(Runtime: 6 min, 10 sec; size: 3.61 MB)
Luc de la Durantaye, chief investment strategist and CIO, CBC Asset Management.
While we continue to have a central scenario — which is one of continued economic expansion — in the previous quarter of our forecast, we had also a recovery [scenario] focusing on recovery that was essentially truncated by, back then, massive fiscal and monetary policy. That continues.
But I think this time around what we’re seeing in the continuation of this scenario is a bit more of a balancing out. One, on the positive side, is the continued reopening of the economies, which continues to be supported by very, very accommodated monetary policy of unprecedented measure. We also continue to have fiscal support, but part of that balance will be that some of that fiscal support will gradually wane over the forecast horizon. So that is part of the balancing act.
We continue to see constructive news on the medical front with improving therapeutic solutions. We’re seeing good progress, positive progress, on development of vaccines. A number of them are moving into the final stage, and we should have news sometime in late August/early September, in some of the leading vaccines.
So, this is what is also psychologically supporting consumers and businesses; that there is sort of a light at the end of the tunnel eventually. But that’s balanced out with the risk of renewed infection, triggering an economic relapse, and we’re seeing it in some states in the U.S. And [in] some areas around the globe, but it’s not on a broad-based perspective for the moment.
So we remain constructive because, particularly on the medical front, the second wave or potential second wave, we assume that it will not have the same negative impact as the first wave for a number of reasons.
One is that we know more what to expect, as opposed to the surprise that we got in the first quarter with this pandemic. We now know more [about] what to do to contain the impact, and we know more as well because without having negative impact on the economy. So, by just simply following some basic measures of wearing masks and washing hands and keeping social distancing, that can go a long way. And you may not need to have a full lockdown of the global economy. And, so, from that perspective, we think that even a second wave would not have the same repercussion on the recovery.
[…] We’ve been mentioning that for awhile now to really look at very broad diversification. And, by that, I just don’t mean the geographical diversification and traditional, but we also have to look at alternative diversification.
We got to remember [that] we do have a challenge with the lowering of interest rates, the policy rate of zero in many jurisdiction, [and] that the bond yields are historically low. So government bonds are not going to play the same role as they have been playing over the last 20 to 30 years. That is, to be generating returns and providing some protection in down markets. Given that they’re so close to the zero-bound, the return will be lower than by historical standards. And, also, [bonds’] ability to protect in equity market correction will be lower in the future.
So we need to find some, and think about some, alternatives to a balanced portfolio, to play a portion of that role that government bonds used to play. And, for that, there’s some ideas that can come up. And there’s no one asset class that can fully replace government bonds, but certainly high-quality corporate bonds can be helpful. We’ve seen that central banks have started to buy high-quality corporate bonds. So they are being somewhat supported by central banks. So that can become one alternative.
We can think of very defensive, high-quality companies’ stock, per se, that pay and have a secure dividend. That can play somewhat of a role as well, and diversifying in those stocks can be helpful.
Having a little bit of gold. […] In these podcasts for over a year, year-and-a-half now, we’ve been talking about [gold] as a portfolio diversifier. Having gold is important. Certainly now at US$1,800 [or] over US$1,800 an ounce, that may not play the same role, and it may not go up as strongly as it did over the last-year-and-a-half. But it’s still an asset that investors should think [about] in their portfolios over time, to diversify their overall portfolios.
And, finally, I’ve always mentioned some of the EM [emerging] markets. Not all of them — some of them are basket case — but some emerging markets are offering some good returns, getting good yields, and have better balance sheets than many developed markets. So, a quality emerging market, either debt or equity markets, can also be part, or should also be part, of a well-diversified portfolio.