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Luc de la Durantaye, chief investment officer for CIBC Asset Management.
Well, there’s a number of factors where we expect a sizzling hot economy. One is just recently the Democratic Party winning both houses in Congress makes fiscal spending more likely. That’s an important point. Related to that as well, you have already measures that have been helping the consumer, which puts the consumer with a fairly high disposable income and high savings rate. So, as you move into 2021, and you have high efficacy vaccines that are deployed in the global economy, you’re going to reopen the economy with a consumer with high pent-up demand, governments that are very supportive from a fiscal perspective, and given that as well central banks are saying it’s confirmed that they are still far away from both their targets on inflation and maximum employment, you will have an environment that is also very accommodative from a monetary policy standpoint. So, those create a very strong environment for recovering economic activity.
That means, from a financial market perspective, strong support both from the fiscal and monetary policy. But it also means that what we’ve observed in the later part of 2020, which was a rotation away from, a little bit from, growth and into value. It means a number of rotations in the financial markets that will continue. So, we’ve seen rotation out of growth into value. We’ve seen non–U.S. equity markets outperforming the U.S. equity market. We’ve seen small-cap stocks outperforming large-cap stocks. And those, we find that that rotation, and the economic environment that we see in our scenario, continuing in 2021.
Maybe I should touch a little bit on the risk quickly. Obviously, there’s a new strain in the virus. So, if the vaccine were to become less effective, obviously, the reopening would take a little longer, so that’s one risk that we need to monitor. The implementation of the vaccine across the U.S. but also across the world — if there are some glitches in terms of the vaccination, that could also slow down our scenario. So, this is another risk. And the third risk is really one that is like on the extreme positive side, where if you do have much stronger economic activity, then maybe it could force the Federal Reserve and some central banks to go back, if you will, on their promises of maintaining policy. And they may have to realign their monetary policy earlier than expected. So, those are the risks that we’re going to be monitoring but within the context of a fairly positive outlook for 2021.
We haven’t touched on the commodity side, and a global economic recovery as well as low inventories are supporting an outlook for continued strength in commodity prices — both metals and energy. And in that context, it brings back the outlook closer to home looking at Canada, which could be benefiting from higher oil prices and higher commodity prices. In addition, with this strength in economic activity, even if the central banks are anchored at the short end of the yield curve, the long end of the yield curve could continue to move up gradually. And we could see the yield curve steepening, which is a good, also a positive environment for the banking sector.
So, those elements are favorable in general to the Canadian equity outlook. And it’s also favorable for the Canadian dollar. As we know, the Canadian economy is resource-intensive still, and the Canadian dollar reacts relatively positively when oil prices continue to move up. And we also know that this environment continues to be somewhat less positive for the U.S. dollar. So, we would also see continuing strength in the Canadian dollar versus the U.S. dollar. And generally speaking, continued weakness in the U.S. dollar versus a number of foreign currencies, which is something to bear in mind as you continue to build your portfolios.