MBA, CIMTM, Fin. Pl.
Investment Specialist, Products Knowledge
A sharp rebound
The various stock market indices around the world have rebounded sharply since bottoming on March 23. The lockdown is easing worldwide and in most cases the return to something close to normal has been successful.
Hopes for the development of a vaccine within a few months are growing. All of these positive and promising elements are among the catalysts that have spurred the rally. The question now is whether the real economy will meet market expectations.
A narrow rally
Taking a closer look at the rally, we quickly see that it is concentrated only in certain sectors, while others have been slow to follow suit. For example, the technology sector was the first to benefit from the situation and has by far produced the best return year to date.
However, last week (week of June 1), we witnessed a sector and style rotation: for the first time in a long time, value style investments outperformed growth style. Know that certain market sectors are more conducive to one style than the other: the banking sector, for example, is much more prevalent in value style investments.
Since the beginning of the year, banks worldwide have significantly underperformed their benchmarks.
- In the United States, from the beginning of January to June 5, 2020, the return of the S&P 500 was -0.26% in U.S. dollars, while that of the banking sector was -13.98%, i.e. 13.72% less than the index. For the same period, the Canadian banking sector underperformed the S&P/TSX by 5.30%.
- In Canada, during the first week of June (June 1 to 5), Canadian bank stocks rose 10.12% while the S&P/TSX gained 4.38%. South of the border, financial sector issues were up 12.26%, significantly more than the S&P 500, which climbed 4.96%.
Other sectors greatly affected by February’s market tumble also performed better than the index, while technology and materials were in negative territory.
There is thus a strong rotation within the various sectors of the index, and the rise in the sectors that have performed well recently was at the expense of those that benefited from the initial surge.
All data provided in this section is from Morningstar.
If index growth pauses, active managers should be able to take advantage of these rotations to generate value for investors. For example, our tactical asset allocation team added temporary exposure to Canadian banks early last week (week of June 1). At the same time, some of our external managers made trades to temporarily increase their relative exposure to financials, in both the Canadian and global markets.
The Québec government announced last week the acceleration of several infrastructure projects aimed at stimulating the recovery of the economy. Many foreign governments will probably do likewise, once their lockdown is over. This could result in a resurgence of so-called cyclical stocks of companies involved in these different projects.
The Financial’s investment team keeps a daily watch on the performance of these stocks and sectors in order to adjust its strategy in a timely manner. Since 2020 is turning out to be a very binary year, i.e. one where the markets are either very good or very bad, our managers must be particularly vigilant in their analyses so that they can pinpoint the best time for this adjustment.
Do these style and sector rotations mark the start of a strong trend that will persist in the coming quarters? In recent years, the value style has experienced many false starts. Nevertheless, our managers are gradually adjusting their strategies so that they can take advantage of current and projected economic and market trends.
Based on market analyzes and indicators, these managers have managed to maintain and even improve the excellent performance of our mutual funds which, at June 5, 2020, are all ranked, without exception, in the first and second quartiles of their respective categories in the Morningstar ratings over a period of one year. A success of which we are very proud and which benefits your portfolio in times of instability!
Know that we’re there by your side during this recovery period and that we’re always available to support you with your personal and professional finances. If you have any questions concerning this article or your investment portfolio, feel free to contact your advisor.
Stéphane Girard, MBA, CIMTM, Fin. Pl.
The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. For any questions, don’t hesitate to contact your wealth management advisor or your tax specialist, accountant or legal advisor.