“Look deep into nature, and you will understand everything better.”
- Albert Einstein
When the Ever Given, one of the world’s largest container ships, became wedged in the Suez Canal in March and blocked hundreds of container ships from passing through this vital trade route, there were unforeseen consequences. One consequence was that nurseries in the U.K. ran out of garden gnomes. This severe shortage of gnomes was aggravated by a perfect spring storm: increased demand from British consumers forcibly bogged down at home, pandemic shipping and manufacturing problems, and the arrival of warm weather.
“We haven’t seen a gnome in six months now, unfortunately,” Ian Byrne of Highfield Garden World in Gloucestershire, England, told The Guardian.
Looking past this dearth of tiny trolls, we are upbeat about all the positive signs that spring has arrived. Temperatures are rising and the global economy is heating up. Leading the way in terms of vaccinations, re-openings and labour market recovery, the U.S. enjoyed a growth spurt that propelled it into recovery. The country’s GDP grew 6.4% during the first quarter. Canada’s GDP also blossomed, posting an expected growth rate of 6.5% in Q1. Equity markets approved and generally reaped solid positive returns in April.
Canada – Green thumbs up
In April, COVID-19 cases climbed again; Ontario, Alberta, British Columbia and Quebec were especially hard hit. New virus variants seem to be spreading more quickly and easily, leading to a third wave that began in March. Some provinces are tightening restrictions and imposing lockdowns, waiting for vaccinations to bring infection numbers down. To date, more than one third of Canadians have received at least a first dose.
Although much of our economy remained closed during Q1, Canada’s equity market spiked to an all-time high. During the year’s first earnings season, loose monetary policy from the Bank of Canada (BoC), the prospect of economic recovery, and rosy corporate earnings gave markets a boost. The S&P/TSX climbed 8%, followed by a 2.4% increase in April. Major contributors were primarily cyclical sectors such as energy, financials, and consumer discretionary.
Oil prices went up about 20% in Q1; West Texas Intermediate (WTI) traded at US$63 a barrel and Western Canadian Select (WCS) climbed above US$50. Strength in oil prices made energy producers one of the market’s best performing segments. Defensive sectors such as consumer staples, utilities and materials lagged in Q1. Gold continued to retreat when investment demand wilted due to an improving economy and rising bond yields. The growth-oriented technology sector also remained out of favour with investors. They believe that growth stocks are currently overvalued against a backdrop of rising bond interest rates and the possibility of higher inflation as economies recover.
Canada’s central bank announced plans to taper purchases of Government of Canada bonds by $1 billion a week, signalling growing optimism for economic recovery in 2021 after the epic catastrophe that was 2020. Governor Tiff Macklem also revised growth expectations upward. Unemployment fell to a pre-pandemic level of 7.5%, and core inflation edged higher to 2%. After such a strong quarter, it’s not surprising that the BoC would reduce stimulus measures to avoid overheating the economy; however, Mr. Macklem emphasized that he plans to keep interest rates near zero for a long time.
Canadian bond yield curves continue to steepen; the two-year yields are currently sitting at 0.31% and the 10-year at 1.56%. The loonie broke above US$0.81, its highest level since February 2018.
United States – Seeds of prosperity
Economic recovery continued to accelerate in Q1 as more consumers received a vaccine and states lifted restrictions. Driven primarily by consumer spending, the U.S. economy grew at an annualized rate of 6.4% in Q1. This increase follows a 4.3% annualized expansion during Q4 of 2020, making it one of the most rapid recoveries in history.
Just over a year ago, lockdown orders pushed unemployment to 14.8%. Now, one year later, the rate has dropped to 6% because the labour market is getting back on its feet. First-time jobless claims fell to 553,000 in April, the lowest level since the pandemic’s onset.
Despite this rapid growth, U.S. Federal Reserve Chair Jerome Powell stressed that the recovery has been uneven. The U.S. central bank decided to keep its easy money policy and anchor interest rates near zero, where they have been sitting since last March. While some fear that the ultra-loose policy stance could overheat the economy, the Fed replied that “risks to the economic outlook remain.” Policymakers acknowledged that inflation may well rise above the 2% target near the end of 2021 before it falls back.
To mark his first 100 days in office, President Joe Biden made his inaugural address to Congress, where he proposed a US$1.8 trillion family aid plan. That comes on the heels of a recently unveiled US$2.3 trillion infrastructure package. President Biden’s newest initiative is aimed at helping the middle class and includes US$1 trillion in new spending over 10 years and US$800 billion in tax cuts.
