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Tech and pharma were key market drivers in 2020. But will last year’s winners continue to outperform in 2021, or will we see a rotation into other sectors under a Biden administration? Kim Parlee talks to Michael Craig, Head of Asset Allocation, TD Asset Management.
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[MUSIC PLAYING]
- It was another late night for political watchers. The Georgia runoff elections that would decide whether the Republicans or the Democrats would control the Senate has happened. And at this time, it looks as though the Democrats have it. So what are the implications for the financial markets in the US economy? We're joined by Michael Craig. He's head of Asset Allocation at TD Asset Management.
Michael, good to see you. I want to start with actually a conversation we had a while ago. It feels it was a long time ago, but not that long ago, with the main US election. And the concern there was if you had a blue wave, you could see these extreme agendas coming through-- high taxation and the markets falling because of that. Fast-forward to today, it looks as though Democrats have it, and we're seeing the markets rallying. So what's going on?
- Well, first for, as far as blue wave, I think it'd be more of a blue ripple. The Democrats have a narrow, narrow majority with the vice president being the tiebreaker in the Senate. So it's not as if they can go with some of the things that require 60-plus votes to push through. So some of the more progressive aggressive policy that people were talking about back in October is just not realistic with a Senate that's this close.
Certainly, many of the confirmations that they're going to want as far as people running various parts of the executive branch will be easier to accomplish. But that Green New Deal, if you will, or really aggressive tax policy, I just don't see it realistically being on the table for the foreseeable future.
- What do you see on the table for the foreseeable future then?
- I think the first order of business will be more stimulus. Covid cases increasing. Even a national lockdown could be on the table. But if that were to happen, I think you're going to see another round of very aggressive stimulus. And so I think part of the rally today is on the hopes of more stimulus.
Bond markets certainly is taking notice. And the bond market has sold off very aggressively in a curve steepening fashion. So longer-term debt has really taken it on the chin today. And so that's what I think the topic du jour is that that the stimulus is the most likely thing first up on the legislative agenda.
- Let's say and let's prognosticate a bit. Once we get past the point of Covid and vaccines rolling out-- and I say that's a big hump to get through. But then when you look ahead to what sectors could benefit from it, a Democrat-controlled Congress, what do you see?
- Well, certainly, things in the infrastructure space, renewable energy, home care all stand to benefit. Legalization of cannabis, you see in the cannabis sector today is really running. And if you look at the market, it looks like it's moving a lot.
But underneath the surface of the market is a degree of mean reversion where all the 2020 losers are really running today. And the winners, the stay-at-home stocks of 2020-- they're up but not much. They're really trailing the market. So I think in many ways, this mean reversion idea is going to take hold today. And a bit of a sector rotation is about to occur.
- What about one of the sectors we are seeing some pressure today are some of the big techs. Now, again, techs have had a huge run. But I think the concern, of course, is about regulation and what could be happening on that front. So what do you see again with a Democrat-controlled Congress? What could happen there?
- Yeah, so first off, the sell-off, or I guess the lack of rally, in tech today is I think reallocation into other areas that have been beaten down and are coming back. I don't think the results last night in Georgia make a whole lot of difference for what's coming down with tech. I think as far as antitrust and what have you, that has left the station. That is in full force now. And I think it's one of those things where many in Washington, both Republican and Democrat, agree to.
So I don't think it would have been hard to get this through various levels of government. So this is on the horizon. It's not the end of the world. In many cases, many have argued that a breakup of tech oligopolies or monopolies is actually beneficial to shareholders. And I think that's a bit more of a fairly sanguine approach to look at it.
But I think the bigger story is that there's other parts of the market that have a far better, more attractive valuation, and that's what's being looked at now. Tech is expensive. It's run a lot. And I think it makes sense to starting to see some people looking at other areas that are a better entry points to invest in.
- We put 2020 to bed, we hope. We've still got some political theater that's going on over the next few days and weeks as we see the transition to a Biden presidency. But putting that aside for a minute, when you look out to 2021-- I almost said 2020. I almost came back again. When we look at to 2021, what are you focused on? I mean, what do you think of the material things to watch?
- So going into this year, we had started to really move our risk around and be a bit more diversified. Last year, it was really all about growth tech, consumer discretionary, et cetera. I think there is opportunity in international stocks now. I think we need to be a little bit more concerned about the US dollar. It has fallen somewhat in the last little while.
But really if you're thinking long-term trends, it is breaking long-term support, and so a weaker US dollar, which, generally speaking, is good for risk. But it's going to hurt US assets somewhat, I think, as a big theme for this year. And, really, the steepening of the bond market, I mean, it'll be interesting to see, as Democrats look for more aggressive fiscal agenda, how the bond market takes it, what the central bank does.
