Asset management unit's outlook sets a positive tone for 2021 but with some cautious notes
When will the Canadian economy bounceback from the pandemic pain? Will the COVID vaccine bring relief for the hardest-hit industries?
So many questions for the next 12 months and uncertainty remains of course, but the latest outlook from BMO Global Asset Managers (BMO GAM) is largely optimistic about 2021.
The report from the firm’s Multi-Asset Solutions Team is title ‘The Great Normalization’ reflecting the monumental shift that is required to return the Canadian economy to whatever ‘normal’ will be post-pandemic.
The positives are led by expectation of mass vaccination through the first half of 2021, which the report suggests will provide an overweight boost for the services sector.
With low interest rates and government support packages continuing, there should be a strong platform for growth, especially as there is still pent-up demand in some sectors.
"By mid-year we expect certain sectors, such as travel and tourism, to bump against capacity constraints as long-delayed holidays and other spending materialize," said Frederick Demers, Multi-Asset Solutions director at BMO GAM. "As normalcy returns, consumer spending is expected to grow and unemployment rates to be meaningfully lower than current rates. Heading into 2021, we are optimistic we will see improved economic conditions and better times ahead."
Weaker spots
Despite the overall positivity, the report highlights where weakness is set to remain.
The Canadian economy is forecast to lag recovery in the US and globally with the federal deficit continuing to grow as relief programs remain in place.
The oil industry is also expected to make slow progress in its recovery during 2021 following a price drop of around 25% this year.
With lockdowns weighing on demand, it will take some time before a return to normality reduces oversupply, supporting price increases. BMO GAM expects oil demand to rebound into 2022 but at a slower rate than the broader pace of the economy.
With lower rates of business travel, combined with a focus on greener energy and demand for ESG criteria to take centre stage, there will be challenges for the industry.
Equities outlook
The report says that there is a favorable medium-term view on equities heading into 2021 given expectations for a vaccine-driven economic recovery and revitalized global corporate earnings.
Current positioning includes:
- Relatively neutral on Value versus Growth
- Overweight global equities versus fixed income
- Overweighted on Small-Caps versus Low-Vol stocks as a reflation play
- Overweighted on emerging-market equities
There are questions around equity market valuations; however, BMO GAM's long-term valuation modeling indicates that equities are reasonably priced at current levels.
