Intelligence Market Q4 2020 - Insights from our strategy team
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Capital Markets Strategy Market Intelligence Q4 2020 Insights from our strategy team Market outlook as of September 30, 2020
Table of contents
Capital Markets Strategy .................................................................................... 2 International equities .......................................................................23
How we stay in touch ......................................................................................... 3 Coronavirus appears to be in the rear view mirror................................... 24
A better way to invest: a three‑pronged approach.................................................. 4 The worst may be over for global trade .................................................. 25
Our seasoned asset management teams help inform our views............................. 5 Copper prices indicate an accelerating Chinese economy....................... 26
Global reach ...................................................................................................... 6 International equities may benefit from stronger economic growth.......... 27
Index returns ..................................................................................................... 7 International equities offer a source of diversification................................28
Market drivers ................................................................................................... 8
Fixed income......................................................................................29
Macro snapshot................................................................................................. 9
Flexibility is required ............................................................................ 30
Manulife Investment Management’s outlook snapshot ........................................ 10
Lower yields around the world create issues for income
Canadian equities .............................................................................11 focused investors.................................................................................31
Not out of the woods yet....................................................................... 12 Central banks are buying everything in sight .......................................... 32
Canadian economy contracts the most ever........................................... 13 Flexibility is key in fixed income............................................................. 33
Unemployment recovery has begun ...................................................... 14 Canadian dollar tied to oil prices ........................................................... 34
Canada retail sales back to pre-COVID levels ......................................... 15 Manulife Investment Management’s sample strategy .............................. 35
Improving oil prices still not enough for S&P/TSX earnings ..................... 16 Access our Manulife Investment Management’s experts.......................... 36
U.S. equities........................................................................................17
The bumpy road to recovery ................................................................. 18
Strongest drop ever for U.S. economy ................................................... 19
US employment has stalled out............................................................. 20
Earnings outlook is improving ............................................................... 21
Outcome of the election doesn’t impact market
returns over the long run ......................................................................22
Capital Markets Strategy
The Capital Markets Strategy team has a range of
responsibilities, from market and economic analysis to investor
education. The team analyzes and interprets the economy and
markets on behalf of Manulife Investment Management. They
work with the portfolio management teams to provide clients
and investment intermediaries with commentary on strategies Philip Petursson, CIM
and asset allocation weightings. Their expertise spans across Chief Investment Strategist
multiple asset classes and geographic regions. and Head of Capital Markets Research
www.manulifeim.ca/cms
Macan Nia, CFA
Senior Investment Strategist
Kevin Headland, CIM
Senior Investment Strategist
2 | Market Intelligence
How we stay in touch
Chartbook Capital Markets Investments Unplugged Quarterly Market
monthly email podcast Intelligence videos
A handy guide that’s updated each quarter A monthly newsletter that includes An insightful and lively podcast, hosted by Quarterly updates that measure key
to illustrate the trends and opportunities in headlines that capture the Capital Markets Philip Petursson, that gives you access to investment markets—including
the markets—for advisor use only. Strategy team’s attention, and their ideas and insight from a range of market Canadian equities, U.S. equities,
perspective on how these headlines will experts—for advisor use only. international equities, and fixed
affect the markets—for advisor use only. Link to the podcast income—for Canadian investors.
3 | Market Intelligence
A better way to invest:
a three‑pronged approach
Experienced specialized teams
• Harnessing strength and depth of expertise
across multiple asset classes and geographies
• Tenacious approach to talent: if new capabilities
are needed, conduct global searches to find the
right team
2
• Access to differentiated philosophies, strategies,
and respected expertise
• Strategic sub‑advisor partnerships
Driven by
three powerful
advantages
Rigorous risk management
• With a view to investor‑driven performance expectations
1 3 Global momentum
• Asset managers and teams on the ground in
international locations
• Close monitoring of behavioural risk
• Deep analysis to identify the right risks with the goal of • Network of investment offices in North America, Asia
long‑term stability Pacific, and Europe with capabilities across a full
range of asset classes
• Built on more than 130 years
of Manulife Investment Management’s wealth and • More than 1,000 investment professionals in
approximately 20 countries and territories
investment expertise
4 | Market Intelligence
Our seasoned asset management
teams help inform our views
Boutique investment teams, global resources.
• Boutique environment: specialized team manages its own investment process, from research
through portfolio construction
• Global footprint: entrepreneurial teams strengthened by global resources
• Extensive investment capabilities: diverse range of investment strategies across asset classes, regions, and
the risk spectrum
Mawer Investment Brookfield Investment Aberdeen Standard Pictet Asset Management Dimensional Fund Advisors
Management Ltd. Management—Experts in Investments—Leading asset —Focused multi‑boutique Canada ULC—a leader in
—Independently owned alternative strategies manager with an expanding asset manager with multifactor investing
Canadian investment global reach strategic focus on global and
• Specialized investment • Dimensional’s systematic
manager that follows international markets
manager focused on listed real • Investment capabilities span approach to investing is
the mantra, “Be Boring.
