With the second wave of Covid-19 and speculation about the U.S. election, uncertainty is a persistent factor for investors. However, a longer-term view offers a more positive perspective.
Luc de la Durantaye, chief investment strategist and chief investment officer with CIBC Asset Management, says his medium-term outlook is one of continued economic expansion with low inflation.
He predicted a “Goldilocks” economy, with sustained moderate growth, would more or less return in the next six to 12 months.
On Wednesday, the Bank of Canada projected Canada’s average annual real GDP to expand by 4.2% and 3.7%, respectively, in 2021 and 2022, following this year’s contraction of 5.7%.
For the U.S., the BoC forecast GDP increases of 3.1% and 3.4% for 2021 and 2022; globally, the figures were 4.8% and 4.3%.
De la Durantaye said he bases his growth outlook on certain assumptions about the pandemic and U.S. election.
For starters, he’s positive on Covid-19 treatments.
With several vaccines in third-stage development, the probability is “relatively high” that one or more will prove effective, he said. Further, therapeutics are reducing the length of illness and hospitalizations, and behavioural changes like mask wearing and handwashing are helping control the virus’s spread.
“We’re better equipped [and] much more knowledgeable about how to control this disease,” de la Durantaye said, which should mean being able to reopen the economy more broadly next year.
Regarding the U.S. election, de la Durantaye is considering the possibility of a blue sweep as polls indicate Democratic presidential candidate and former vice-president Joe Biden continues to lead the race.
With the Democrats proposing increased taxes, the wealthy as well as corporations would be negatively impacted if new tax policy were introduced.
However, the Democrats would also likely increase fiscal spending to support the economy, de la Durantaye noted.
A Democratic administration may also result in an easing of trade tensions — another positive at the margin, he said.
For investors, de la Durantaye’s outlook is “still constructive for risky assets — so favourable to equities versus government bonds, for example,” he said.
Within equities, a slight rotation into small-cap stocks is occurring, as they’ve outperformed technology stocks in recent weeks, de la Durantaye said.
The Russell 2000 index, which represents the performance of U.S. small-caps, has a one-month performance of 5.7%, compared to 3.12% for the tech-focused Nasdaq.
While tech remains important in the longer term, small-caps and value stocks may do some catching up as the economy reopens, de la Durantaye said.
A reopening economy, combined with expectations for inflation, also means investors may see a slight increase in yields at the longer end of the curve — “certainly as we look out beyond the next 12 months,” de la Durantaye said.
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