January 2021 LifeSpring Insights

 

When it comes to economic forecasting, there’s one thing we can say for sure: any predictions should be taken with a grain of salt.

After all, who could have predicted 12 months ago that the TSX would plunge 31% from January 1 to late March? And if in March you’d said stocks would soar back and post gains for the year, you’d likely have gotten more than a few raised eyebrows.

One thing we can all agree on is that we’d like 2021 to be easier on our portfolios (and our nerves) than 2020. To that end, let’s look at what the latest economic numbers tell us could lie ahead.

First up, the 50,000-metre view

According to the Business Development Bank of Canada’s 2021 Economic Outlook, the Canadian economy is expected to achieve solid growth, with actual performance linked to how widely available the COVID-19 vaccine is by mid-year. BC’s economy should be a leader with 4% growth, just behind Ontario which is forecast to lead the provinces with a 4.5% expansion.

Now let’s zero in on the factors that could drive the economic growth of Canada, BC and the global economy in the coming year.

1. Savers create “preloaded stimulus”

If you’ve been able to keep working during this crisis, you may have noticed that your bank balance has grown and your credit card bill has shrunk. COVID-19 restrictions have simply left us with fewer places to spend our money.

Cancelled travel spending alone is enough to give the national savings rate a boost: Canadians spend billions of dollars each year on international travel.

Deferred spending, along with significant government assistance during the crisis, have driven the household-savings rate to unprecedented levels. In the fourth quarter of 2019, for example, households set aside just 2% of post-tax income, according to Statistics Canada. In the first quarter of 2020, that jumped to nearly 6% as COVID-19 restrictions took hold in March. It then skyrocketed to 27.5% in the second quarter and remained well into double digits at nearly 15% in the third.

Finance Minister Chrystia Freeland has referred to this money as “preloaded stimulus”. Assuming the vaccine rollout accelerates, look for Canadians to spend a significant portion of it in cyclical sectors of the economy in the latter half of 2021 and into 2022, such as retail, travel, tech and real estate.

2. Rate hikes: still off the table

The Bank of Canada slashed its overnight interest rate (on which Canadian banks base lending rates to consumers and businesses) from 1.75% in January 2020 to 0.25% by late March. The central bank is also buying about $4 billion of government bonds a week.

For consumers, this has led to record low rates for mortgages and other loans, fueling spending. For savers, Bank of Canada bond purchases have kept the price high, and driven down the interest rates paid to bondholders.

And it appears low rates are here to stay, for now. The central bank stated it is targeting a 2% increase in the consumer price index (CPI)—a key inflation measure—before even considering rate hikes or fewer bond purchases. And it doesn’t expect to hit this 2% target until 2023.

Given this, in the coming year consumers should expect to earn low rates on government bonds, GICs (term deposits), high-interest savings accounts and other conservative investments that guarantee your principal. This could benefit stocks*, equity-focused mutual funds* and ETFs*, as investors take on more risk in search of higher returns.

3. BC real estate market: switch gears or more gains?

Lower rates and higher household savings helped push BC’s real estate market to an unexpected gain last year. In its November update, the BC Real Estate Association (BCREA) reported a 9.7% rise in the number of homes sold in the province in 2020, with prices jumping nearly 10%. BCREA expects continued price gains in 2021, with a 2.6% average increase.

One thing to watch for though, is whether the intense interest in rural properties holds up. In a recent economic report, Central1 Credit Union said it feels big-city life will likely regain some allure as vaccines roll out, helping revive prices in BC’s downtowns and potentially temper further gains elsewhere.

From the report: “We see greater risk in smaller markets as the pandemic drove a rush to smaller markets and recreational-home purchases, reflecting remote-work promises and expectations of a prolonged period of limited recreational travel. The availability of a vaccine is likely to temper this demand and potentially lead to a modest reversal.”

4. Pandemic tech trends will stick

According to BlueShore investment partner NEI, large cap U.S. tech stocks are still well-positioned to benefit. AllianceBernstein, one of the report’s contributors, writes that these companies “have truly distinctive capabilities that are in high demand during the pandemic, along with strategic business models that support long-term growth.”

Still, the report sounds a note of caution about the valuations of some tech stocks, which is something to watch after the NASDAQ 100 index soared 46% in 2020. The report also flags a potential drag on commercial real estate, should a mix of at-home and office work become the norm for more people, which seems increasingly likely as the pandemic continues.

5. Politics will (continue to) play a big role

Finally, with President-Elect Joe Biden inaugurated on January 20, and two victories in recent runoffs for Senate seats in Georgia, the Democrats now control all three levels of the American federal government.

That increases the odds of additional stimulus in the form of direct payments to unemployed Americans. This, in turn, would support U.S. consumer spending and, along with it, Canadian exports, around 75% of which go south of the border. Other sectors – railway and transportation stocks, as well as component and raw-material suppliers in areas like homebuilding and automobile manufacturing – may also benefit from a Democratic party agenda.

Then there are government finances, which are deep in deficit due to the pandemic. In a recent article, Conference Board of Canada chief economist Pedro Antunes wrote, “Over the four fiscal years from 2020-’21 to 2023-’24, federal and provincial/territorial governments are expected to amass $864 billion in deficits and add $940 billion to the aggregate net debt. This will bring the aggregate net debt as a share of GDP to over 95 per cent, levels not seen since the early 1990s.

To stave off a further rise in the debt-to-GDP ratio, according to Antunes, the country will need to bring in either tax increases, spending cuts or both. But it seems likely that governments won’t put either on the table until the economy has found a firm footing post-pandemic.

6. Environmental concerns will boost mining

The race to zero emissions, zero energy dependency, and zero waste, coupled with the significant capital commitment that includes both the U.S. and China (for U.S., it’s their largest ever at $2 trillion, much more than the Apollo space program), will be a boost to the global mining sector, Canada included.

Why mining? To produce batteries for electric cars and clean energy storage units, you need minerals. For example, it takes a significant amount of copper to build an electric car or a fast charging station.

This will drive a 10-year sustained trend, not a straight line but a new economy. ESG and mining will receive inflows, and emerging markets will be indirect benefactors.

However these six factors play out in driving the economic growth of Canada, BC and the global economy, you have control of your own financial goals and how you intend to reach them. Focus on your financial plan with the help of your advisor to ensure you make the most of what 2021 brings.