth despite the restrictions.2 The consumer price inflation rate in the Euro Area was confirmed at 2% year-on-year in May 2021, the highest since October 2018, due to the low base year. Upward pressure came from energy (13.1% versus 10.4% in April).3 Amongst the largest Euro Area economies, the highest jobless rates were recorded in Spain (15.4%), Italy (10.7%) and France (7.3%).4 Britain’s job market showed signs of recovery. In the three months to April, it stood at 4.7%, down from 5.1% at the end of 2020.5

Thanks to an extremely accommodative policy mix, the U.S. economy continues to recover, growing by an annualized 6.4% in the first quarter.6 After a decade of disappointment, U.S. productivity growth is on the rise again. Time will tell if this is a structural upshift that will be sustained. The U.S. unemployment rate dropped to 5.8% in May 2021, the lowest since March 2020.7 The annual inflation rate in the U.S. accelerated to 5% in May of 2021 from 4.2% in April, the highest reading since August of 2008 amid low base effects from last year, rising consumer demand as the economy reopens, soaring commodity prices, supply constraints, and higher wages as companies grapple with a labor shortage. This inflation is uneven with the 20% that is COVID-19-skewed, up at a 22% annual rate over the past six months, while the other 80% that represents the part of the economy not being affected has seen its CPI rise at a 1.6% annual rate and was up 0.15% in May.8 At the June meeting, The Federal Reserve held its target range for interest rates steady at 0% to 0.25% but said it will probably increase it by the end of 2023 to 0.6%. The hike will come sooner than the Fed had expected in March, mostly because of a faster pandemic recovery, vaccination uptake, and rising domestic inflation.9

Canadian GDP is estimated to have gone down in April, the first decline since the spring of last year due to the third wave lockdown. Canada’s annual inflation rate quickened to 3.6% in May of 2021 from 3.4% in April. The Canadian dollar has appreciated to above 83 US cents, up from 78 cents in January. The Bank of Canada has attributed much of this increase to improving fundamentals like rising commodity prices.10

U.S. equities ended May on a modest note as inflation concerns dominated the headlines. The S&P 500 posted a gain of 0.7%, the S&P MidCap 400 posted 0.2% and S&P SmallCap 600 posted 2.1%. Canadian equities gained in May, with the S&P/TSX Composite up 3.4%. The S&P Europe 350 added 2.7%, making several new all-time highs. The Australian benchmark, S&P/ASX 200, closed the month up 2.3%. Most Asian single-country indices posted gains in May, including the S&P China 500 up 1.3%, and the S&P Korea BMI, up 0.7%, while the S&P Singapore BMI was down 0.6%.

In June, we maintained the asset allocation we established in May. Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once populations are vaccinated. The recent shift in the bond-equity correlation into positive territory appears to be a function of the persistency in inflation. Fiscal spending that funds local governments supports our exposure to treasuries and municipal bond exposure in the U.S. We continue to include exposure to gold as a portfolio stabilizer.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, healthy consumer balance sheets, and a healing labor market. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 Trading Economics. China Retail Sales, National Bureau of Statistics of China. June 9, 2021.

2 Trading Economics. Euro GDP, EUROSTAT. June 8, 2021.

3 Trading Economics. Euro Area Inflation. June 17, 2021.

4 Trading Economics. Euro Unemployment Rate. June 1, 2021.

5 Trading Economics. U.K. Unemployment Rate. June 15, 2021.

6 Trading Economics. U.S. GDP. June 4, 2021.

7 Trading Economics. U.S. Unemployment Rate, Bureau of Labor Statistics. June 4, 2021.

8 Trading Economics. U.S. Inflation Rate. June 10, 2021.

9 The Federal Reserve. FOMC Statement. June 16, 2021.

10 Trading Economics. US CAD Exchange Rate, Statistics Canada. June 16, 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. May 31, 2021. Index performance is based on total returns and expressed in the local currency of the index.

 

 

Economic activity has accelerated and is expected to remain strong into the third quarter of 2021, largely due to vaccination progress, economic re-opening, and large-scale fiscal stimulus. The U.S. is expected to be the principal driver of growth, followed closely by Europe as April restrictions are eased.

While the demand side of the global economy is heating up, the global growth boom underway is creating bottleneck pressures. Factory output has struggled to keep up with demand due to pandemic-related restrictions and shortages of intermediate inputs. Much of the year-over-year price increase can be attributed to base effects, coming off the low point for demand that occurred one year ago. The remainder of this recent inflation push is due to temporary factors such as stimulus-driven demand and supply chain restraints. The Fed and other developed global central banks have indicated that easing has reached a peak. Taper has started at the Bank of Canada and the Bank of England. As we monitor the recovery, we are aware that the global labor market is slow to heal, with the U.S. still 10 million jobs short of pre-pandemic levels.1 We have maintained our economic outlook of three months of Growth followed by Stagnation for the remainder of our twelve-month forecast horizon.