To fund the proposal, the Biden administration wants to increase the tax rate on capital gains and dividends to 39.6% from 20% for households that make more than US$1 million.
During his address, Biden took a tough tone against China and President Xi Jinping, adding fuel to geopolitical tensions between the world’s largest economies.
While the pandemic’s third wave continues to ravage the globe, the U.S. has now administered more than 200 million vaccine doses. Based on this successful rollout, the Biden administration announced that the U.S. will branch out and begin exporting approximately 60 million doses of the AstraZeneca vaccine to unspecified nations in need. This comes after mounting pressure on the U.S. to share more of its supply.
The S&P 500 reached a record high in April, gaining 5.3%. Corporate earnings remained strong as technology giants posted Q1 results that were much better than expected.
Europe and the U.K. – Green shoots
Like the U.S., the United Kingdom has been a leader in vaccine rollouts. In April, the Purchasing Managers’ Index (PMI) posted its highest reading since 2013. It rose to 60, indicating a rapid rebound for business activity. Consumer confidence indicators, inflation expectations and employment data are all signalling that the U.K. is putting the “petal” to the metal and is poised for economic recovery.
Conditions in other European countries varied. Some entered a new round of lockdowns, slipping the continent back into recession territory.
As vaccine supply increases, and governments can loosen lockdown measures in time for this summer’s tourism season, we are hoping for a strong uptick in economic growth during the latter half of 2021.
On the policy front, the U.K. and the rest of Europe are diverging from each other. It is unlikely that the U.K. will introduce more stimulus, while the EU is committed to a significant pace of asset purchases.
In April, U.K. equities (FTSE 100) delivered a 4.1% return, and EU equities (STOXX 50) gained 1.9%.
China – A fertile landscape
Soaring exports helped China post 18.3% year-over-year GDP growth for the first quarter of 2021. This contrasts to a 6.8% contraction in the same period last year. Although the number beat consensus expectations, growth is expected to decelerate in the coming quarters once other major economies restart and demand decreases for Chinese goods and services.
The government expects 6% GDP growth for 2021, the first year of the recently unveiled Five-Year Plan. With COVID-19 largely contained and the economy showing a quick recovery, policymakers renewed their campaign to prune risks, especially in the financial and property sectors. In response to this de-risking effort, credit growth slowed. China’s debt reduction campaign is a 2021 priority as the government seeks to deleverage. It is also worth noting that Beijing is continuing to support small businesses, which includes deferring interest and principal payments until the end of 2021.
Given a slower pace of growth ahead, China’s equity market struggled to gain any ground. The Shanghai Composite’s return was essentially flat for April.
Japan – Growth spurt
Thanks to China’s continued economic growth, March exports from Japan rose 16.1% compared to March of 2020, their strongest performance in more than three years. This high growth number is slightly misleading because it is calculated against a very poor performance in March of 2020. Even so, growth beat expectations and provides a reason to be confident that Japan is cultivating a recovery as the rest of world is set to reopen.
While it did not officially enter another state of emergency, Japan has been targeting COVID-19 hotspots and asking specific prefectures to adopt stricter measures to curb a rebound. Daily cases were rising in April, leading medical experts to become concerned about a fourth wave of infections, especially around Tokyo and Osaka, the country’s most populated areas. With the Tokyo Olympics less than 100 days away, Japan will face increased scrutiny of how it is handling the pandemic.
The Nikkei 225 declined 1.3% in April.
Our strategy
We seem to be in a bit of a Goldilocks scenario. After spiking sharply to start the year, bond yields have stabilized for now, but could move higher. Equity markets are supported by accommodative monetary and fiscal policy, plus hope based on vaccine rollouts.
We are keeping a perennial eye on inflation for a number of reasons: strength in commodity prices; a very slightly tighter monetary stance from the BoC; an uptick in labour costs; and several other factors. If inflation begins to sprout, it will likely be transitory and no action will be required in the short term. We believe we are well grounded, with a modest overweight to U.S. equities and a corresponding underweight to bonds.
The last word
While the Ever Given mishap is one of a number of incidents that revealed the connectivity and fragility of the global supply chain, and COVID-19 cases continue to climb in many parts of world, green shoots are starting to emerge.
The old adage of “sell in May and go away” (which refers to the six-month period between May and October when markets often experience lower volumes and movement) may not be a fruitful approach in 2021. Vaccination efforts in the U.S. and U.K. are ripening into strong recoveries – and Canada is enjoying a budding recovery. Although different regions of the world are in varying stages of recovery, our optimism stems from an economic momentum that is germinating globally.
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