In this episode, Sylvain Brisebois, Senior Vice-President and National Sales Manager, BMO Private Wealth speaks with Brian Belski, Chief Investment Strategist, BMO Capital Markets who shares his thoughts on the unprecedented nature of 2020 and challenges that remain for 2021.
Transcript:
Welcome to The Wealth Experience podcast series, where our subject matter experts provide the latest updates on what’s happening in the world around us…brought to you by BMO Private Wealth.
Sylvain Brisebois: Good day, everybody. My name is Sylvain Brisebois and I’m the senior vice president and national sales manager with BMO private wealth. Today, I’m joined by Brian Belski, a gentleman who needs no introduction – of course BMO Capital Markets’ chief investment strategist.
Brian, 2020 is behind us, finally – a year that was far from normal for so many reasons. And we now begin a new year, and with that comes a new outlook on the markets and the world around us. We always appreciate your outlook on the future but especially at strange and challenging times like these. Thank you for taking some time with us today to share your thoughts, and on that, let’s begin.
Markets have recovered strongly since March of 2020 – that’s been well documented. Relative to forecasted earnings, do you think the markets are ahead of themselves here.
Brian Belski: It’s a great question, and thank you so much for having us. There’s a formula in the market, “Stocks lead earnings, which lead the economy,” and it’s something that I think a lot of people have struggled with – with this, quote unquote, disconnection with respect to Main Street and Wall Street, or Bay Street, for that matter. And I think too much has been played into that, because, again, we have been experiencing unprecedented times. And I think what investors probably should realize is that this quote unquote return to normalcy that I think everybody sorely needs and actually really wants in 2021 is not going to be as easy as everybody thinks – meaning we’re not going to be living our normal lives as fast as everybody would like to and the markets are actually showing.
I do think that it’s dangerous to say that markets are ahead of themselves, especially given the fact that markets in North America, especially in 2020, had more net outflows of assets than inflows, and we continue to see massive inflows into the fixed income markets in North America.
In terms of being ahead of it, go back to the formula, “Stocks lead earnings, which lead the economy.” Stocks are doing their typical and traditional forecasting in leading on what’s happening. But earnings actually could be a lot better than most people think, and that’s part of our call for both Canada and the United States in 2021 that earnings are going to be better. So, if in fact earnings are going to be better still, then potentially the economy could be better as well, which could ultimately bring additional credibility on how strong stocks have been.
Sylvain Brisebois: Fantastic. In the spirit of time, I'll get back to comments on targets and your expectations for 2021 near the end of this recording, but I want to put you in the hot seat this morning a little bit. We’ve had many calls with you to speak about the general markets. I want to speak about specifics this morning, if that’s OK, and on that I would speak to the 5G technology.
We’re going to see demand grow exponentially for bandwidth, and I wonder what the implications and your views are on the price of copper in the broadband cable market? Has the recent appreciation for copper already priced that in? Any comments on that?
Brian Belski: Great question. You know, copper just isn’t about bandwidth either; I like to call it a bits and pieces type component to overall technology, whether or not it’s semiconductor chips or even Tesla, for that matter.
And so base metals, and metals in general, is an area that we’ve been bullish on for awhile – copper has been one of the better performing metals so far in 2021. And we think that the increased demand will proceed as these other fundamental factors with respect to – well, whether or not you mention it, in terms of 5G or solar in the New Green Deal that Mr. Biden is going to be unwinding in terms of clean energy.
I think the demand for copper is pretty consistent, and that call, by the way, is consistent with our great commodity strategies in BMO Capital Markets. We can see continued pricing for copper to be strong.
Sylvain Brisebois: Very good. And speaking of commodities, we’ve talked a lot about electric vehicles, and those are going to be here to stay. Can you comment on that technology in the market and perhaps lithium, nickel – and even the price of oil if it gets left behind to some extent?
Brian Belski: Well, we had a bit of a recalibration with respect to the price of WTI here, mostly because of supply factors beginning to tighten up here a little bit. In terms of the fundamental factors driving oil, we still think supply outstrips demand, so we could see a bit of a pullback. And there have been, from a commodity perspective, maybe some quote unquote short coverings as the price has been pushed higher.