The Chinese economy advanced 18.3% year-on-year in the first quarter of 2021, boosted by strengthening domestic and global demand, strict virus containment measures, and continued fiscal and monetary support, and accelerating sharply from a 6.5% growth rate in the fourth quarter.2 China’s surveyed urban unemployment rate eased to 5.1% in April, compared to 5.3% in March and 6.0% in the same period last year.3

The Euro Area economy shrank 0.6% in the January-March quarter entering a double-dip recession, as several countries across the region imposed social distancing and lockdown measures to curb the spread of the coronavirus pandemic. Among the bloc’s largest economies, Germany, Italy, Spain, and the Netherlands fell back into contraction territory, while France’s economy returned to growth as the government delayed the imposition of lockdown.4

The U.S. economy grew by an annualized 6.4% in the first quarter, following a 4.3% expansion in the previous three-month period.5 With Janet Yellen and Jay Powell heading up macroeconomic and central bank policymaking, and with U.S. rates at the lower bound and the Fed having adopted Average Inflation Targeting, 2021 is likely to bring previously unseen coordination between the fiscal arm of the federal government and the central bank. Increases in personal consumption expenditures (PCE), non-residential fixed investment, federal government spending, residential fixed investment, and state and local government spending were partly offset by decreases in private inventory investment and exports.6 U.S. core consumer prices rose 3.0% in April 2021, the largest annual increase since January 1996.7

The U.S. Labor Department released soft jobs data for April 2021 showing an increase of 266,000, versus estimates for a 1 million gain.8 Canada’s job recovery hit a snag in April as a third wave of lockdowns across most provinces, including Ontario, led to fresh employment losses. The country shed 207,100 jobs in April, partially erasing large gains over the previous two months. The unemployment rate rose to 8.1% in April, from 7.5% a month earlier. Canada’s economy remains about half a million jobs shy of pre-pandemic levels.9

U.S. equities ended April on a positive note, with the S&P 500 posting a gain of 5.3%. Smaller caps also posted gains, with the S&P MidCap 400 and the S&P SmallCap 600 up 4.5% and 2.0%, respectively. U.S. fixed income performance was positive across the board. Canadian equities posted gains in April, with the S&P/TSX Composite up 2.4%. The S&P Europe 350 rose 2.2%, lifting its year-to-date return to 11.0%. The S&P United Kingdom outperformed, rising 4.0%, however the bulk of the European benchmark’s return was due to France, while Italy was a notable exception. Asian equities posted gains in April, with the S&P Pan Asia BMI up 1.8%. Most Asian single-country indices posted gains. Gold’s ability to protect against more than increases in the general price level suggests that its long-term real returns should be positive.

Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once populations are vaccinated. In May, we maintained the asset allocation that we established in April. Fiscal spending that funds local governments supports our exposure to treasuries and municipal bond exposure in the U.S. We continue to include exposure to gold as a portfolio stabilizer.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, healthy consumer balance sheets, and a healing labor market. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 U.S. Bureau of Labor Statistics. May 7, 2021.

2 Trading Economics. China GDP. April 16, 2021.

3 Trading Economics. China Unemployment National Bureau of Economics. May 11, 2021.

4 Trading Economics. Europe GDP. May 18, 2021.

5 Trading Economics. U.S. GDP. April 29, 2021.

6 Trading Economics. U.S. Inflation, U.S. Bureau of Economics. May 12, 2021.

7 Trading Economics. U.S. Inflation, U.S. Bureau of Labor Statistics. May 12, 2021.

8 Trading Economics. U.S. Employment, U.S. Bureau of Labor Statistics. May 7, 2021.

9 Trading Economics. Canadian Employment, Statistics Canada. May 7, 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. April 30, 2021. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The tug-of-war between the virus and the global immunization effort intensified in March. The focus now will be on economic reopening. Every recession is different and the events that led to the great recession of 2020 were unique, as has been the response from governments and central banks. Through large-scale fiscal transfers and central bank actions in many economies, households and businesses have been supported through the crisis and are in a position to emerge with their balance sheets largely intact. Our twelve-month forward outlook remains three months of Growth, followed by nine months of Stagnation, as we have seen evidence of a stronger short-term recovery rebound but a lingering longer-term impact on employment and output.

