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Luc de la Durantaye, chief strategist and chief investment officer for CIBC Asset Management.
Generally, our context is one of continued economic expansion with a low degree and moderate degree of inflation. You could say Goldilocks is back almost, to a certain degree, in the next six to 12 months. We also have to make some assumptions behind that, as the listener will certainly be wondering in the back of their minds, “What do you think of the pandemic? What do you think of the U.S. election?” And we would say two things. Part of our scenario is one is the vaccine is very important, therapeutic is very important. And we’re siding on the side of positive in terms of these developments. In short, there are nine vaccines that are in third-stage development, three that are fairly in the lead, with different technologies. The initial stages of the first and second stages of testing were promising, and they’re different technologies.
But the probability, relatively high, that one or two of these vaccines will likely develop into something that’s effective in controlling the pandemic. Combined with that, the therapeutics that are also improving and reducing the length of hospitalization, reducing the length of the time that people are sick. And the third element — and it’s a combination of these things — the third element is behavioural changes in individuals, where mask wearing is increasing, social distancing is increasing and hygiene in general has improved. So we’re better equipped, we’re much more knowledgeable about how to control this disease. So we’re seeing that in a positive light, and being able to reopen more broadly the economy, as we move into 2021. So that’s the first underlying assumption.
The second underlying assumption is towards the U.S. election. We’re facing somewhat different dynamics in this election than 2016. I won’t go through everything, but certainly the polls have improved their methodologies. We’re seeing polls that are in the leads for the presidency towards vice-president Biden. We’re also seeing, even at the Congress level, at the Senate level, that there is a chance of a blue sweep. In short, for us, what that means is a changing environment in three important aspects. One is on the taxation. Yes, taxation will rise if we end up with a blue wave in the U.S., after the U.S. election, which would be a negative to U.S. corporations. But two, we would probably have under this scenario a higher fiscal spending, which would be supportive for the economy. And the third element is the overall trade — easing tension on the trade aspect — which would at the margin be positive. So we see this and anticipate that this is the most likely outcome. And therefore, what does that mean for investing?
It means a number of potential changes. It’s still constructive for risky assets, so favourable to equities versus government bonds, for example. We would see a slight rotation, and we’ve started to see this starting in September, where we’ve seen Russell 2000 — so small-cap stocks — outperforming the more technology, like NASDAQ, type of index. And so we’re seeing some rotation into what has done really well since the pandemic versus what has suffered from the pandemic. So if we’re reopening, then you might have some catching up in some of these sectors.
Longer term, technology is still an element that’s very important that is going to continue to develop. But in the short term, there’s some extreme movements that have been made, extreme underperformance versus outperformance, underperformance of small-cap, underperformance of value, that we might see some catching up. I think these are very important trends that we’re anticipating could continue if our scenario evolves.
And finally a slight increase at the longer end of interest rates could be likely — so a steepening, a gentle steepening, of the yield curve as we start anticipating better growth. And yes, perhaps anticipating potentially a little bit higher inflation, not in the next 12 months, but certainly as we look out beyond the next 12 months.