asset investment strategies equities, bonds, real estate, • Believes active backed by insight gained from
Make Money.TM”
within both equity and debt private equity, multi‑asset manager skills leads to decades of academic research
• Investment philosophy of buying • Investment philosophy driven
solutions, and absolute better long‑term results and experience implementing
wealth‑creating companies, with return strategies rules‑based strategies in
by fundamental, bottom‑up • Do not adhere to, or
excellent management teams, competitive markets
analysis combined with • Active portfolio managers that impose, a single investment
that are trading at a discount to broad operational and place a significant emphasis approach on their • A multifactor approach focuses
their intrinsic value
market insights on rigorous research and a investment managers, on stocks characterized
• Prudent investment approach strong collaborative ethos by smaller capitalizations,
• Part of Brookfield Asset empowering each of their
rooted in risk management • Backed by a Focus on
lower relative valuations and
Management, a global teams to be independent,
that has delivered superior higher profitability
alternative asset manager with Change investment innovative, and accountable
risk‑adjusted, long‑term results over 100 years of experience philosophy, disciplined risk • Subadvisors for Manulife
• Risk management is an integral
• Firm’s “boring” investment in the ownership and operation management, and shared Investment Management
part of the decision‑making
approach has helped investors of real assets commitment to a culture of exchange traded funds
process and risk monitoring is
safely and profitably navigate the investment excellence
an independent function
investing landscape over many
different economic cycles
5 | Market Intelligence
Global reach
Over 1,000
investment
professionals
Canada Europe
U.S.
Asia
Australia
Manulife Investment Management: More than 475 investment professionals Aberdeen Standard Investments: 635 investment professionals
Mawer Investment Management Ltd.: 33 investment professionals Brookfield Investment Management: 33 investment professionals
Pictet Asset Management: More than 300 investment professionals
The diagram represents the geographic location of investment professionals and the number of investment professionals by sub‑advisor: Manulife Asset Management, as of December 31, 2018, Mawer Investment Management Ltd.,
Brookfield Investment Management, Aberdeen Standard Investments, and Pictet Asset Management, as of September 30, 2020.
6 | Market Intelligence
Index Returns
Q3 2020 total return performance recap
Equity Returns Fixed Income Returns
Index Q3 2020 YTD 1 Year Index Q3 2020 YTD 1 Year
FTSE Canada All
S&P/TSX (CAD) 4.73% -3.09% -0.03% 0.11% 8.46% 7.16%
Government Bond (CAD)
FTSE Canada Universe
S&P 500 (USD) 8.93% 5.57% 15.14% 0.44% 8.00% 7.08%
Bond (CAD)
ICE BofA US corporate
S&P 500 (CAD) 6.49% 8.28% 15.74% 1.69% 6.62% 7.84%
(USD)
ICE BofA US corporate
MSCI EAFE (USD) 4.87% -6.69% 0.99% -0.27% 9.82% 8.80%
(CAD)
ICE BofA US High Yield
MSCI EAFE (CAD) 2.53% -4.29% 1.53% 4.70% -4.84% 2.22%
Constrained (USD)
ICE BofA US High Yield
MSCI Europe (USD) 4.45% -8.45% -0.27% 2.68% -0.38% 3.13%
Constrained (CAD)
Barclay’s Global Aggregate
MSCI Europe (CAD) 2.11% -6.10% 0.26% 2.66% 5.72% 6.24%
Bond (USD)
MSCI Emerging Markets Barclay’s Global Aggregate
9.65% -0.96% 10.84% 0.71% 4.48% 3.88%
(USD) Bond (CAD)
MSCI Emerging Markets
7.19% 1.58% 11.43%
(CAD)
7 | Market Intelligence
Market drivers looking back Canadian Equities U.S. Equities International Equities Fixed Income In Canada, the S&P/TSX Composite Following the sharpest quarterly In overseas markets, international Global central banks continued their Total Return Index continued its contraction in GDP on record, the equities rallied 4.9% in US dollar monetary policy support, maintaining strong rebound before stumbling in US equity markets continued their terms as measured by the MSCI EAFE short term interest rates near historical September, finishing the third quarter strongest rally from a bear market in Index, including dividends. Given lows. Both US investment grade and with a return of 4.7%, including history as the S&P 500, Dow Jones, the fairly strong correlation across high yield bonds performed well given dividends. The market reacted to and Nasdaq all surpassed their global markets during this pandemic the renewed appetite for risk as spread improvements in COVID-19 cases pre-COVID highs, jumping 8.9%, and recovery, it is not surprising that narrowed to pre-COVID levels. The across Canada, for much of the 8.2%, and 11.2% in US dollar terms, international equities also wavered Fed maintained their commitment quarter, looking to better days ahead. respectively on a total return basis. during September. An increase in new to lower interest rates, by pledging September is typically the worst month However, the pause in the equity COVID-19 cases, and renewed fears to keep interest rates near zero until in terms of performance, and this year markets’ ascent during September surrounding the Brexit deal further 2023. The Fed expects to maintain an was no exception. Volatility increased shouldn’t have come as much of a hampered returns across Europe. accommodative stance of monetary in Canada in parallel with its southern surprise to observers. Given equity Better than expected economic data policy until inflation averages 2% over neighbor as the number of COVID-19 valuations, especially within the out of China during the second quarter, time and will allow inflation to run cases started to increase, creating technology-based companies, it was buoyed equity markets in Asia. “moderately” above its long-running fears of another lockdown. Further only a matter of time before we would 2% goal. The central bank’s new complicating things for Canada was see a pullback. Another headwind approach to inflation is meant to the fall in oil prices in September. The for the markets was seasonality, as support the labor market and broader price of oil, as measured by the West September has recorded the worst economy by keeping interest rates Texas Intermediate (WTI), trended monthly return for the S&P 500 Index, lower for a longer period of time. sideways for much of the quarter, in terms of median and average return, peaking at US$43.39/bbl before since 1950. finishing the quarter at US$40.22/bbl. Source: Manulife Investment Management as of September 30, 2020. Performance histories are not indicative of future results. 8 | Market Intelligence
Macro snapshot
Manulife Investment Management believes that manufacturing activity is indicating a global economic recession.