Emerging Market Asia is being buffeted by a number of forces including the policy-induced downshift in China and the sustained pandemic drag. The Chinese economy advanced 18.3% year-on-year in the first quarter of 2021, accelerating sharply from a 6.5% growth in the fourth quarter of 2020.1 Exports from China soared 30.6% year-on-year to USD 241.1 billion in March 2021, slowing from a record 154.9% growth in February. Among major trade partners, exports were up to the U.S. (53.3%), the EU (45.9%), and Australia (23.1%).2

The Eurozone economy shrank by 0.7% in the fourth quarter of 2020, following a record 12.5% expansion in the previous three-month period. Among the bloc’s largest economies, France, Italy, and the Netherlands contracted in the fourth quarter, while GDP growth in Germany and Spain slowed sharply.3 For the year 2020 as a whole, GDP fell by 6.6%.4 The U.K. remains among the global leaders in vaccine distribution with nearly half of its population having received at least one dose and daily vaccinations reaching 0.8 per 100 population in late March. The consumer price inflation rate in the Euro Area was confirmed at 1.3% year-on-year in March 2021, the highest since January 2020.5

The U.S. is vaccinating its population and reopening its economy, while the fiscal response has also been more expansionary. The American Rescue Plan of $350 billion will be followed with higher tax rates, shifting interest towards more favorable asset classes including tax exempt municipal bonds. The U.S. economy expanded an annualized 4.3% in Q4 2020 but shrank 3.5% for the year.6 The U.S. dollar advanced and capped its first quarterly gain in a year, thanks to the U.S. growth dynamic versus its global peers. The Canadian economy expanded 2.3% in the last three months of 2020, following a record 8.9% growth in the previous period.7 Canada’s trade surplus narrowed to CAD1.04 billion in February of 2021 from a revised CAD1.21 billion in the previous month. Total exports decreased by 2.7% to CAD49.9 billion in February, a level 4.1% higher than that set in February 2020.8 On balance sheet policy, the Bank of Canada began its tapering at the end of April.

U.S. equities ended the first quarter of 2021 on a strong note, with the S&P 500 posting a gain of 6.2%. Smaller Caps outperformed, with the S&P Mid Cap 400 and the S&P SmallCap 600 up 13.5% and 18.2% for the quarter, respectively. Canadian equities posted strong gains in Q1, with the S&P/TSX up 8.1%. International performance was also positive. The S&P Europe 350 closed the first quarter of 2021 up 8.7%. The United Kingdom was responsible for 2.5% of the total while France was the second-largest contributor with 1.5%. Asian equities had a positive start to the year, with the S&P Pan Asia BMI up 2.7% in the first quarter. Early-2021 trends of rising government bond yields and strong equity markets continued in March, reflecting the brighter economic outlook and increased fiscal support, particularly in the U.S. In March, the MSCI All Country World Index gained 2.5%, led by the S&P 500 (4.2%) and the S&P/TSX (3.6%). International stocks also had a modest (1.8%) gain. By contrast, the MSCI emerging market benchmark shed 1.7%.

Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once populations are vaccinated. In April, we maintained the asset allocation that we established in March. Fiscal spending that funds local governments supports our exposure to U.S. treasuries and municipal bond exposure in the U.S. We continue to include some exposure to gold as a portfolio stabilizer.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, a wealth effect from rising asset values and lower consumption, healthy consumer balance sheets, and a healing labor market. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 Trading Economics. China GDP Growth. April 16, 2021.

2 Trading Economics. China Trade: General Administration of Customs. April 13, 2021.

3 Trading Economics. Eurozone GDP Growth. March 9, 2021.

4 Trading Economics. Eurozone GDP Growth: EUROSTAT. March 9, 2021.

5 Trading Economics. Eurozone Inflation. March 16, 2021.

6 Trading Economics. U.S. GDP Growth. March 25, 2021.

7 Trading Economics. Canada GDP Growth. March 2, 2021.

8 Trading Economics. Canada Trade. April 7, 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. March 31, 2021. Index performance is based on total returns and expressed in the local currency of the index.

 

 

Section 1: Q2 2021 Outlook

 

Now Is an Opportune Time to Make an Allocation to Global Macro Strategies

Global Macro is an investment style that is highly opportunistic and has the potential to generate strong risk-adjusted returns in challenging markets. Against a backdrop of the current pandemic, uncertainty, and potentially increased volatility, we felt it would be timely to share our insights on the approach and explain why we believe now could be an opportune time to make an allocation to Global Macro Strategies.

The impact of the macro-economic environment is different among different asset classes and changes over time. Global Macro driven investment decisions are particularly important in high uncertainty/high volatility environments where macro factors exert a meaningful influence on asset pricing. These types of environments affect factors such as interest rate differentials, foreign exchange balances, and the consequent over and under valuation of asset classes and sectors, which may be exploited through nimble and tactical positioning.

