Belski: Expect Big Moves in 2021
To start the New Year, Brian Belski teases his investment strategy for Canadian and U.S. equities.
January 2021
Key Takeaways
- Unprecedented market recovery to continue through 2021
- Downgrade Technology and Communication Services to
market weight - Upgrade Financials to
overweight on the basis of diversification
For market analysts, there’s a tug of war between positive news – vaccines, political stability, etc. – and cyclical negativity. Which force will be greater in 2021?
BB: In our view, positivity will be a major force in 2021. But make no mistake, as investors reckon with unprecedented earnings growth from the lows of 2020, the “believability” of the recovery could come into question. We believe that the majority of strategists and economists have become so short-term oriented, so biased to negativity, that they lose perspective in an attempt to “make the call.” But as they sow doubt in an effort to generate interest for their forecasts, our focus remains on long-term fundamentals. We’re investors. We have conviction. And that’s why we do what we do.
Based on where markets are today, you’re calling for an 11% gain in the S&P/TSX and a 14% in the S&P 500. Can you lay out the currency implications for Canadian investors?
BB: Sure. The truth is we don't fixate on currency for multiple reasons. Number one, we primarily focus our attention on bottom-up indicators that speak to a company’s intrinsic value. Two, the majority of our emphasis with respect to fundamentals is on the U.S., and we think some of these currency issues play out in the stock price itself. All that said, longer term we expect to see further gains in the loonie versus the US dollar, especially as emerging markets and commodities get stronger. The Canadian dollar is extremely correlated to natural resources, such as crude oil, and that asset class has been slower to rebound from the 2020 lows.
On the U.S. side, Information Technology remains your biggest sector allocation despite a downgrade from overweight to market weight. Are you bullish or bearish?
BB: At the moment, markets are having a hard time evaluating whether President Biden will actually take a more aggressive stance on the tech industry. The conventional wisdom holds that Democrats are more “regulation-happy;” however, the other side of that coin is that liberals are more tech-friendly and tech companies in general skew liberal. So, it's a balancing act. Quite frankly, the biggest factor with tech this year would be another economic closure.
Given the direction of confirmed cases, we believe investors are underestimating the probability that Biden will shut down the country for another 30 days. And if that's the case, we expect a huge move in the stay-at-home stocks. We want to avoid that short-term volatility, which is why we neutralized both Technology and Communication Services. But I will tell you this: Those are our two favorite sectors for the next three to five years.
By contrast, you moved Financials to overweight. Is that primarily a value or dividend story?
BB: It's a diversification story, although value comes into play as well. For example, if asked where we look for the most mispriced growth stocks, we would say Financials. But it’s clear that the low interest rate environment is not good for all companies in the sector, so you have to play with themes and individual stocks. Our preferred theme is scale, in particular money center banks, brokers and asset managers. Picking our spots carefully allows us to diversify the overall portfolio exposure, harness a value opportunity, and focus on companies that we believe are well positioned for the mid to long term.
Brian, one last question. We like to end by asking for a book recommendation that’s shaped the way you think. What would you suggest for our Advisor audience?
BB: Easy – The Art of Contrary Thinking by Humphrey O'Neill. It has nothing to do with investing, and everything to do with trusting the evidence. His famous phrase is “When everybody thinks alike, everyone is likely to be wrong,” by which he means you should never mistake popular belief for scientific proof. This sums up our approach to capital markets – if the facts support our analysis, then we have absolute license to think differently from everybody else.
Brian Belski is the Chief Investment Strategist for BMO Capital Markets. He also manages the BMO U.S. Equity Plus Fund, available to Canadian investors in multiple flavours:
Read the complete 2021 Market Outlook report, or contact your Regional BMO Global Asset Management Representative for access to the U.S. and Canada Strategy Snapshots.
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