Continued fiscal and monetary responses around the world to the COVID-19 pandemic, combined with little inflation and low interest rates, have all the makings to support a long-term bull market, say experts.
Brian Belski, chief investment strategist with BMO Capital Markets, says environments like the one we’ve entered in 2021 have historically supported continued stock market gains.
“We see no reason why 2021 will be any different,” says Belski, who co-authored BMO’s Investment Strategy 2021 Market Outlook with Nicholas Roccanova, Ryan Bohren and Andrew Birstingl.
“Yes, valuations appear stretched at first glance, but they also need to be considered within the context of historically low interest rates and little inflation, ingredients that are likely to persist throughout 2021 and beyond.”
Belski says it’s reasonable to expect market valuations to sustain or even expand slightly from its current level. In addition, he anticipates corporate earnings growth will recover sharply from pandemic lows – particularly during the second half of 2021 since much of the damage was lockdown specific and not necessarily related to companies themselves.
“In fact, aside from the global financial crisis, 2020 represented the swiftest quarter-over-quarter earnings collapse for the S&P 500 where index EPS plummeted nearly 50% during the first quarter,” he says. “Thus, we anticipate that 2021 has the potential to be one of the best years ever in terms of earnings growth – something we believe will also help to push stock prices higher.”
Liz Lunney, head of portfolio management at ATB Wealth, agrees there is room to run in the equity bull market through 2021 and into 2022, with the end of the cycle to be determined by central bank interest rate policy and inflation expectations.
“Low and stable interest rates, combined with government support programs, suggest a continuation of strength into 2021, especially with the anticipated recovery in corporate earnings,” she says.
More specifically, Lunney says low and stable interest rates in North America and developed economies around the world will be positive for equity markets – especially when combined with a global economic recovery.
“Fixed-income markets and government bonds, in particular, will be more challenged,” she says. “That said, there will be selective opportunities in the fixed-income space and bonds will continue to play an important role in balancing risk in client portfolios.”
Lunney notes in some respects, 2020 was a tale of two markets in Canada. The S&P/TSX was up 3.8 per cent year-to-date at the end of November. That said, the broad market fell 2.3 per cent if we were to strip out Shopify, up 4.5 per cent, and the mining sector (gold in particular), up 1.6 per cent.
“Looking ahead to 2021, a shift even at the margin in shopping behaviours and excess liquidity are expected to support companies like Shopify and the mining sector. Conditions are also setting up which should be supportive of the Canadian banking and energy sectors,” she says.
While cautiously bullish, Michael Wood, region head for the Prairie region at TD Wealth Private Wealth Management, expects that investors should still prepare for a long road ahead.
“We’re obviously not through the pandemic. There’s still a lot of uncertainty,” he says, also noting the transition of political power in the United States. “Having said that, we are definitely bullish on the economic recovery globally as well as in North America … It’s just going to be a matter of time.”
Like Lunney, Wood is high on equities for at least the next 12 to 18 months – particularly due to interest rates that he predicts will be close to zero for the next couple of years.
“For those looking for investment opportunities, there are not a lot of alternatives outside of equities. The equity markets are really where everyone is going to be looking,” he says.
Pedro Antunes, chief economist for the Conference Board of Canada, says while the central bank has indicated short-term interest rates will remain largely untouched through to 2023, longer-term yields might tell a different story.
“The bank doesn’t have as much control over those, and there’s a sense that as the economy picks up … that we are going to see more upward pressure on longer-term bonds. We’re already starting to see some implications of that happening,” he says.
Antunes says while many now have a handle on how deep the pandemic has cut, there are still many questions about the long-term repercussions. In the near term, he credits stronger oil prices in providing a timely boost to the Canadian economy in 2021.
“Oil prices have already started to pick up, and whether we agree with it or not, our economy is still very dependent on resources like oil. That tends to drive a stronger currency,” says Antunes, who believes the Loonie will plateau around $0.80 US.
“Also, when we see oil prices pick up, that tends to produce better profitability in some of Canada’s important sectors, which tends to boost equity markets and so on.”
Rev your savings engines
Research indicates room to grow for TFSA, RRSP contributions
Despite a global pandemic, many Canadians continue to utilize tax-free savings accounts and registered retirement savings plans as part of their respective investment strategies. Yet new data shows many are not taking full advantage of these savings vehicles.
According to BMO’s annual TFSA survey released late last year, more than half (53 per cent) of Canadians say they contributed the amount they expected in 2020 – only slightly down from 2019 (58 per cent). A little over two-thirds (68 per cent) of Canadians now say they have a TFSA.
On average, Canadians are holding $30,921 in their TFSAs – up over nine per cent from 2019. Regionally, those in the Prairies hold the least in their TFSAs on average at $24,495, while those in B.C. hold the most at $34,880.
The BMO survey also noted a gap for investors with knowing what can be included in a TFSA. Nearly a quarter (24 per cent) of Canadians are not aware what investments are eligible.
Only half (49 per cent) of Canadians are aware that a TFSA account can hold both cash and at least one other type of investment. Investors in Atlantic Canada have the highest proportion of cash in their TFSAs at 47 per cent, followed by Quebec and Alberta at 40 per cent.
“When investing, it’s important to make sure that the money being invested is working for you,” says Nicole Ow, head of term investments with BMO. “TFSAs can be a great vehicle to grow savings for short or long-term goals, but it’s important to have the money that is contributed working for the investor.”
RRSP activity, meanwhile, is mixed. According to Statistics Canada, the total number of people putting money into RRSPs fell 4.6 per cent from 2000 to 2018 – a drop to six million from 6.3 million. Many experts point to the introduction of TFSAs in 2009 and rising housing prices behind declining use of RRSPs.
Twenty-nine per cent of tax filers contributed to an RRSP in 2000, compared with 22 per cent in 2018. RRSP data for the 2019 tax year has yet to be released.
Yet for those who are contributing, the amount they are holding is increasing. According to BMO, Canadians who already contributed to their RRSP say they added $6,409 for the 2019 tax year – up from $5,247 in 2018. The average amounts held in RRSPs in Alberta has increased by 22 per cent from $17,000 to $18,000 between 2018 and 2019.
“It’s encouraging to see Canadians across the country emphasizing long-term investing and boosting their planned contributions,” says Robert Armstrong, director of multi-asset solutions with BMO Global Asset Management.
“While Canadians plan to contribute to their RRSPs, we advise individuals to monitor their progress and make regular contributions to avoid stress associated with overcontributing penalties and meeting the RRSP deadline.”