Perhaps the most universally accepted concept of prudent investing is to diversify, yet this concept grossly oversimplifies the challenge of portfolio construction. The goal of diversified investment management is to earn the highest return while meeting the risk tolerance criteria of an investor through asset allocation and selection. Asset allocation models can be defined as Conservative, Moderate Growth, Growth, and Aggressive Growth or by Defensive, Defensive Balanced, Balanced, Balanced Growth, and Growth. Regardless of the labels, the risk profiles for these models are mandated to reflect the risk tolerance of the clients who invest in them.

When asset classes are combined in a portfolio, the amount and direction of each change over time will benefit or hurt the overall risk of the portfolio. Correlation is a statistic that measures the degree to which two variables move in relation to each other. In optimal portfolio allocation, if all stocks tend to fall together as the market falls, the value of diversification is lost. Negative correlations describe a relationship between factors that move in opposite directions. Negative correlations are of particular interest in the financial world since negatively correlated assets move in opposite directions. Asymmetric correlation occurs when correlations behave differently in negative environments than they do in positive ones. Correlations between asset classes, measured over the full sample of returns, have been found to demonstrate this behavior.

 

Diversification Disappears When it is Most Needed

Numerous studies that have examined correlation asymmetry support a finding of the undesirable variety: characterized by high positive correlations among asset classes in negative markets when low and negative correlations are needed, and low or negative correlations in upside markets when high and positive correlations are needed.i ii iii However, Global Macro strategies exhibit appealing downside correlations relative to equities, bonds, and other hedge fund strategies. This can be well understood given Global Macro’s lower exposure to systematic liquidity risk and systemic deleveraging risk.

 

Portfolio Construction: Manage Portfolio Correlations Rather Than Static Asset Allocation

SOURCE: PAGE, SÉBASTIEN AND PANARIELLO, ROBERT (2018). “WHEN DIVERSIFICATION FAILS.” FINANCIAL ANALYST JOURNAL. VOL. 74, NO. 3.

 

Asymmetries in upside and downside correlations have also been found to exist between stocks in a single market, as well as across markets internationally.iv The “neutral” asset allocation of 60% of a portfolio held in stocks and 40% in cash, bonds, and other financial assets that does not adjust will experience asymmetric correlations in negative markets, as will asset allocation ranges above and below 60/40. Asymmetric correlations also have similar implications in risk management when looking at the behavior of bonds.

Frame Global Asset Management uses a Global Macro approach. We consider the outlook for the global economy relative to a view of expected U.S. GDP growth in the twelve months ahead. The outlook falls into one of our five broad descriptions: GROWTH, STAGNATION, RECESSION, INFLATION and CHAOS, allowing for a transitioning in the period from one environment to another as well as recognizing total regime shifts. (See White Paper 2).v

We define Growth, Stagnation, Inflation, Recession and Chaos as the following:

Growth: U.S. Real GDP growth greater than 2.5%
Stagnation: U.S. Real GDP growth between 0 and 2.5%
Inflation: U.S. CPI greater than 3.5%
Recession: U.S. Real GDP less than 0%
Chaos: All asset classes exceed a correlation threshold

In doing this, we can recognize the changing correlations among asset classes and adjust when they change. The historical monthly return data of over forty asset classes is tagged using rules to assign each month with one of the five environments. From this tagging, expected return distributions are created by drawing from twenty years of return data using bootstrapping (random sampling with replacement) from past economic environments that are similar to what is anticipated in the coming twelve months. The twelve-month forward outlook and updating of expected return distributions is updated monthly.

 

We Measure What Matters: The Degree to Which a Given Asset Diversifies the Main Growth Engine When It Underperforms

Our own research shows that when historic data for asset classes is partitioned under these broad economic environments, patterns of behavior emerge. This allows us to create portfolios using ETFs that are the closest proxy to the asset classes that are used in the modelling process. Using ETFs, we can specifically address expected returns among the asset classes being considered while also addressing the probability of negative returns in those asset classes in the anticipated economic environment.

Global Macro investments tend to perform best in high uncertainty/high volatility environments where macro factors exert a meaningful influence on asset pricing. We believe today’s markets will remain in a state of disequilibrium over the next year, making current asset valuations increasingly fragile.

It is not enough to evolve a portfolio within equities or fixed income in environments where all equities or all bonds are highly and positively correlated or correlated with each other. In these environments, it is important to recognize the correlations and the lack of diversification benefit. In these negative return environments, it is important to have permission, within investment policy across the risk sensitivity spectrum of clients, to shift to low and negatively correlated asset classes. This involves the consideration of global equities as well as broad fixed income and market capitalization.

The current environment seems to be one in which Global Macro is well positioned for successful portfolio management.

