National Bank Investments - Asset Allocation Strategy - April 2021

by Martin Lefebvre, CIO, and Team, National Bank Investments

National Bank Investments' Asset Allocation Strategy
April 2021


– With already one quarter completed in 2021, the final picture is clear. Against a backdrop of rising interest rates, stocks have pulled ahead of bonds which are showing losses, while the more cyclical sectors, regions and factors sit atop the equity podium.

˃ The ending of Q1/2021 also implies that we have just wrapped up the first year of the ongo ing bull market. After such a stellar performance over the period, one can reasonably question what the next y ear has in store. Historically, second years of bull markets (average of 10%). So, what are the key elements that will determine how bumpy the road ahead will be this time

˃ On the geopolitical front, there are two major issues that should keep the markets on their toes over the coming quarters and both revolve around the Biden administration. The first is its infrastructure plan(s) and, more importantly, how this new spending will be funded. The second question concerns the U S policy approach toward China, and the April 22 U.S. hosted climate summit (which Xi Jinping is expected to attend) should provide more information on this front

˃ On the macroeconomic front, we see three crucial variables for what next. First, inflation, as the next few months should reveal significantly higher annual figures. Second, long term interest rates, which are technically due for a break in the near term, but will likely test the symbolic 2% threshold sooner or later , especially if concerns of economic overheating intensify. And third, the U.S. dollar, which we continue to see weaken over a 12 month horizon but it could remain supported for a few more months given what will likely be a period of spectacular growth sou th of the border.

˃ For emerging markets, a rising U.S. dollar usually means underperformance, and the past two months have been no exception. Under these circumstances, we provide an update of the investment thesis that has led us to overweight EMs since l ast August. In short, our models and analysis show that valuations, fundamentals, and macro conditions continue to point in the direction of EM outperformance relative to U.S. equities. Consequently, we remain positioned in this direction. However, we are slightly reducing their allocation in favour of Canadian equities to account for near term tail risks and to increase our allocation to cyclical sectors traditionally overrepresented in value indices.



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