How growth and expansion in 2021 is more than possible.
With 2021 well underway, the familiar theme of uncertainty can hopefully begin to settle as political turmoil south of the border calms with the transition to a new administration and vaccines begin making an impact on COVID-19 caseloads. Despite economic challenges created by the global pandemic, North American stock markets are starting the year strong, with the Dow Jones Industrial Average moving past the 31,000 level for the first time in early January, and the S&P 500 Index hovering just under 4,000.
While there is room for optimism, Philip Petursson, chief investment strategist at Manulife Investment Management, cautions that patience may be required for the first half of 2021.
“We know that economic growth will be slower because of ongoing lockdowns, which could trigger a market correction given where valuation is,” says Petursson. “But it’s important for investors to stay focused on the longer term that will look better than it does today.”
Recovery in Asia
Initially hard hit by the pandemic, Asia has made an impressive recovery and currently drives global growth. China’s economy is back to pre-pandemic growth rates, with gross domestic product climbing 6.5 per cent in the fourth quarter from a year earlier.
Rebound in China.
One of the few V-shaped recoveries globally.
Source: Y-Charts, Dec 3, 2020
And this growth is expected to continue with China’s GDP on track to reach 8.2 per cent this year, with projections that it could overtake U.S. GDP by 2028.1,2
In response to China’s rapid reopening, the Capital Markets and Strategy Team’s model portfolio has increased its weight to emerging markets to 10 per cent of the overall portfolio allocation. Along with a strong comeback in China, Taiwan is also lending to a strong economic recovery in that region of the world.
CPI YOY vs CMS Inflation Model
1998 - 2021 (Including Forecast)
Source: Manulife Investment management, Bloomberg
“If we think we are moving into an environment where growth over the next year is accelerating, and inflation is going to be accelerating, that tends to historically benefit emerging markets – and that benefits commodities,” says Petursson. “By having exposure to a broader emerging markets index, which includes Asia, Latin America and Africa, we think it will serve investors very well through 2021.”
Here at home, as life slowly begins to resume a more normal pace, Petursson expects North America will experience its own rapid recovery with a wave of consumption that we haven’t seen for quite some time. “The combination of pent-up demand of people wanting to get out of the house, go shopping, go to restaurants, plus excess savings will contribute to the economic recovery as people get back to living.”
Stronger economic growth coupled with anticipated inflation rates of 2.5 per cent this year may also contribute toward higher interest rates on the U.S. 10-year Treasury yield. “We could see the 10-Year Treasury yield at 1.5 per cent within the next six to 12 months, with a yield of 2.0 per cent entirely possible on stronger than expected growth,” says Petursson.
US Treasury Yield 10-2 Spread, last 5 Years
Source: Manulife Investment management, Bloomberg As of January 7th, 2021
The quantitative easing program by the Federal Reserve which drove the money supply higher by 25 per cent year over year is likely to continue to contribute to a weaker U.S. dollar in 2021. This may also contribute to higher U.S. inflation and higher longer-term interest rates this year.
Looking ahead, all eyes are on the U.S. and how a new administration in the White House will take on the challenging tasks of rolling out faster vaccination programs, supporting the medical community under enormous strain, getting additional economic support to households and rebuilding strained political, economic and diplomatic relationships on a global scale.
During these difficult times, the support of an advisor is needed more than ever. To help your clients make sense of it all, access the resources available in our new Value of advice section of Solutions Magazine, including a recent article entitled, Make no mistake, the stock market isn’t the economy.
FOR ADVISOR USE ONLY.
© 2020 Manulife. As one of Canada’s largest integrated financial services providers, Manulife offers a variety of products and services including insurance, living benefits, segregated fund contracts, mutual funds, annuities and guaranteed interest contracts. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Manulife Mutual Funds and Manulife Exchange‑Traded Funds (ETFs) are managed by Manulife Investment Management (formerly named Manulife Asset Management Limited). Manulife Investment Management is a trade name of Manulife Investment Management Limited. A division of Manulife Asset Management Limited. Commissions, trailing commissions, management fees and expenses all may be associated with investments in the Manulife Mutual Funds and Manulife ETFs. Please read the ETF facts/fund facts as well as the prospectus before investing. The Manulife Mutual Funds and Manulife ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. Manulife, Manulife & Stylized M Design, and Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.