 

 

Section 2: Four Themes

 

Theme 1: Greater Global Co-Operation

A meeting of central bankers and finance ministers from 19 of the world’s largest economies plus the European Union – the G20 – was held in early April to discuss issues facing the global economy.vi

• The G20 acknowledged the improved global economic outlook due to vaccination campaigns and continued policy supports, especially in advanced economies, while focusing on the uneven recovery across and within countries. It committed to protect those most impacted, including “women, youth, informal and low-skilled workers.”

• The G20 extended the Debt Service Suspension Initiative (DSSI) until end-2021, recognizing the unique challenges faced by low-income emerging markets (EMs). 46 countries have requested debt relief worth $12.5 billion. The new extension would cover an estimated $9.9 billion in bilateral debt payments.

• The G20 called on countries to “develop forward-looking strategies regarding climate change and environmental protection, investing in innovative technologies and promoting just transitions toward more sustainable economies.” Climate change took a backseat during the Trump era but is likely to retake center-stage in future post-pandemic meetings.

• The Group talked about reforming the WTO. This is important because the pandemic has accelerated protectionism, increased deglobalization pressures and made countries more inward-looking.

• The G20 also called for cooperation for a “globally fair, sustainable and modern international tax system.” A global minimum corporate tax would allow the U.S. to raise additional revenue from U.S.-based European companies and other multinationals.

 

Theme 2: Inflation Threat Brewing

We define an Inflationary environment as periods when the year-on-year realized CPI increases beyond 3.5%. Central banks globally generally target 2%. For decades, inflation has not been a problem in developed markets. Both monetary and fiscal policy have contributed to economic circumstances that are disinflationary, rather than inflationary, resulting in lower and less volatile inflation.

Today, inflationary regime change concerns point to four factors.

First, there has been an unprecedented increase in money creation. US M2 has grown by $4.2trn, from $15.5trn to $19.7trn in one year (to February 2021).vii

Second, there has been extraordinary fiscal accommodation that needs to be financed. The Congressional Budget Office (CBO) estimates a U.S. fiscal deficit of $3.1trn in 2020, or 15% of GDP. The CBO forecasts the deficit will shrink to $2.3trn in 2021, or 10% of GDP. In the entire modern history of the US, there have only been two instances of consecutive double-digit deficit years.viii

Third, the bond market is signaling increased inflation as long-term yields have recently increased.

Fourth, the inflation derivatives market is pricing in a 31% probability that the average inflation rate will exceed 3% over the next five years.ix High and volatile inflation creates uncertainty, thus harming the ability of companies to plan, invest, grow, and engage in longer-term contracts. Moreover, while firms with market power can increase their output prices to mitigate the impact of an inflation, many companies can only partially pass on the increased cost of raw materials, shrinking margins.

U.S. core inflation currently stands at 2.6%.x Due to the uncertain pace of recovery from the pandemic, we are not yet forecasting an inflation environment in the next twelve months.

 

Theme 3: Higher Interest Rates and a Stronger Dollar Have Weighed On Gold

Gold is considered to be an effective hedge against inflation, but this has not happened in 2021. Following price weakness in the first two months of the year, the gold price extended its decline in March. Gold finished March at US$1,691.1/oz., down over 10% y-t-d, its weakest quarterly performance since Q4 2016, and 18% below the record US$2,067/oz achieved in early August 2020.xi Gold’s performance has been weak across major currencies.

Recent analysis suggests gold’s current performance is consistent with the onset of previous reflationary periods. Analysis indicates that the primary driver of gold’s decline during March, and throughout Q1, was higher interest rates, impacting the opportunity cost of holding gold. While expectations of higher inflation kept building, the continued bond sell-off pushed nominal and real yields on sovereign debt higher during the month – with the 10- year Treasury yield seeing its sharpest rise in thirty years. Gold’s increased sensitivity to interest rates is a headwind in the short term, but the recent increase in interest rates is expected to level off as central banks continue to use monetary policy tools to keep them in check. Some central banks, including the Reserve Bank of Australia and European Central Bank (ECB), have increased bond purchases when local yields increased, while both the Federal Reserve and the Bank of England have signaled a continuation of their current asset-purchasing plans and level of target rates.xii

Despite the intense focus on rising yields during the quarter, the overall level of yields is structurally low. As a result, investors continue to shift their asset allocations from traditional high quality, low yielding bonds to assets which offer higher potential returns, but simultaneously have higher volatility.

Investors will eventually face elevated levels of risk (a driver of gold investment demand) in the short to medium term as markets continue to assess how monetary and fiscal strategies play out. The differing approaches to control higher yields taken by central banks around the world are likely to contribute to heightened risk as well. For example, the rising yield gap between the U.S. and Europe could put further pressure on the ECB and the stuttering economic recovery in the latter.

