Virus retreats, economic outlook improves
The pandemic is entering a new phase with vaccines at hand, case counts in decline and businesses gradually resuming normal operations. Though many variables are at play, we look for a significant rebound in economic growth this year, with most economies achieving pre-pandemic levels of output sometime this year or next.
Bond yields surged, valuation risk recedes
Longer-term bond yields have surged as investors’ expectations of faster inflation and better economic growth are offsetting the impact of central-bank efforts to hold rates down. We think real rates could rise even higher but structural changes related to demographics, an increased preference for saving versus spending and the maturing of emerging markets will ultimately limit how high they can go.
Stocks rise to record levels led by economically sensitive segments
Global equities rose to new highs as the pace of COVID-19 vaccinations progressed, virus counts declined and earnings exceeded expectations. We recognize there is froth in some areas of the market and that valuations are elevated, but our modelling suggests the possibility that price-to-earnings ratios could rise even further as fears of the crisis fade and interest rates return to normal levels.
Executive summary
The pandemic is entering a new phase with vaccines at hand, case counts in decline and businesses gradually resuming normal operations. Bond yields have surged, stocks have climbed to records and a variety of market signals suggest that economies are on the cusp of a strong recovery.
Economy
Containing COVID-19 has been critical to the economic recovery, which we believe has much more room to grow with the help of significant monetary and fiscal stimulus.
Fixed income
Longer-term bond yields have surged with investors’ expectations of faster inflation and better economic growth.
Equities
Global equities rose to new highs and the economic recovery has driven rallies in small and mid-cap stocks, financials and industrials, and value stocks overall.
Emerging markets outlook
Emerging-market equities delivered strong overall gains in 2020. However, the returns came from a limited number of markets, with only seven of 27 countries in positive territory. Many emerging-market country indexes fell 10% to 20% over the past 12 months. We have seen better performance across most sectors. However, a handful of stocks was responsible for the improvement.
We expect emerging-market currencies to outperform their developed-market peers. Sterling will likely underperform other major currencies such as the euro, Canadian dollar and Japanese yen.
The recent rise in U.S. bond yields has given the greenback a short-term boost, offering investors a more attractive opportunity to sell the dollar.
We expect that the Canadian loonie will appreciate to $1.18 per U.S. dollar over the next 12 months.