Second half of 2021:

The first of these factors is undoubtedly inflation. This economic number is calculated on a trailing 12-month basis. As of early April 2021, therefore, the starting point for the inflation reading was in 2020, when economic activity was at its nadir due to the closure of many economies. These closures had the effect of causing significant supply chain delays in many sectors and, consequently, a decline in the supply of available products.

However, the first principle in economics is based on the law of supply and demand. Currently, demand for many goods and services is on the rise with the reopening of many economies, but supply is still catching up as companies need to rebuild their inventories.

This situation is perceived by various specialists as temporary and it should gradually return to normal. The question, however, is whether the resulting rise in commodity prices will end up eating into companies’ currently very high profit margins.

If the shortages prove to be more persistent, then central banks would be forced to adjust their interest rates faster than initially expected. Could this upward pressure, due to a more sustained rise in inflation, cool investor enthusiasm for the stock markets and possibly slow these markets?

For its part, the U.S. Federal Reserve (Fed) continues to believe that inflationary surges will be temporary and it seems ready to support a high level of stock market liquidity. The next few months will tell whether its decisions are correct.

The second factor to consider is a desynchronized reopening of global economies. The very uneven rollout of vaccination campaigns in different parts of the world and the emergence of certain COVID-19 variants have thwarted a synchronized global recovery. As a result, emerging markets, which got off to a flying start in 2021, are currently in negative territory (in Canadian dollars).

At this stage, government assistance programs and accelerated vaccination campaigns are attracting investors to the United States, triggering a rise in the U.S. dollar. The Canadian dollar is rising even faster, supported by the price of commodities such as copper and oil. For its part, Europe has slowed, weighed down by the third wave.

In such circumstances, good geographical allocation will be essential.

Lastly, the third factor concerns sector and style rotation. First, let’s say that the indices themselves may not be the best indicators of everything that’s really going on behind the scenes in the markets. Big rotations are currently underway between the different sectors. Many managers see a cycle that could potentially be shorter. In fact, according to this assumption, we may have already reached mid-cycle and the stock market could consolidate its gains of the past twelve months.

The stocks that were hardest hit by the crisis rebounded quickly at the start of the cycle. They are now giving way to quality names with strong revenues. Managers who seek growth at a reasonable price and less spectacular companies that show good revenue and dividend growth, could thus be rewarded. With this in mind, sound stock selection would become an important factor in the coming months.

In summary, the second half of 2021 will likely see some ups and downs. In such an environment, active portfolio management would be investors’ best ally. In addition, during pivotal periods such as the one we’re currently experiencing, the quality of portfolio diversification will, more than ever, be the key to success.