Technology stocks may have led the way through the COVID-19 pandemic, but it will be commodity and more traditional stocks – bolstered by a timely rollout of coronavirus vaccines and ongoing government financial support – that will shine in the year ahead, several investment experts predict.
In 2020, growth stocks like the “FAANGs” – which includes Facebook Inc. (FB-Q), Apple Inc. (AAPL-Q), Amazon.com Inc. (AMZN-Q), Netflix Inc. (NFLX-Q) and Google LLC, whose parent is Alphabet Inc. (GOOG-Q) – skyrocketed as everyone turned to technology to keep businesses going. That left more traditional and value stocks in the dust.
Now, those commodity and value stocks are picking up steam while growth stocks are on pause, says Keith Richards, president and chief portfolio manager at ValueTrend Wealth Management Inc. in Barrie, Ont. He adds that his firm has rotated gradually out of tech stocks and into oil and energy as well as other commodity investments.
“The right place to me now is all about commodities and value stocks, and international, to some extent,” he says, adding his technical analysis indicates that the trend started to play out in July and August.
The stock market correction took place in March as countries around the globe issued stay-at-home orders was “quick and dirty,” Mr. Richards says. Although stock markets were volatile, they pushed to new highs later in the year.
As technology and work-from-home stocks soared, they were “way overvalued,” everything else was “way oversold,” he says.
As such, high-flying tech stocks are now taking a breather and may trade sideways for some time, Mr. Richards says. For example, after reaching a high in September, Amazon’s stock has eased back this month to where it was trading in August.
Candice Bangsund, vice-president and portfolio manager, global asset allocation, at Montreal-based Fiera Capital Corp., says the “reflationary trade” will take place over the next 12 to 18 months.
Other expectations are that bond yields will form a bottom and move higher, inflation expectations will rise, the U.S. dollar will weaken and commodity prices will increase, she says.
“It’s inherently positive for resources, industrials, financials,” Ms. Bangsund says. “When it comes to how to play that reflationary trade, it’s largely via our overweight allocation to the Canadian stock market because it’s inherently a value-oriented play.”
Fiera is overweight on Canadian stocks now because it’s “where we see the most upside potential,” she says. “We expect the [Toronto Stock Exchange] will outperform the U.S. market in 2021, which is a sharp reversal from what we’ve seen.”
Ms. Bangsund adds that there are also some “compelling opportunities in the emerging-markets space,” although Fiera is currently neutral on U.S. and international markets.
Doug Porter, chief economist and managing director at Bank of Montreal (BMO) in Toronto, is also positive on Canadian stocks.
“We believe Canada is expected to see a fairly forceful recovery in 2021,” backed by rising commodity prices, strong government fiscal support and a smooth rollout of COVID-19 vaccinations, he says.
BMO forecasts a real gross domestic product growth rate of 5.5 per cent for Canada in 2021 compared with a 4-per-cent rebound for the U.S.
“I do believe there is a lot of pent-up demand, especially for services,” Mr. Porter says. “There is just so much fiscal support out there that I do believe the consumer can come roaring back. We got a taste of that in the summer.”
He says BMO estimates that Canadian households have as much as $150-billion of excess savings that have been built up since the pandemic began and “consumers will be looking to spend a fair bit of that in 2021.”
That means consumer-oriented stocks will likely do well, Mr. Porter says. More traditional stocks that were sold off heavily earlier in 2020 will also lead the charge in 2021. While oil “hogs the spotlight,” other commodities – including agriculture, forest products, industrial metals, gold and even natural gas – have done surprisingly well, and that could continue.
But Mr. Porter says proper diversification is key as there are many unknowns as 2021 unfolds, including how the vaccination program rolls out, the potential for problems to crop up and how governments will manage after turning on the spending taps this year.
While the overall outlook for 2021 is positive, Charlie Spiring, founder, chairman and senior investment advisor at Wellington-Altus Private Wealth Inc. in Winnipeg says he is “more optimistic for the back half of the year.”
He recommends taking a barbell approach to clients’ portfolios – balancing riskier investments with more conservative ones.
Mr. Spiring expects a “K-shaped recovery,” which means certain sectors will lead while others will struggle. Having that balance helps mitigate that impact.
Although he recognizes the potential for commodities such as oil, gas and gold to rise, he warns they can be a tough game to follow.
“I think there’s a trade about to happen in them, but I just don’t trust them for long-term capital growth and income,” he says.
Meanwhile, the issue with technology stocks is that “you don’t always get earnings to support them,” Mr. Spiring says, and right now stocks of disruptive technologies are dominating the market. “But when you get it right, you get rewarded,” he adds.
Mr. Spiring says he expects that “tech will be one of the leading sectors [in 2021], but it’s going to be one of the more volatile sectors. So, it’s one where you need to fasten your seatbelt and weather storms.”
Specifically, he says there is potential for a broader market pullback of 5 per cent to 7 per cent in early 2021, and tech stocks might decline by perhaps as much as 10 per cent to 15 per cent.
But with strong fiscal support from governments around the world and rising demand, Ms. Bangsund of Fiera says economies will be able to rebound and enter a new cycle of growth as a vaccine is rolled out, setting up an almost “goldilocks scenario ... [with] 2021 looking to be a great year on the equity front.”