Switzerland 51.2
50.3
52.5 Netherlands 44.1 Russia 48.9
Canada 56 Germany 56.4
54.1 United Kingdom Poland 50.8
51 Ireland
Czech Republic 50.7
51.2 France Hungary 48.8 Japan 47.7
United states Turkey South Korea
53.2 50.8 Spain 52.8
China 53
49.8
53.2 Italy
Saudi Arabia 50.7 Taiwan
Mexico Greece 55.2
42.1 50
India 56.8
Vietnam
52.2
45.1 Singapore
51.2 Indonesia
47.2
Purchasing Brazil 64.9
Managers’ Index
Above 51
South Africa Australia 55.4
49.4
50
Below 50
Indicates movement up,
down or no movement
from the previous quarter
The Markit PMITM (Purchasing Managers’ IndexTM) series are monthly economic surveys of carefully selected companies compiled by Markit. They provide advance insight into the
private‑sector economy by tracking variables such as output, new orders, employment and prices across key sectors. Economic analysts, business decision‑makers, forecasters
and policy‑makers leverage the PMI surveys to better understand business conditions in any given economy. Central banks in many countries use the data to help make interest rate
decisions, and analysts in the financial markets use PMI data to forecast official economic data.
Source: Markit and Manulife Investment Management as of September 30, 2020. Performance histories are not indicative of future results.
9 | Market IntelligenceManulife Canadian Equities U.S. Equities
Investment Bearish Bullish Bullish
Management’s Not out of the woods yet The bumpy road to recovery
outlook Our outlook for the S&P/TSX Composite Index remains somewhat murky as
there are few signs that oil prices will trend higher and remain at levels that
While the US economy has started to reopen and recover following the
COVID‑19 lockdowns, it remains in a recession. The markets have staged a
snapshot would support a full and sustained recovery in earnings. While not perfect,
the year‑over‑year change in oil prices correlate to the year‑over‑year change
very strong and impressive rally, but they may be taking a rest given the near
term uncertainty including but not limited to the increased likelihood of a
Overview in TSX earnings and therefore offers insight to what forward returns may look second or third wave of COVID‑19 and what the economic consequences may
like. A tepid demand recovery for crude is likely to keep prices below their be, potential for a vaccine and its manufacturing and distribution to a global
The global pandemic of 2020 highs. The energy sector therefore may likely be a drag on the TSX. population, renewed trade tensions between China and the United States, and
COVID-19 is having and will In addition, the low interest rate environment may also be a headwind for of course, the U.S. election. Despite these risks, and while not trying to be too
continue to have a significant the financials sector. Other areas within the TSX Composite are attractive optimistic, investors need to look past the near‑term volatility, as we believe
impact on the global economy though, and as such we would suggest selectivity is the key to successful we will be well on the path to recovery by the end of 2021.
and financial markets. investing in Canada.
The great pause has given
way to a recovery, but we
believe this recovery has three
International Equities Fixed Income
stages, alarm, resistance, and
exhaustion. If we’ve entered the Developed markets Developed markets sovereigns
exhaustion phase as we believe, Bearish Bullish Bearish Bullish
then we should expect market
returns to be below average Emerging markets Corporate credit
over the next couple of years.
Bearish Bullish Bearish Bullish
Coronavirus appears to be in the rear-view mirror Flexibility is required
While the Coronavirus seems to be in the rear‑view mirror, it does not mean Exceptionally low interest rates are likely to remain around the world and across
it’s gone. International equities are likely going to face similar risks as US the curve spectrum in the near term. However, one of the consequences to
equities. Pandemic and geopolitical risks have been and will continue to the Fed’s monetary inflation coupled with the trillions in fiscal stimulus by the
be global and so too will be the recovery. We are starting to see a second U.S. federal government, will likely be an increase in inflation and a steeper
wave of COVID‑19 cases, which will lead to an increase in volatility. One yield curve. With the Fed’s implied commitment to keep short rates at 0% until
bright light may be in emerging markets, as earnings momentum seems 2023, the longer end of the yield curve will be subject to market driven forces,
to be stronger in China, Korea, and Taiwan than elsewhere in the world. absent any Fed intervention. It is normal following a recession that the longer
Regardless of the short‑term market reaction, pockets of opportunity end of the yield curve steepens out. In this environment we believe credit does
remain, and the longer-term focused investor stands to benefit. well and short‑duration bonds outperform longer‑duration. Investment grade
and high yield bonds have enjoyed a strong rally supported by the Fed’s actions.