The reflation trade will also lead to the uneven performance of equities. Recent stimulus measures have flooded capital markets with liquidity, pushing financial asset valuations ever higher. Historically, gold has also underperformed commodities in the early stage of a reflationary period but tended to catch up and outperform in the longer term.

As investors look to guard against these risks, we expect gold will find further support in its role as a portfolio hedge.

 

Theme 4: U.S. Market Cap Rotation

The announcement of a vaccine for COVID-19 and the implementation of a series of fiscal and monetary stimulus plans to support a recovery in the U.S. economy has resulted in the more domestically focused small- and mid-cap segments of the U.S. equity market outperforming large caps. While this has occurred, the ownership of this space is largely domestic.

Mid- and small-cap U.S. equities represent a significant piece of the global market. The S&P Mid Cap 400 and S&P Small Cap 600 are benchmarks for U.S. mid and small caps. Over the past 20 years, they have outperformed the S&P 500, as well as a majority of actively managed U.S. equity funds in their respective size segment.xiii

The size and liquidity of mid- and small-cap U.S. equities are substantial in the context of global comparisons. At the end of 2020, the S&P Mid Cap 400 had a market capitalization similar to the entire French stock market, while the U.K.’s stock market, the largest in Europe, was roughly the same size as the mid- and small-cap indices combined.xiv

The prior outperformance of mega caps means that now, smaller companies have the potential to act as important diversifiers. The largest U.S. company by market capitalization, Apple, has risen from a 3% weight in the S&P 500 (as of December 2015) to a 6% weight at the end of Q1 2021, larger than the combined weight of 158 smaller constituents. Added to other “Big Tech” titans of Microsoft, Amazon, Alphabet, Facebook, and Tesla, just six companies compose 22.2% of the index, outweighing the 350 smallest names in aggregate.xv

We expect to see relative outperformance in the mid and small market cap sectors as we recover from the pandemic impacted market.

 

 

Section 3. Investment Outlook

 

Global Pandemic Leads Us to a Growth Forecast for the Next Three Months Followed by Nine Months of Stagnation

SOURCE: FRAME GLOBAL ASSET MANAGEMENT

 

Frame Global Asset Management considers these trends and factors them into our outlook for the economy in our twelve-month forward period. We look back to periods of similar economic behavior and use this information to predict the future behavior of the asset classes that we consider. Our investment process allows us to adapt for non-traditional monetary policy and other exogenous variables.

 

 

Section 4. March 2021 Portfolio Models

The macroeconomic outlook continues to improve, and the recovery may be faster than one that typically follows a business cycle recession, as vaccination rollouts accelerate, and the US$1.9 trillion stimulus package has been signed into law. This has prompted a surge in inflation expectations and commodity prices and a bond sell-off.

At this point in the recovery, households have used lockdown savings to pay down debt – particularly credit cards – while holding onto cash for precautionary reasons, causing demand to be suppressed. Our twelve-month forward outlook remains at three months of Growth, followed by nine months of Stagnation, as we have seen evidence of a stronger short-term recovery rebound but a lingering longer-term impact on employment and output.

Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once populations are vaccinated. In March, we maintained the asset allocation that we established in February. We continue to include some exposure to gold as a stabilizer in this volatile environment. Shorter duration fixed income has been maintained as the U.S. economy normalizes and inflationary pressures are rising.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, a wealth effect from rising asset values and lower consumption, healthy consumer balance sheets, and a healing labor market.

 

Deborah Frame, CFA, MBA

President and Chief Investment Officer

April 14, 2021

 

iThe Myth of Diversification Reconsidered. MIT Sloan School Working Paper 6257-21. William Kinlaw, Mark Kritzman, Sebastien Page, David Turkington. February 2021.
iiThe Myth of Diversification. The Journal of Portfolio Management. David B. Chua, Mark Kritzman, and Sébastien Page. Fall 2009.
iiiAsymmetric Correlations of Equity Portfolios. Andrew Ang, Columbia University and NBER Joseph Chen, Stanford University. March 2002.
ivThe Myth of Diversification Reconsidered. MIT Sloan School Working Paper 6257-21. William Kinlaw, Mark Kritzman, Sebastien Page, David Turkington. February 2021.
vFrame Global Asset Management. White Paper 2. January 2016.
viG20 Communications. FSB. April 7, 2021.
viiTrading Economics. U.S. M2 Money Supply. February 2021.
viiiThe Best Strategies for Inflationary Times. Henry Neville, Teun Draaisma, Ben Funnell, Campbell R. Harvey, and Otto Van Hemert. April 4, 2021.
ixThe Best Strategies for Inflationary Times. Henry Neville, Teun Draaisma, Ben Funnell, Campbell R. Harvey, and Otto Van Hemert. April 4, 2021.
xTrading Economics. U.S. CPI. March 2021.
xiWorld Gold Council. Gold Market Commentary. April 2021.
xiiWorld Gold Council. Gold Market Commentary. April 2021.
xiiiS&P Dow Jones. Hidden in Plain Sight. Tim Edwards, Sherifa Issifu. April 2021.
xivS&P Dow Jones. Hidden in Plain Sight. Tim Edwards, Sherifa Issifu. April 2021.
xvS&P Dow Jones. Hidden in Plain Sight. Tim Edwards, Sherifa Issifu. April 2021.

