Weekly Letter: A Perspective on the 2021 Financial Markets

Apr 30, 2021 | Warren Andrukow


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It was another relatively calm week for global equity markets with many oscillating near all-time highs. The U.S. central bank – known as the “Fed” –  provided an update on its outlook. Its messaging around inflation and approach to monetary policy was largely consistent with what it has been telegraphing for some time. This stood in contrast to the Bank of Canada, which just last week indicated it would begin to incrementally withdraw some stimulus by reducing its purchases of government bonds. As a result of the divergence between the two central banks, the Canadian dollar has been notably strong of late, reaching a three-year high. Below, we provide an update on the COVID situation, and focus on the global technology industry, whose earnings results over the past week were closely watched by investors.

Coronavirus Update

The third wave of the virus appears to have peaked in Canada over the past few weeks. The country’s 7-day average rate of new daily infections sits near 8,000, versus the 8,600 level from the week ago period. Declines in the pace of new daily infections were witnessed across some of the big provinces such as Quebec, Ontario, and BC. Saskatchewan was relatively unchanged, while Alberta had a modest increase. More problematic were Manitoba and Nova Scotia, both of whom saw a meaningful jump in the number of new daily infections across their provinces. The northern territories also saw an uptick. While it is certainly premature to proclaim an end to the country’s third wave, there are reasons to be more optimistic. Additionally, vaccinations continue to ramp higher, with more than 30% of the country’s population having now received one dose.

Elsewhere, cases continue to steadily decline in the U.S., while Europe is also seeing a falling trend in new infections, though a wide disparity exists from one part of the region to the next. Turkey for example continues to face elevated case figures, prompting the country to enter into a renewed lockdown. Meanwhile, India has yet to see a notable decline in its infections, with the country still reporting a staggering level of over 350,000 new daily infections per day over the past week.

Strong Earnings From Technology

The global technology sector has become one of the most scrutinized by investors, for a number of reasons. First, it is arguably the most important global sector, representing the largest weight, by far, in global markets. As a result, it has meaningful influence over the direction of global stock market returns. Secondly, it has been on a remarkable run for a number of years, helping propel global markets higher. Lastly, investors have been hoping that robust earnings growth could help offset some of the valuation headwinds that emerged earlier this year as a result of higher bond yields.

This week’s earnings reports, highlighted by very strong revenue growth in some cases, helped to remind investors that fundamentals remain solid and future prospects are bright. In many cases, businesses tied to cloud computing, e-commerce, advertising, cybersecurity, and wireless connectivity among other themes, are benefitting from secular tailwinds that have existed for some time, and were accentuated by the pandemic. The results released over the past week suggest the tailwinds remain strong today. Moreover, management teams of many businesses struck an optimistic tone about the prospects for stronger near-term demand, fuelled by a reopening of the global economy.

The operating environment remains undoubtedly positive for many high-growth technology companies. Nevertheless, it is important to recognize the risks that the stocks, rather than the businesses, face. First, expectations of future growth are already high and reflected in current valuations. The companies will have to deliver growth that exceeds current estimates in order for their stock prices to move meaningfully higher in the future. Secondly, valuations are very sensitive to interest rates. Investors typically value a stock by estimating future earnings and cash flow, and discounting those future streams back to present day values using an interest rate. A stock’s current value is therefore susceptible to changes in the rate that is used, and this is particularly true for high-growth businesses. Put simply, higher interest rates and bond yields, could more than offset a stock’s strong earnings growth.

The strong results from the technology sector should be supportive for markets near-term given the sector’s prominence. But, at some point, bond yields may resume their march higher as investors shift their attention back to the potential for building inflationary pressures. We believe it’s important to manage for this risk, by ensuring portfolios are well-diversified, with exposure across factors and sectors that can help offset the vulnerabilities within high-growth technology holdings. Ultimately, the threat may come to pass with no meaningful impact, but it’s prudent to err on the side of vigilance rather than risk complacency.

Market Decline and Recovery Results

The peak-to-trough numbers for the current market decline and subsequent recovery are provided in the table below, as of today's closing prices.