While spreads have narrowed, we believe there remains a cushion should the
government curve steepen. We continue to favour high yield as an attractive
Manulife Investment Management as of September 30, 2020. The commentary on this page is that of Manulife
income generator. Defaults will continue through the recovery as some
Investment Management. Performance histories are not indicative of future results. For illustration purposes only. companies will still fall victim to the COVID lock downs. In this regard, security
selection, and careful credit analysis is of paramount importance.
10 | Market IntelligenceCanadian Equities
Canadian Equities
Not out Canadian Equities
of the Neutral
woods yet Bearish Bullish
Key themes
1 2 3 4
Canadian economy Unemployment recovery Canada retail sales back Improving oil prices
contracts the most ever has begun to pre-COVID levels still not enough for
S&P/TSX earnings
Canadian GDP fell the most on Shutdown and isolation Retail sales in Canada have Historically, earnings for the
record as it dropped 38.7% in requirements across Canada, as rebounded to pre-pandemic TSX have correlated with the
the second quarter of 2020 part of the coronavirus containment levels following the government- change in the price of crude
after falling 8.2% in the first efforts, had resulted in the fastest enforced lockdowns. The rapid YOY. Oil prices have been
quarter, on an annualized basis. increase in unemployment. The bounceback was to be expected bouncing between US$40/bbl
The C.D. Howe Institute didn’t Canadian unemployment rate when the economy started to and US$50/bbl (WTI) through
wait for the second consecutive has now started to recover off its reopen. Now that the pent-up the end of the third quarter.
quarter of negative GPD growth highest level in history. However, it demand has been satisfied, we However, even if we see WTI
as it previously declared that the will take some time before it gets should expect more normalized stay at US$50/bbl or above,
economy was in a recession as anywhere near pre COVID levels. sales activity going forward, the TSX won’t likely see positive
of March. The Canadian economy barring another shutdown as earnings until mid-2021.
has started to reopen, so we a result of a second wave of
have likely seen the worst of the COVID-19 cases.
contraction, but it remains to be
seen how long it may last.
For illustration purposes only. Source: Manulife Investment Management as of September 30, 2020. The commentary on this page is that of Manulife Investment Management.
Performance histories are not indicative of future results.
See pages 11‑14 for complete information.
12 | Market IntelligenceCanadian Equities Canadian economy contracts the most ever Canadian GDP fell the most on record as it dropped 38.7% in the second quarter of 2020 after falling 8.2% in the first quarter, on an annualized basis. The C.D. Howe Institute didn’t wait for the second consecutive quarter of negative GPD growth as it previously declared that the economy was in a recession as of March. The Canadian economy has started to reopen, so we have likely seen the worst of the contraction, but it remains to be seen how long it may last. Canada GDP QoQ annualized 10 5 0 -5 -15 -20 -25 -30 -35 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sept Dec Mar Jun Sep Dec Mar Jun 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 Source: Manulife Investment Management and Bloomberg, as of June 30, 2020. 13 | Market Intelligence
Canadian Equities Unemployment recovery has begun Shutdown and isolation requirements across Canada, as part of the coronavirus containment efforts, had resulted in the fastest increase in unemployment. The Canadian unemployment rate has now started to recover off its highest level in history. However, it will take some time before it gets anywhere near pre‑COVID levels. Canada unemployment rate 2008 ‑ Current 15 14 13 12 11 10 9 8 7 6 5 Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep Feb July Dec May Oct May Aug Jan Jun Nov Apr Sep Feb Jul 2008 2008 2008 2009 2009 2010 2010 2010 2011 2011 2012 2012 2013 2013 2013 2014 2014 2015 2015 2015 2016 2016 2017 2017 2018 2018 2018 2019 2019 2020 2020 Source: Manulife Investment Management and Bloomberg, as of August 31, 2020. 14 | Market Intelligence
Canadian Equities
Canada retail sales back to pre-COVID levels
Retail sales in Canada have rebounded to pre-pandemic levels following the government-enforced lockdowns. The rapid bounceback was to be expected when the economy started
to reopen. Now that the pent-up demand has been satisfied, we should expect more normalized sales activity going forward, barring another shutdown as a result of a second wave
of COVID-19 cases.
Canada retail sales
Last 5 years
55000
50000
Retail sales (millions)
45000
40000
35000
30000
Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun
2015 2015 2016 2016 2016 2016 2016 2016 2017 2017 2017 2017 2017 2017 2018 2018 2018 2018 2018 2018 2019 2019 2019 2019 2019 2019 2019 2020 2020
Source: Bloomberg and Manulife Investment Management. As of July 31, 2020.