The macroeconomic outlook continues to improve, and the recovery may be faster than one that typically follows a business cycle recession, as vaccination rollouts accelerate, and the US$1.9 trillion stimulus package has been signed into law. This has prompted a surge in inflation expectations and commodity prices and a bond sell-off. The latest round of global manufacturing PMIs have flagged rising input costs, growing order back-logs, and longer supplier delivery times. Commodity prices have increased sharply as seen in Bloomberg’s commodity price index, up 17.5% from December 1st to March 1st.1 Oil prices hit their highest level in more than a year in February with WTI crossing the US$60 per barrel mark.2 Higher shipping costs and input shortages will test central banks’ commitments to keep interest rates low for an extended period as pent-up demand could outpace supply. At this point in the recovery, households have used lockdown savings to pay down debt – particularly credit cards – while holding onto cash for precautionary reasons, causing demand to be suppressed.

Our twelve-month forward outlook remains at three months of Growth, followed by nine months of Stagnation, as we have seen evidence of a stronger short-term recovery rebound but a lingering longer-term impact on employment and output.

In China, an updated analysis shows that non-financial debt as a percent of GDP jumped 23% to 281% in 2020.3 The debt spike is likely to be temporary. China’s economy returned to its pre-pandemic growth path in the fourth quarter of 2020, which triggered an earlier-than-expected normalization in credit policy. In the Asia Pacific region, Australia’s economy grew at a stronger-than-expected pace toward the end of last year with a 3.1% non-annualized gain.4

The Euro Area has been hampered by lockdowns. The continent has been slow to ramp up vaccinations, with only slightly more than 5% of the population in major European countries having received at least one dose.5 The annual core inflation rate in the Euro Area, which excludes volatile prices of energy, food, and alcohol & tobacco, and at which the ECB looks in its policy decisions, slowed to 1.1% in February, from 1.4% in January.6 The U.K. is seeing a sluggish start to the year thanks to extended lockdowns and as the Brexit deal hit trade hard in January. A relatively speedy vaccine rollout that has seen 30% of the U.K. population receive at least one dose as of early March, should help the recovery beyond the current quarter.

The US$1.9 trillion stimulus package will add significantly to households’ purchasing power. Retail sales in the U.S. shrank 3% month-over-month in February of 2021, following an upwardly revised 7.6% jump in January.7 Housing starts reached the highest rate in 14 years in December as people moved away from the big cities due to the coronavirus pandemic but sank by 10.3% month-over-month in February.8 Prices for U.S. exports rose 1.6% from a month earlier in February 2021 while import prices increased 1.3% month-over-month.9 Canada’s fourth quarter GDP rose to an annualized 9.6%. The annual inflation rate remains low at 1.1% in February. Excluding gasoline, inflation was 1.0%, down from 1.3% in January.10

Despite a sell-off in the last week of the month, U.S. equities ended February on a positive note, with the S&P 500 posting a gain of 2.8%. Smaller caps outperformed, with the S&P Mid Cap 400 and the S&P Small Cap 600 up 6.8% and 7.7%, respectively. Volatility remained high, with the VIX closing the month at 27.95. U.S. Treasury performance was negative. Canadian equities ended February strongly, with the S&P/TSX Composite up 4.4%. Despite a sharp sell-off at month end, the S&P Europe 350 finished February with a gain of 2.7%, while the S&P United Kingdom rose 1.8% in pound sterling terms. Asian equities posted gains in February, with the S&P Pan Asia BMI up 1.7%. Government bonds sold off in February as investors digested a confluence of factors that look set to push inflation higher and could test central banks’ commitments to keep interest rates low for an extended period.

Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once populations are vaccinated. In March, we maintained the asset allocation that we established in February. We continue to include some exposure to gold as a stabilizer in this volatile environment. Shorter duration fixed income has been maintained as the U.S. economy normalizes and inflationary pressures are rising.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, a wealth effect from rising asset values and lower consumption, healthy consumer balance sheets, and a healing labor market. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 BCOM Index. December 1 to March 1, 2021.

