How do you top a capital markets miracle?

Having completed its 2021 Mid-Year Capital Markets Outlook, which provides insight into capital markets around the world, Mackenzie Investments is overweighting equities as it moves forward, according to the report’s author.

“Our basic premise is that the backdrop is fundamentally sound, and we want to have a predisposition to be overweighting our portfolios toward equities,” Brent Joyce, the Vice-President Investment Strategist who joined the company seven months ago, told WP. “We think interest rates will rise a little bit and that's a bit of a headwind for bond investors. It's not to the exclusion of one versus the other, but at the margin, we favour stocks over bonds.”

Joyce, who plans to make the wide-ranging outlook a semi-annual publication, came to his conclusion after “the unprecedented state of affairs of what’s happened in the last 18 months, certainly in the last year. How do you top a miracle? That’s what a lot of investors are asking themselves today. Maybe you don’t have to. Maybe you can just bask in the glow of the vaccines and progress we’ve made. But the markets had the granddaddy of all positive surprises back in the fall with the vaccine announcement, and they’ve responded in kind.

“Where we still sit is exceptionally positive for equity markets,” he said. He emphasized that inventories still needs to be restocked and that all the negative news around supply chain disruptions is a problem – albeit a good problem to have, given that companies will have to ramp up to meet the increased demand, which is an easier problem to have than weak demand.

“We’re slowing from an exceptional level and the year-over-year changes – because of dramatic declines last year – are eye-popping,” said Joyce, noting we’ve left the worst of last year’s declines and still have very robust readings for many fundamentals, particularly earnings. Consumers have also indicated they’re willing to spend on goods and services once doors reopen, which will be provide an economic boost, and government support is morphing into longer-term infrastructure investments.

“Equity markets can live with a good environment that is stabilizing, although they do prefer the improving environment,” Joyce said, anticipating more modest returns with a very robust economic backdrop in the next 12 to 18 months. The key big central bank players – Europe, the U.S. Federal Reserve, even the People’s Bank of China – are also being quite accommodative, even though the more peripheral players – such as Canada, New Zealand, Mexico, and Brazil – are tightening policy.

There were, as many have noted, pandemic winners and losers. Some companies have benefited from the work-play-stay at home environment, which may result in some lasting consumption behaviour changes, though at a lower level than during the lockdown, while other companies – such as airlines, hotels, and the hospitality industry - have survived and are beginning to reopen.

When asked about his positivity, Joyce said, “a lot of that positivity is reflected in how far we’ve come for stock prices, but there’s still more to go.”