We don't see that US central bank doing anything for some time. So it is going to be a bit of a steepener, which actually is good long-term just because it adds more value back to the bond market. So long story short, we still like equity but at much more of a diversified approach.
We have increased our positions in Europe and Asia and Canada and reduced in the US and have really sold fixed income to fund a lot of that as well. So that's how we're probably going into 2021. Fingers crossed. It's going to be less of a crazy year and a bit more normal, if you will, relative to last year.
- Yeah, and before I let you go, I wouldn't mind just touching on, you were talking about the US dollar weakening. And, I mean, that has implications for-- you mentioned US assets, but also things-- the Canadian dollar, commodities-- all these things that are priced in US dollars. So is that going to be an accelerant to some of the trends that you're seeing in those areas as well?
- Yeah, we're bullish on commodities certainly. And when I say commodities, softs, base metals all look good. Certainly if they get a big infrastructure bill passed, that's going to be quite bullish. As far as-- it's the decarbonization of the economy goes, or green investments-- that's where copper is going to come into play. And it's going to be great tailwind to copper.
And so you look, the traditionally speaking, when you have a bout of US dollar weakness, the commodity markets tend to do quite well. And I would not be surprised to see that play out in 2021.
- That could be a better news for story for Canada, maybe. I don't know. I mean, how does that play in? I mean, you got the green energy side, plus you've got the traditional fossil fuels here in Canada. So how does that look?
- I think it's actually all good for Canada, quite frankly. And, by the way, we had been fairly defensively positioned in Canada for some time. But on the agricultural side, it's a good story. On the energy side, Biden's really going to-- where you will see some regulation is on fracking. And ironically that'll be bullish for energy just because less supply coming to market. And that should be helpful to our energy producers.
Our renewables-- Canada's renewable energy, Canada certainly punches above its weight there. So in many ways, the commodity side of our economy, we should do quite well, both on renewables and the kind of traditional commodity sectors. So we think the Canadian market should have a pretty good year this year and not in-- look, the last 10 years, TSX has not done that great. I mean, we're talking 4% to 5% total returns of the last 10 years. I think we're going to see a much better year this year.
- Mike, thanks very much.
- Thanks, Kim. It's been my pleasure. And happy new year to you and your family.
[MUSIC PLAYING]
- It was another late night for political watchers. The Georgia runoff elections that would decide whether the Republicans or the Democrats would control the Senate has happened. And at this time, it looks as though the Democrats have it. So what are the implications for the financial markets in the US economy? We're joined by Michael Craig. He's head of Asset Allocation at TD Asset Management.
Michael, good to see you. I want to start with actually a conversation we had a while ago. It feels it was a long time ago, but not that long ago, with the main US election. And the concern there was if you had a blue wave, you could see these extreme agendas coming through-- high taxation and the markets falling because of that. Fast-forward to today, it looks as though Democrats have it, and we're seeing the markets rallying. So what's going on?
- Well, first for, as far as blue wave, I think it'd be more of a blue ripple. The Democrats have a narrow, narrow majority with the vice president being the tiebreaker in the Senate. So it's not as if they can go with some of the things that require 60-plus votes to push through. So some of the more progressive aggressive policy that people were talking about back in October is just not realistic with a Senate that's this close.
Certainly, many of the confirmations that they're going to want as far as people running various parts of the executive branch will be easier to accomplish. But that Green New Deal, if you will, or really aggressive tax policy, I just don't see it realistically being on the table for the foreseeable future.
- What do you see on the table for the foreseeable future then?
- I think the first order of business will be more stimulus. Covid cases increasing. Even a national lockdown could be on the table. But if that were to happen, I think you're going to see another round of very aggressive stimulus. And so I think part of the rally today is on the hopes of more stimulus.
Bond markets certainly is taking notice. And the bond market has sold off very aggressively in a curve steepening fashion. So longer-term debt has really taken it on the chin today. And so that's what I think the topic du jour is that that the stimulus is the most likely thing first up on the legislative agenda.
- Let's say and let's prognosticate a bit. Once we get past the point of Covid and vaccines rolling out-- and I say that's a big hump to get through. But then when you look ahead to what sectors could benefit from it, a Democrat-controlled Congress, what do you see?
- Well, certainly, things in the infrastructure space, renewable energy, home care all stand to benefit. Legalization of cannabis, you see in the cannabis sector today is really running. And if you look at the market, it looks like it's moving a lot.