2 Bloomberg WTI Index. February 21, 2021.

3 Trading Economics. China Debt, BIS Statistics. March 2021.

4 Trading Economics. Australia GDP. March 3, 2021.

5 European Centre for Disease Prevention and Control. March 17, 2021.

6 Trading Economics. Euro Area Inflation. March 17, 2021.

7 Trading Economics. U.S. Retail Sales. March 17, 2021.

8 Trading Economics. U.S. Housing Starts. March 16, 2021.

9 Trading Economics. U.S. Trade. March 17, 2021.

10 Trading Economics. Canada Inflation. March 17, 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. February 28, 2021. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The global economy has experienced a type of regime shift in response to the pandemic, and the recovery that follows will not be typical of historic recoveries following periods of recession and stagnation. Since the pandemic began, our outlook has been influenced by virus-related developments and fiscal stimulus, with consumer spending particularly sensitive to changes in these developments.  With our focus on this, we have changed our current twelve-month forward outlook to three months of Growth, followed by nine months of Stagnation, as we have seen evidence of a stronger recovery rebound since the start of the year.

Governments around the world are signaling that they will maintain fiscal support, with the U.S. administration set to lead the way by turning its attention to a multi-year infrastructure package. At the same time, major central banks are expressing a willingness to maintain accommodative stances despite a near-term inflation bounce, as they encourage an inflation overshoot and a rebound in inflation expectations. Incoming reports raise estimates of global GDP growth to 4% in 2021.1

China’s current account surplus widened to 2.0% of GDP in 2020, amounting to US$298.9 billion, compared to US$141.3 billion (1.0% of GDP) in 2019.2 On the merchandise trade front, China’s export sector was boosted by PPE and tech-related products. The steep decline in oil prices also cut China’s import bill by US$67.8 billion (or 26.5%) in 2020.3 In Western Europe, industrial activity and construction have continued to expand even as a weak service sector depresses GDP. Strong manufacturing is largely driven by the export-oriented German economy, where the manufacturing output index jumped 3.2%.4

In the U.S., the new stimulus package should boost an economy that is already off to a better-than-expected start to the year. The U.S. earnings season has been very strong, with the Q4 2020 earnings growth rate for the S&P 500 at 3.9%.5 Retail sales surged 5.3% in January.6 Manufacturing output continued to climb rapidly through January and most housing indicators showed strong levels of activity.  The Canadian economy (outside of the hospitality sector) continued to show resilience through the second wave of lockdowns as households and businesses adapted to tighter restrictions and the number of new COVID-19 cases continues to trend down. Retail sales were impacted by new containment measures but have remained resilient relative to the collapse in the spring. Manufacturing has been less severely impacted by the second wave of lockdowns with sales gradually converging back towards year-ago levels.

Global central banks have effectively taken interest rates to zero, driving nearly all sovereign debt to negative real yields. With less opportunity for yield across fixed income assets – especially those of shorter duration or higher quality – investors will likely continue to shift exposure to riskier assets. The S&P 500 posted a loss for January of 1.01%. Smaller caps outperformed, with the S&P MidCap 400 and the S&P SmallCap 600 up 1.5% and 6.3%, respectively. U.S. fixed income performance was mostly negative, particularly in corporates. Canadian equities posted losses, with the S&P/TSX Composite down 0.3%. The S&P Europe 350 erased its gains in the final day of January, leaving the continental benchmark with a total return of -0.8%. The S&P United Kingdom was down 0.6%. Asian equities began 2021 strongly. The S&P China 500 was up 4.8% and the S&P Hong Kong BMI was up 3.4%. Australian equities managed a gain with the S&P/ASX 200 up 0.3%, continuing a recent strong run which has seen it gain 12% over the last three months.

Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once populations are vaccinated. In February, we shifted a portion of the gold exposure into U.S. Midcap Equities to reflect the updated outlook to near-term growth. Across the Conservative, Moderate Growth, Growth, and Aggressive Growth models, we added 8%, 10%, 12%, and 14% respectively. We continue to include some exposure to gold as a stabilizer in this volatile environment. Shorter duration fixed income has been maintained as the U.S. economy normalizes and inflationary pressures are rising.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, a wealth effect from rising asset values and lower consumption, healthy consumer balance sheets, and a healing labor market. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 World Bank. Global Economic Prospects. January 2021.

2 Trading Economics. China Current Account. January 2021.

3 Trading Economics. China Imports. January 2021.

4 Trading Economics. Germany Exports. January 2021.

5 FactSet. Earnings Insight. February 26, 2021.

6 Trading Economics. U.S. Retail Sales. February 17, 2021.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. January 29, 2021. Index performance is based on total returns and expressed in the local currency of the index.