But, clearly, with this notion of electronic cars and, again, cleaner energy and the like, that will put, we believe, continued downward pressure on oil. But still there’s great companies in Canada and the United States that have spent a lot of money on names like Suncor and CNQ and TransCanada (TC Energy), and Enbridge has spent a lot of money on renewable research. So, again, they’re going to be at the forefront of some of this.
But I do think that, again, you’re going to see continued diversification in terms of leadership in the markets, and so the materials sector in Canada is going to play a big part of that in terms of nickel and silver and copper and the like in terms of batteries and the like.
But it’s not just going to be about new cars and batteries; it’s going to be about global synchronized growth improving over the next few years, not so much in 2021, Syl, but I think that’s the call from a broader perspective over the next five to 10 years.
Sylvain Brisebois: OK. And the trends for the next five to 10 years are going to be interesting in real estate as well. I think everybody can acknowledge that working from home is going to be here to stay in some form of other. Do you like companies like Colliers and Brookfield, and Cadillac Fairview, and how do you deal with these in this environment with uncertainty of what the next five or 10 years might hold in terms of real estate demand?
Brian Belski: Yeah. We still own Brookfield in the portfolios that we run for the wealth management channel in Canada. Exquisitely managed company. We do not own the other two, so I can’t speak to those in particular. But, you know, there can be a case made, Syl, that you’re going to start to see new capacity constraints and then rebuilding of offices. We like to joke about the whole open concept of floors and the like. Well, we could be going back to the old-school offices as people become more comfortable in terms of going into a traditional office setting than cubicle, so that would actually entail a new supply coming in in recalibrating offices.
So, we like Brookfield from a longer-term perspective just because of how that company is managed.
Sylvain Brisebois: Fantastic. The last time we were doing recordings like this, I think we had clarity on the U.S. election outcome; what wasn’t clear at the time was the Senate. And I think generally speaking the Republicans were expected to be leading a couple of months ago. It looks like that has changed. Does that change your way of viewing the world a little bit if the Democrats are a little bit stronger in U.S. politics here?
Brian Belski: Not it doesn’t, Syl, and I’m glad you brought that up because for several years we’ve been opining in our research work that politics has nothing to do with the absolute performance of the stock markets, really – what the economy is doing and what’s happening fundamentally. And I think too many people, based on our conversations with clients and customers around the world were focused on the quote unquote blue wave of Democratic control in two out of the three branches of government in the United States, which looks like now that is an official standing thanks to the run-off election in Georgia.
So, I think too many people are giving politics too much credit with respect to policies. There’s clearly going to be an impact on taxes and regulation going forward but, given this unprecedented time, it’s our belief from an investment strategy standpoint at BMO that Mr. Biden is going to focus on COVID and COVID first, and additional prevention and additional stimulus.
With respect to the other platform issues that typically coincide with a more Democratic slash liberal platform, I think it’s going to take a little bit longer for those to literally be implemented as such. I think the markets got it right – that that’s why you’re seeing higher prices.
Sylvain Brisebois: Thank you very much on that. I’m going to change gears a little bit here. And, Brian, if I’m not mistaken, most strategists, your colleagues across North America do good work, but not many of them run actual money; you run portfolios and clients are investing real money in them. You’re launching a new publication on a new portfolio as SMID Cap portfolio. That might be a new term for some of our listeners. Could you expand on that and why are you launching now? Am I right to assume also that that could be a portfolio available to our listeners at some point here?
Brian Belski:Yes. Thank you for mentioning it. We actually published it as a portfolio in December, given the fact that we are FINRA-registered analysts, meaning I have several different licences in the United States and we have to publish a research report first before the portfolio can officially be launched – our partners and you as well are going to be launching this portfolio for our BMO Wealth clients in the United States over the next 30 to 90 days, and we’re hopeful that something could also develop in Canada.
SMID means small- and mid-cap companies, so anywhere from $500 million up to $10 billion is kind of the range that we’re looking at for this portfolio. Typically, and historically, we run portfolios, as many as 40 to 50 stocks; at the most this portfolio is going to be 75 given the risk perspective that is a little bit higher in small- and mid-cap stock.
