So, while it’s impossible to predict what might happen in 2021, we’re still going to give it a try. Over the last few weeks, I asked four Canadian investment professionals for their thoughts on the year ahead.
Chris Heakes, vice-president and portfolio manager, Global Structured Investments at BMO Asset Management
We are cautiously optimistic for 2021. With vaccines rolling out, and fiscal and monetary stimulus continuing to be in place in developed markets, we think there is the possibility of 2021 being much better from an economic and recovery point of view. Overall, we’d continue to advocate for high-quality equities as higher-quality companies are better suited to navigating a challenging backdrop. We do still expect some lingering volatility but, again we’re optimistic on a 12-month lookout that business activity should pick up, which will lessen credit risks and potentially allow some beaten-up areas of the market to recover further. As a base case, we would look for high-single-digit- to low-double-digit equity returns in this scenario.
As for sectors, I’d look to financials, in particular banks—both north and south of the border. I also like dividend-based strategies, which underperformed in 2020, while tech took the centre stage. I think this could reverse and investors could look at high quality dividend-based strategies. Lastly, I like industrials and real estate investment trusts as well. Certainly there are some challenging times to navigate, but with progress being made around COVID-19, these sectors are attractive over the next 12 to 24 months.
David Barr, president, CEO and portfolio manager at PenderFund Capital Management
For the first time in a long time, we are seeing more retail investors participating in the continued upside in small caps. However, whenever a long-term trend reverses, we have to wonder if it can be sustained. Market history tells us that usually these swings don’t just last for one or two quarters. We believe there are many small-cap companies still on their path to recovery and that with the renewed optimism of a vaccine, we are on the verge of seeing strong earnings momentum for these businesses.
We have been talking a lot internally about a group of companies we call the “ZIPSS”—technology companies that have some similarities to the business models of the popular, high-flying big five tech names like Amazon and Facebook, but which we believe have much longer runways of growth ahead. With the digital transformation we are witnessing, further accelerated by the global pandemic, we believe these companies are poised to create a lot of value for patient shareholders in the years ahead.
The pack is represented by a group of five companies that are amongst the disruptive breakout leaders in their industry. Zillow Group Inc. is disrupting how property is bought and sold; IAC/InterActiveCorp is poised to transform a whole host of services from search and entertainment to finding work and home repair; PAR Technology Corporation is gaining momentum and benefitting from the massive tailwinds caused by the sudden need to re-platform and digitize the restaurant industry; Stitch Fix, Inc. is an online apparel company focused on hyper personalizing proper fit and style of clothing in order to delight consumers; and Square, Inc. is a leading fintech that has become a significant disruptor in the payments and banking industry. These companies have promising economic models to drive profitable growth as they scale; they are amongst the breakout leaders in their respective categories that benefit from positive feedback loops, which tend to make the strong even stronger; and they target industries with massive total addressable markets.
Rob Edel, chief investment officer, Nicola Wealth
The underlying issues that have been driving the market are monetary and fiscal policy, and that will continue to be the catalyst in 2021. There is some concern that [bullish] sentiment gets overdone and that you have a pullback at some point, but I think the market would welcome that. As long as interest rates stay low and we don’t have fiscal tightening—and with a democratic administration in the U.S. having enough power to spend money, but not enough to raise taxes—that’s a positive for markets. At the same time, central banks have indicated that they are going to keep monetary policy easy for an extended period of time.
The key variable to watch is the bond market, and especially 10-year yields. If the economy recovers and if you see inflation [rise], where will the 10-year yield go? At what point does that become a problem for the market? The issue is that if yields rise, the discount valuation process becomes more problematic. One reason why people are OK with present equity valuations (which are reaching record highs) is because of low rates. If you’re using a higher interest rate when discounting future earnings, you then get a lower valuation. So that’s one thing, but also there’s the opportunity cost: If yields go up, it makes fixed income more attractive.