Quarterly Outlook: Recovery Still in Progress, Despite Crosswinds- Boxing Day Sales Arrive Early!
In this publication, we discuss our outlook for the global economy and outline our tactical asset allocation recommendations for the next 9-12 months. We continue to believe that the global economy remains relatively early in the current economic cycle, and suggest investors maintain an overweight allocation to equities over bonds and cash. Volatility will probably pick up as yields push higher as the Federal Reserve (Fed) and Bank of Canada (BoC) normalize their monetary programs. That said, conditions remain highly accommodative and we suggest investors use periods of volatility to add to high-quality positions in companies with strong earnings growth potential and reasonable valuations – i.e., growth at a reasonable cost vs. growth at any cost. We suggest investors maintain an underweight allocation to fixed income and cash.
Key Takeaways:
- Global growth still bifurcated, but hovering above trend. The Organization for Economic Co-operation and Development (OECD) is forecasting global real GDP growth of ~5.7% year-over-year (YoY) in 2021, and 4.5% YoY in 2022. This growth is being led by strength across advanced economies, which we believe are tracking ahead of their emerging market peers on vaccination rates/reopening efforts. We maintain the view that the successful reopening of the global economy towards a more synchronized scenario versus today’s bifurcated recovery will depend on effective vaccination programs globally and continued fiscal and monetary support.
- Inflation is rising everywhere and likely to stick around longer than expected. U.S. economic growth averaged a 6.4% annual growth rate over the first two quarters of 2021. While GDP growth is expected to moderate into 2023, it is still expected to remain above trend. The Canadian economic outlook remains robust despite near-term softness in the economy. We expect past gains in income, employment, and savings to fuel stronger growth in consumption and business investment next year.
- Asset allocation recommendations – unchanged from Q3 update.We continue to recommend an overweight allocation to equities with a preference for companies that are expected to benefit the most from the recovery process (i.e., cyclical, small-mid cap equities, value, etc.). Given relative valuations and the earnings outlook, we suggest an overweight allocation to the cyclically sensitive S&P/TSX vs. the tech-heavy S&P 500 index. Investors should also maintain an underweight allocation to fixed income and cash.