15 | Market IntelligenceCanadian Equities
Improving oil prices still not enough for S&P/TSX earnings
Historically, earnings for the TSX has correlated with the change in the price of crude yoy. Oil prices have been bouncing between US$40/bbl and US$50/bbl (WTI) through the end
of the third quarter. However, even if we see WTI stay at US$50/bbl or above, the TSX won’t likely see positive earnings until mid-2021.
Change in oil price (YOY) vs change in S&P/TSX earnings per share lagged 3 months (YOY) lagged 3 months
1995 – current
80% 160%
Oil at $50 implies negative earnings growth
60% through 2020 giving way to a recovery in 2021. 120%
(shaded area is an estimate of yoy change based
40% on $50 US/bbl WTI price) 80%
Year over Year (%)
20% 40%
0 0
-20% -40%
-40% -80%
-60% -120%
Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
S&P/TSX EPS growth YOY (LHS) Crude oil price (USD) YOY (RHS)
Source: Bloomberg and Manulife Investment Management. As of August 31, 2020.
16 | Market IntelligenceU.S. Equities
U.S. Equities
The bumpy U.S. Equities
road to Neutral
recovery Bearish Bullish
Key themes
1 2 3 4
Strongest drop ever U.S. employment Earnings outlook Outcome of the election
for U.S. economy has stalled out is improving doesn’t impact market
returns over the long run
The U.S. economy suffered its U.S. first-time jobless claims have As we look forward, we’re starting to Since 1945, equity market returns
biggest quarterly plunge in activity declined since the initial bomb of see signs that the global economy have been better on average
on record in the second quarter, 6.8 million jobless claims the week may have bottomed and has shifted under a Democratic president.
falling 31.7%. The damage was of March 27 to 1.4 million for the from contraction to recovery. The The results are fairly skewed
a result of the pandemic-fueled last week of June. While this is an U.S. ISM Purchasing Managers’ Index though, as Republicans have had
lockdowns. As the economy improvement, weekly first-time jobless for the month of August showed that the unfortunate circumstance
continues to reopen, economic claims have remained above 1 million manufacturing activity increased of overseeing six of the worst
growth should trend higher, barring for the month, while continuing claims materially on a month-over-month calendar-year returns. While
another shutdown as a result of a have stalled out at 19 million for the basis. Historically, the ISM PMI leads individual sectors could experience
second wave of the coronavirus. last three weeks — or put another way, S&P 500 earnings growth by six more ups and downs as a result of
these numbers are four and 10 times months. This would suggest that while political party platforms, the overall
their respective pre-COVID levels. third-quarter earnings are likely to show market is less likely to be affected
steep declines on a year-over-year by legislation. Regardless of the way
basis, we believe earnings will stabilize you cut up the various outcomes
in the fourth quarter before moving of the election, history shows that
higher into 2021 as the recovery there isn’t that much difference in
takes hold. terms of performance.
Source: Manulife Investment Management as of September 30, 2020. The commentary is that of Manulife Investment Management. Performance histories are not indicative of future results.
See pages 17–20 for complete information. For illustration purposes only.
18 | Market IntelligenceU.S. Equities
Strongest drop ever for U.S. economy
The U.S. economy suffered its biggest quarterly plunge in activity on record in the second quarter, falling 31.7%. The damage was a result of the pandemic-fueled lockdowns. As the
economy continues to reopen, economic growth should trend higher, barring another shutdown as a result of a second wave of the coronavirus.
US GDP QoQ annualized
10
5
0
-5
-10
GDP (%)
-15
-20
-25
-30
-35
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun
2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2019 2020
Source: Manulife Investment Management and Bloomberg, as of June 30, 2020.
19 | Market IntelligenceU.S. Equities
US employment has stalled out
US first-time jobless claims have declined since the initial bomb of 6.8 million jobless claims the week of March 27th to 1.4 million for the last week of June. While this is an improvement,
weekly first-time jobless claims have remained above 1 million for the month while continuing claims have stalled out at 19 million for the last three weeks, or put another way, these numbers
are 4 and 10 times their respective pre-COVID levels.
Amount of Fed rate cuts during easing cycles
1973 - current
The good news:
First-time unemployment claims are falling. The bad news:
U.S. first-time jobless claims US continuing jobless claims
Weekly – year-to-date Weekly – year-to-date
8000 28,000
26,000
24,000
22,000
Job losses (thousands)
Job losses (thousands)
6000
20,000
18,000
16,000
4000 14,000
12,000
10,000
8,000
2000
6,000
4,000
2,000
0 0
Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Sep 03 Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Sep 03
2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020
Source: Bloomberg, Manulife Investment Management. As of September 30, 2020.
20 | Market IntelligenceU.S. Equities
Earnings outlook is improving
As we look forward, we’re starting to see signs that the global economy may have bottomed and has shifted from contraction to recovery. The U.S. ISM Purchasing Managers’ Index for the
month of August showed that manufacturing activity increased materially on a month-over-month basis. Historically, the ISM PMI leads S&P 500 earnings growth by six months. This would
suggest that while third-quarter earnings are likely to show steep declines on a year-over-year basis, we believe earnings will stabilize in the fourth quarter before moving higher into 2021 as
the recovery takes hold.