But underneath the surface of the market is a degree of mean reversion where all the 2020 losers are really running today. And the winners, the stay-at-home stocks of 2020-- they're up but not much. They're really trailing the market. So I think in many ways, this mean reversion idea is going to take hold today. And a bit of a sector rotation is about to occur.
- What about one of the sectors we are seeing some pressure today are some of the big techs. Now, again, techs have had a huge run. But I think the concern, of course, is about regulation and what could be happening on that front. So what do you see again with a Democrat-controlled Congress? What could happen there?
- Yeah, so first off, the sell-off, or I guess the lack of rally, in tech today is I think reallocation into other areas that have been beaten down and are coming back. I don't think the results last night in Georgia make a whole lot of difference for what's coming down with tech. I think as far as antitrust and what have you, that has left the station. That is in full force now. And I think it's one of those things where many in Washington, both Republican and Democrat, agree to.
So I don't think it would have been hard to get this through various levels of government. So this is on the horizon. It's not the end of the world. In many cases, many have argued that a breakup of tech oligopolies or monopolies is actually beneficial to shareholders. And I think that's a bit more of a fairly sanguine approach to look at it.
But I think the bigger story is that there's other parts of the market that have a far better, more attractive valuation, and that's what's being looked at now. Tech is expensive. It's run a lot. And I think it makes sense to starting to see some people looking at other areas that are a better entry points to invest in.
- We put 2020 to bed, we hope. We've still got some political theater that's going on over the next few days and weeks as we see the transition to a Biden presidency. But putting that aside for a minute, when you look out to 2021-- I almost said 2020. I almost came back again. When we look at to 2021, what are you focused on? I mean, what do you think of the material things to watch?
- So going into this year, we had started to really move our risk around and be a bit more diversified. Last year, it was really all about growth tech, consumer discretionary, et cetera. I think there is opportunity in international stocks now. I think we need to be a little bit more concerned about the US dollar. It has fallen somewhat in the last little while.
But really if you're thinking long-term trends, it is breaking long-term support, and so a weaker US dollar, which, generally speaking, is good for risk. But it's going to hurt US assets somewhat, I think, as a big theme for this year. And, really, the steepening of the bond market, I mean, it'll be interesting to see, as Democrats look for more aggressive fiscal agenda, how the bond market takes it, what the central bank does.
We don't see that US central bank doing anything for some time. So it is going to be a bit of a steepener, which actually is good long-term just because it adds more value back to the bond market. So long story short, we still like equity but at much more of a diversified approach.
We have increased our positions in Europe and Asia and Canada and reduced in the US and have really sold fixed income to fund a lot of that as well. So that's how we're probably going into 2021. Fingers crossed. It's going to be less of a crazy year and a bit more normal, if you will, relative to last year.
- Yeah, and before I let you go, I wouldn't mind just touching on, you were talking about the US dollar weakening. And, I mean, that has implications for-- you mentioned US assets, but also things-- the Canadian dollar, commodities-- all these things that are priced in US dollars. So is that going to be an accelerant to some of the trends that you're seeing in those areas as well?
- Yeah, we're bullish on commodities certainly. And when I say commodities, softs, base metals all look good. Certainly if they get a big infrastructure bill passed, that's going to be quite bullish. As far as-- it's the decarbonization of the economy goes, or green investments-- that's where copper is going to come into play. And it's going to be great tailwind to copper.
And so you look, the traditionally speaking, when you have a bout of US dollar weakness, the commodity markets tend to do quite well. And I would not be surprised to see that play out in 2021.
- That could be a better news for story for Canada, maybe. I don't know. I mean, how does that play in? I mean, you got the green energy side, plus you've got the traditional fossil fuels here in Canada. So how does that look?
- I think it's actually all good for Canada, quite frankly. And, by the way, we had been fairly defensively positioned in Canada for some time. But on the agricultural side, it's a good story. On the energy side, Biden's really going to-- where you will see some regulation is on fracking. And ironically that'll be bullish for energy just because less supply coming to market. And that should be helpful to our energy producers.
Our renewables-- Canada's renewable energy, Canada certainly punches above its weight there. So in many ways, the commodity side of our economy, we should do quite well, both on renewables and the kind of traditional commodity sectors. So we think the Canadian market should have a pretty good year this year and not in-- look, the last 10 years, TSX has not done that great. I mean, we're talking 4% to 5% total returns of the last 10 years. I think we're going to see a much better year this year.
- Mike, thanks very much.
- Thanks, Kim. It's been my pleasure. And happy new year to you and your family.
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