indicatorPortfolio Manager's Commentary

Portfolio Manager's Commentary, December 2020

By ATB Investment Management Inc.

December 2020 year in review

A year for the history books has come to an end. If an investor looked at their portfolio once at the end of 2019, and again at the end of 2020, it would appear on the surface to have been an uneventful yet successful year. Both equity and bond markets enjoyed strong performance and reached new highs by year end. Of course, this belied the dramatic pullback and heightened uncertainty that was experienced at the end of the second quarter. COVID-19 was rapidly spread to every corner of the globe reshaping our daily lives. By year’s end, the virus was showing a strong resurgence coupled with increased lockdown measures. Most were happy to say goodbye to 2020.

Economy

COVID-19 and subsequent lockdown measures resulted in a roller-coaster year for unemployment globally; however, government support programs, in conjunction with central bank easing, encouraged a strong recovery. With viral resurgence toward year-end, governments extended many support measures into 2021. Central banks have also signalled no plans to ease up on stimulus for the foreseeable future. U.S. Fed Chair, Jerome Powell, indicated that “until substantial further progress has been made toward the Committee's maximum employment and price stability goals.” The global economy is not yet back to January 2020 levels; but, with governments in no rush to ease off the gas even as growth accelerates, a full recovery may not take long. 

The virus hit Alberta from two sides, with the energy industry experiencing another sharp downturn. When global growth slows, energy demand generally dries up, and this year was no different. Global fuel consumption in 2020 fell by nearly 9% compared to 2019.1 That drop may not appear drastic, however, between 2007 and 2009 (during the financial crisis), fuel demand only declined 1.5%. Prices for WTI fell alongside demand this year, temporarily trading at negative prices for an afternoon. Demand has since picked up in-line with economies reopening and energy prices remained on an upward trend heading into year-end. Like the broader economy, growth for the energy sector is expected to continue throughout next year. Alberta’s unemployment remains elevated in comparison with the rest of Canada.

Canada and Alberta Unemployment Rates, and WTI Crude Oil Price

Graph showing Canadian retail sales versus new jobs

Source: Statcan Labour Force Survey (LFS), Bloomberg


Financial markets

For those that recall the market events of 2018, it was a year that saw global stocks sharply sell-off despite economic conditions favouring growth. 2020 was the opposite. The market made a quick recovery after the initial selloff in March, while the economy continued to falter. It is often said that the stock market is unfettered from the economy. The last few years provided clear examples of such.

Major stock market total returns in 2020 (CAD)

Graph showing the 3 major market's returns year-to-date for 2020

Source: Bloomberg


Recapping the last quarter, October saw some heightened volatility and sideways price movement, anticipating a close American election. It was far closer than anyone imagined; but, markets quickly shifted focus to news that COVID-19 vaccine trials were exceeding expectations. This gave hope that “business as usual” might return earlier than anticipated, leading to a sustained rally in financial markets through to the end of the year. Notably, the stocks hurt most by the lockdowns were given a boost. As New Year’s Eve came to a close, overall global equities were at all time highs. The MSCI World Index finished up 9% in Canadian dollar terms for the quarter, and 14% for the year.2 This continued rally in risk assets has resulted in arguably frothy valuations by year end; but, on a positive note, earnings growth is expected to continue strongly through the next couple years. This should help to temper valuations as earnings grow into elevated price levels. 

Shifting to fixed income, with central banks back in full stimulus mode and interest rates globally at near record lows. Bloomberg reported in December that “27% of the world’s investment grade debt is now sub-zero” for yield.3 The exceptional performance for the year as yields moved lower, left the investment grade universe for Canada at a paltry 1.21% yield by year end. With a yield that low, one thing is abundantly clear ⁠— the probability of repeat performance for the next few years is possible, but highly unlikely.

Canadian yields

Graph showing the 3 bond market returns year-to-date in 2020.

Source: Bloomberg, FTSE Russell


The Compass Portfolios and ATBIS Pools

A strong final quarter for all major asset classes left overall returns for the year not only positive for the Compass Portfolios, but with above average returns for all of the funds. The relative credit tilt within the fixed income component excelled, as credit spreads contracted post vaccine news pushing returns up 5% in the last two months of the year. That tailwind helped to push Conservative and Conservative Balanced to a near record year in terms of return, second only to 2009’s return due to the rebound from the bottom of the financial crisis. As stated in our last commentary for Q3, overall equity performance lagged for the year due to the underweight in technology. Expectations of a return to normal gave other sectors a lift towards the end of the year. In particular, financials and industrials (which Compass tends to be overweight), both performed better than the information technology sector in the last quarter globally.2

Compass Portfolios returns, series A
Total returns, 2020 calendar year

Compass Portfolios total returns 2020 to September 30 chart

Source: ATBIM


For the ATBIS Pools, a similar story is shown for the Fixed income Pool, which had a standout year due to strong credit performance. Given the low absolute yields, we anticipate higher yields into the future. The fixed income holdings, both within the Compass Portfolios and the ATBIS pools, continue to have a shorter relative duration to the benchmark. Stronger relative equity performance in the fourth quarter contributed to stronger overall equity pool performance for the year as a whole. This is largely attributed to the underweight in materials and technology (namely gold stocks and Shopify). The end-of-year lift to financials and industrials helped to close the performance gap. The US and International pool both had strong absolute performance hitting double digit returns by year end.

ATBIS Pools returns, series F1
Total returns, 2020 calendar year

Graph showing the ATBIS Pools returns, year-to-date for 2020

Source: ATBIM


Conclusion

This was one of those years where an investor’s long term resolve was put to the test. The speed of the selloff in March was shocking to say the least. In the midst of that slide, the natural instinct as emotions take hold, was to question if action was needed. As quickly as markets bottomed and economic implications of the pandemic started to surface, the market rebounded at near equal pace. It was a stark reminder that the pricing mechanism for equities is based on expectations of the future, and far less on the current economic environment. Timing the market this year would have required precision and a good deal of luck. ATB Investment Management is a strong proponent of sticking to one's long term investment strategy through a suitable well diversified portfolio. Once that plan is set, the best course of action in response to market moves, is often no action at all.

1Source: U.S. EIA - Total World Liquid Fuels Consumption.
2Source: MSCI World Total Return Index (CAD).
3Source: Mullen, and Ainger. (2020, Dec 11). Bloomberg. World’s Negative Yield Debt Pile At 18 Trillion For First Time. Retrieved from http://www.bloomberg.com.

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