ISM Manufacturing PMI vs. S&P 500 Index earnings growth YoY (advanced 6 months)
2000 - current
75 75%
65%
70
55%
65 45%
ISM PMI Manufacturing level
35%
YoY Earnings growth
60
25%
55 15%
5%
50
-5%
45 -15%
-25%
40
-35%
35 -45%
-55%
30
-65%
25 -75%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
US ISM PMI (LHS) EPS Growth (RHS)
Source: Bloomberg and Manulife Investment Management. As of September 30, 2020.
21 | Market IntelligenceU.S. Equities
Outcome of the election doesn’t impact market returns over the long run
Since 1945, equity market returns have been better on average under a Democratic president. The results are fairly skewed though, as Republicans have had the unfortunate
circumstance of overseeing six of the worst calendar-year returns. While individual sectors could experience more ups and downs as a result of political party platforms, the overall
market is less likely to be affected by legislation. Regardless of the way you cut up the various outcomes of the election, history shows that there isn’t that much difference in terms
of performance.
Average S&P 500 Average S&P 500
Total returns Total returns
20.00% 20.00%
18.31%
18.00% 18.00% 17.92%
16.03%
S&P 500 total returns (%)
S&P 500 total returns (%)
16.00% 16.00%
14.88%
14.00% 14.00%
16.63% 13.54%
12.00% 12.00%
10.56%
10.00% 10.00% 9.45% 8.73
8.00% 8.00%
6.00% 6.00%
4.00% 4.00%
2.00% 2.00%
0 0
All years Democrat Republican Dem Dem Dem pres, Rep Rep Rep pres,
president pesident sweep split rep congress sweep split dem congress
Source: Manulife Investment Management and Bloomberg, as of September 30, 2020.
22 | Market IntelligenceInternational Equities
International Equities
Coronavirus Developed Markets
appears to Neutral
be in the rear Bearish Bullish
view mirror
Emerging Markets
Neutral
Bearish Bullish
Key themes
1 2 3 4
The worst may be over International equities may Copper prices indicate International equities
for global trade benefit from stronger an accelerating offer a source of
economic growth Chinese economy diversification
Just as global trade was starting to In their June World Economic Outlook, As China is the largest importer Although the U.S. equity market has
improve following the Phase 1 trade the International Monetary Fund of copper, an increase in the price outperformed international equities
deal between the U.S. and China, the projects that many regions around of copper is usually tied to an for much of the last decade, this
COVID-19 pandemic ground it to a the world could grow faster than the increase in demand from China. isn’t the norm. Since 1971, the MSCI
halt. However, given that economies U.S. in 2021. While the near term Due to its broad use throughout EAFE Index has outperformed the
have started to slowly reopen, we’ve economic downside could be worse, various industries, the price of S&P 500 Index in 43% of the rolling
likely seen the worst of the impact. companies located in these growth copper is often seen as good 12-month periods. It’s practically
regions should benefit from the indicator for the health of the a coin flip as to which area will
strong economic rebound coming out Chinese economy. The recent outperform in any given year.
of the various lockdowns. increase in prices should indicate Exposure to international markets
an improvement in economic can help provide an appropriate
growth in China and could also lead level of diversification to a portfolio.
to a stronger global economy.
Sources: Manulife Investment Management, Bloomberg as of September 30, 2020. The commentary on this page is that of Manulife Investment Management. Performance histories are not indicative of future results.
See pages 23–26 for complete information. For illustration purposes only.
24 | Market IntelligenceInternational Equities
The worst may be over for global trade
Just as global trade was starting to improve following the Phase 1 trade deal between the U.S. and China, the COVID-19 pandemic ground it to a halt. However, given that economies
have started to slowly reopen, we’ve likely seen the worst of the impact.
Year-over-year export growth by country
2013 - current
80
60
40
20
Percent Change YoY
0
-20
-40
-60
-80
Jan Jul Jan Jul Jan Jan Jul Jan Jul Jan Jan Jul Jan Jul
2013 2013 2014 2014 2015 2016 2016 2017 2017 2018 2019 2019 2020 2020
China exports YoY US exports YoY Japan exports YoY S. Korea exports YoY Germany exports YoY
Source: Manulife Investment Management and Bloomberg, as of August 31, 2020.
25 | Market IntelligenceInternational Equities
Copper prices indicate an accelerating Chinese economy
As China is the largest importer of copper, an increase in the price of copper is usually tied to an increase in demand from China. Due to its broad use throughout various industries,
the price of copper is often seen as good indicator for the health of the Chinese economy. The recent increase in prices should indicate an improvement in economic growth in China
and could also lead to a stronger global economy.