The messaging from us would be this: we believe that the market in general in the stock market in Canada and the United States is going to be a lot more diversified. And as we start to see a broadening out of fundamental strength, you want to have some exposure in your longer-term equity holdings of small- and mid-cap companies. So, the premise of the portfolio is we're going to be overweight in sectors that we want to be in for the next three to five years – namely communication services, technology and consumer discretionary, with a particular focus on the near term in areas like financial and industrials, and that’s why we are positioned accordingly in the portfolio that we have already published in December.
Sylvain Brisebois: Wonderful. So, advisors will be taking care of reading through that research, I think, in the near term.
Let’s talk about the targets here to finish the call today. For the end of 2020, and correct me if I’m off on this a little bit but the S&P closed at 3756; your target was 3650. That’s remarkably close – I can tell that to the audience; this is not an exact science. And, despite the year that we had, you came in pretty close on the TSX in Canada. We finished at 17433; your target was 18200. So, can you speak about the proximity to the targets that you were able to achieve there and also, perhaps, comments on where you expect the US S&P 500 and the TSX to finish in 2021?
Brian Belski: Well, fair’s fair, and thank you for your comments. We’re obviously flattered and humbled by that. It takes time and it’s a process and it’s a discipline that we have carved out now. So, I’m entering my 31st year on Wall Street this year and we’ve published nine forecasts on Canada since we’ve been at BMO and 23 forecasts on the S&P 500 in the United States. So, our forecasts for 2021 respectively are 4200 in the US in terms of the S&P 500 and 19500 in the TSX – we actually think the TSX could outperform the US, given those numbers, as a catch-up trade.
The TSX at the end of the year kind of went, on a very short-term basis, went the other direction relative to the U.S.; we think that’s just because the US has been much more of a momentum play. And we do believe that the catch-up trade in terms of Canada providing value, if you want some U.S. exposure – increased U.S. exposure. Remember, the majority of growth and earnings that we’re seeing in Canada is really tied to the U.S., so that’s where we wanted to expose in Canada that are really more exposed to the U.S.
With respect to our targets last year, you know, we suspended them in March, brought them back in August where we moved our target from 3400 to 3650 on the S&P 500. So, we were kind of positioned to under-promise and over-deliver in the U.S.
In Canada we really thought we’d see even more of a catch-up trade, and it looked like it was going to do that. We got pretty close and, again, you know, we’re blessed and fortunate to have a great team and a process and a discipline that has proven to work over time.
Sylvain Brisebois: That’s wonderful. As we’re recording this call, the TSX is a little over 18000 and so perhaps a couple of weeks more is what you require. I say that with a smile because, to the audience, that is a remarkably accurate forecast. Thank you for that.
And, Brian, as always we wish we had more time to expand on these targets – we want to keep these calls relatively brief – and so we will continue to deal with an unprecedented nature of 2020 into 2021 and the challenges and opportunities that that might bring, but we do value your perspective and, above all, the work that you do to help us make better informed decisions for our clients.
And as always, to our clients, you are encouraged to reach out to your wealth professionals for deeper conversations on any topic you wish to discuss.
In the meantime, everybody please take care of yourselves, be well, and, until next time, thank you for listening and thank you again, Brian.
This podcast series has been brought to you by BMO Private Wealth. Please join us again.
Disclosures:
The comments contained in this podcast are general in nature, provided for information purposes only, and do not constitute legal, investment, trust, estate, accounting or tax advice. They are provided for general guidance, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. Unless otherwise qualified, any opinions, estimates and projections in this report are those of the speakers as of the release date, are subject to change without notice, and may not reflect those of BMO Private Wealth. This podcast may not reflect all available information.
BMO Private Wealth is a brand name for a business group consisting of Bank of Montreal and certain of its affiliates in providing private wealth management products and services. Not all products and services are offered by all legal entities within BMO Private Wealth. Banking services are offered through Bank of Montreal. Investment management, wealth planning, tax planning, philanthropy planning services are offered through BMO Nesbitt Burns Inc. and BMO Private Investment Counsel Inc. Estate, trust, and custodial services are offered through BMO Trust Company. BMO Private Wealth legal entities do not offer tax advice. BMO Trust Company and BMO Bank of Montreal are Members of CDIC.
® Registered trademark of Bank of Montreal, used under license.