Chinese imports vs copper prices YOY change
2006 - current
150 150%
125 125%
China imports USD YOY % change
100 100%
Copper price YOY % change
75 75%
50 50%
25 25%
0 0%
-25 -25%
-50 -50%
-75 -75%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
China imports USD (LHS) Copper Price (RHS)
Source: Manulife Investment Management and Bloomberg, as of August 31, 2020.
26 | Market IntelligenceInternational Equities
International equities may benefit from stronger economic growth
In their June World Economic Outlook, the International Monetary Fund projects that many regions around the world could grow faster than the US in 2021. While the near term
economic downside could be worse, companies located in these growth regions should benefit from the strong economic rebound coming out of the various lockdowns.
Economic growth projections
10.0
8.0 7.4
6.0 6.3
6.0 5.5
4.5
4.0
2.3 2.4
2.0 1.3 1.4
0.7
0.0
-2.0 0.8
-4.0
-6.0
-5.8
-8.0
-8.0
-10.0
-10.2 -10.2
-12.0
United States Euro area Japan United Kingdom Emerging and
developing Asia
2019 2020 Projection 2021 Projection
Source: International Monetary Fund World Economic Outlook, as of June 2020.
27 | Market IntelligenceInternational Equities
International equities offer a source of diversification
Although the US equity market has outperformed international equities for much of the last decade, this is not the norm. Since 1971, the MSCI EAFE equity Index has outperformed
the S&P 500 in 43% of the rolling 12-month periods. It is practically a coin flip as to which area will outperform in any given year. Exposure to international markets can help provide
an appropriate level of diversification to a portfolio.
Trailing 12-month return differential between S&P 500 and MSCI EAFE
40%
30%
US outperforms
20%
12-month outperformance
10%
0%
-10%
-20%
International outperforms
-30%
-40%
-50%
-60%
1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: Manulife Investment Management and Bloomberg, as of September 30, 2020.
28 | Market IntelligenceFixed Income
Fixed Income
Flexibility Developed Market Sovereigns
is required Neutral
Bearish Bullish
Corporate Credit
Neutral
Bearish Bullish
Key themes
1 2 3 4
Lower yields around Central banks are Flexibility is key in Canadian dollar
the world create buying everything fixed income still tied to oil prices
issues for income in sight
focused investors
Although global sovereign bond Global central banks have been During periods of volatility, the Recently, the loonie’s relationship to
yields may have bottomed, they implementing unprecedented monetary need for a dynamic fixed-income interest rates has completely broken
won’t be going back to their long- policies in an effort to protect their strategy is all the more important down and the shorter-term moves
term averages in the near term. respective economies during this as the various types of fixed income can be entirely attributed to the
In addition, more than $10 trillion pandemic. The U.S. Federal Reserve perform differently in different price of oil, specifically West Texas
USD of global sovereign bonds has even gone as far as investing in environments. It’s extremely rare that Intermediate (WTI). As oil prices
have a negative yield. corporate bonds, both investment-grade a fixed-income type will be the top have fallen more recently, so has the
and high-yield, to provide liquidity to performers in consecutive years. Canadian dollar. Expect the Canadian
those markets. The Bank of Canada has dollar to remain range-bound
expanded its balance sheet by almost between US$0.75–0.77 on
five times as it buys a combination of US$40–45/bbl.
bonds, including federal, provincial, and
corporate issues.
Source: Manulife Investment Management as of September 30, 2020. For illustration purposes only. The commentary on this page is that of Manulife Investment Management.
Performance histories are not indicative of future results. See pages 29‑32 for complete information.
30 | Market IntelligenceFixed Income
Lower yields around the world create issues for income focused investors
Although global sovereign bond yields may have bottomed, they will not be going back to their long term averages in the near term. In addition, more than $10 Trillion USD
of global sovereign bonds have a negative yield.
10‑year government bond yields (%)
Russia 6.25
0.61 Norway Sweden -0.04
Canada 0.56
0.23 United Kingdom
Denmark -0.41
Germany -0.52
Japan 0.01
-0.52 Switzerland France -0.24
0.25 Spain South Korea 1.43
United States 0.64
0.87 Italy China 3.13
1.02 Greece
Mexico 6.11 6.0 India
Thailand 1.32
Philippines 2.82
0.86 Singapore Malaysia 2.68
AAA
6.93 Indonesia
AA+ AA-
Brazil 7.59
A+ A-
Australia 0.79
BBB+ to BBB-
BB+ to BB-
0.50
Source: Bloomberg as of September 30, 2020. Ratings are from Standard & Poor’s, and are subject to change. Foreign investing, especially in emerging markets, has additional risks, such as currency and market volatility and
political and social instability. The commentary on this page is that of Manulife Investment Management. Performance histories are not indicative of future results.
31 | Market IntelligenceFixed Income
Central banks are buying everything in sight
Global central banks have been implementing unprecedented monetary policies in an effort to protect their respective economies during this pandemic. The U.S. Federal
Reserve has even gone as far as investing in corporate bonds, both investment-grade and high-yield, to provide liquidity to those markets. The Bank of Canada has expanded its
balance sheet by almost five times as it buys a combination of bonds, including federal, provincial, and corporate issues.
Total balance sheet assets
U.S. Federal Reserve and Bank of Canada
Bank of Canada balance sheet assets ($CAD millions)
U.S. Federal Reserve balance sheet assets ($US millions)
8000000 600000
7000000
500000
6000000
400000
5000000
4000000 300000
3000000
200000
2000000
100000
1000000
0 0
Sep Dec June Sep Mar Jun Dec Mar Jun Sep Dec Mar Jun Dec Mar Dec Mar June Dec Mar Sep Dec Mar Jun Sep Dec Mar Sep Dec Mar Jun
2010 2010 2011 2011 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2015 2015 2016 2016 2016 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2020 2020
US Federal Reserve Balance Sheet Assets (LHS) Bank of Canada Balance Sheet Assets (RHS)
Source: Manulife Investment Management and Bloomberg, as of August 31, 2020.
32 | Market IntelligenceFixed Income
Flexibility is key in fixed income
During periods of volatility, the need for a dynamic fixed-income strategy is all the more important as the various types of fixed income perform differently in different environments.
It’s extremely rare that a fixed-income type will be the top performers in consecutive years.
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YTD Fixed Income Asset Classes
11.8% 9.5% 13.7% 57.5% 15.2% 9.8% 18.5% 7.4% 8.8% 3.7% 17.5% 9.3% 2.4% 14.4% 8.9%
Global Bonds
9.9% 9.0% 11.5% 51.6% 12.0% 9.7% 15.6% 5.3% 7.6% 3.5% 10.2% 7.5% 1.9% 14.4% 8.0%
US Aggregate
6.7% 7.0% 8.6% 28.2% 10.1% 8.5% 9.7% 1.7% 7.5% 2.7% 10.2% 7.4% 1.4% 13.8% 7.5%
US Treasury
6.6% 6.3% 6.4% 16.3% 8.5% 8.4% 9.4% 0.8% 6.9% 2.6% 5.6% 6.2% 1.1% 8.7% 6.8%
US Credit
4.4% 5.1% 5.2% 16.0% 7.3% 8.4% 6.2% -1.2% 6.0% 1.2% 3.7% 4.1% 0.9% 8.6% 6.8%
US High Yield Bonds
4.3% 4.6% 4.8% 6.9% 6.7% 8.2% 4.3% -1.5% 5.5% 0.8% 2.6% 3.5% 0.4% 8.1% 6.4%
US Floating Rate
4.3% 4.1% 0.2% 5.9% 6.5% 7.8% 4.2% -2.0% 5.1% 0.5% 2.1% 3.4% 0.0% 6.9% 5.7%
Canadian Bond Universe
4.1% 3.7% -3.1% 5.4% 5.9% 5.6% 3.6% -2.0% 3.1% -0.7% 1.7% 2.5% -1.2% 6.9% 4.8%
Canadian Government Bonds
4.0% 2.2% -10.9% 4.5% 5.5% 4.7% 2.1% -2.6% 2.5% -0.8% 1.0% 2.3% -2.1% 6.8% 0.4%
Canadian Corporate Bond
3.6% 2.1% -26.4% -0.2% 5.4% 4.4% 2.0% -2.7% 1.6% -3.2% 1.0% 0.1% -2.3% 3.7% -0.3%
Canadian Short Term Bonds
3.1% 1.8% -29.1% -3.6% 3.6% 1.5% 2.0% -6.6% 0.6% -4.6% 0.0% 0.1% -4.6% 3.1% -0.7%
Emerging Market Debt
Source: Floating Rate (S&P/LSTA Leveraged Loan Index), Canada Bond Universe (DEX Universe Bond), Canada Inv. Corporate Bonds (DEX Corporate Bond), Canadian Government Bond (DEX Federal Universe Bond), Canadian Short
Term Bonds (DEX Short Term Bond), Global Blonds (Barclays Global Aggregate), US High Yield (BofA ML US High Yield Master II Unconstrained), Emerging Market Debt (JPM EMBI Global Diversified Index).
Source: Manulife Investment Management and Bloomberg, as of September 30, 2020.
33 | Market IntelligenceFixed Income
Canadian dollar tied to oil prices
Recently, the loonie’s relationship to interest rates has completely broken down and the shorter-term moves can be entirely attributed to the price of oil, specifically West Texas Intermediate (WTI). As oil
prices have fallen more recently, so has the Canadian dollar. Expect the Canadian dollar to remain range-bound between US$0.75–0.77 on US$40–45/bbl.
Oil Prices vs CADUSD and Fair Value Model to Oil
2000 - Current
$1.20
Current CADUSD = US$0.7596
$1.10 Implied fair value:
Oil @ $40.97 = US$0.7596
$1.00
* $5 ∆ in WTI = ~ 2.0 ₵ change
$0.90
$0.80
$0.70
$0.60
$0.50
$0.60
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Fair Value Model (Oil) CAD USD
Source: Bloomberg, Manulife Investment Management. As of September 17, 2020.
34 | Market IntelligenceManulife Investment Management’s
sample strategy
10% 30% 25% 35%
Canadian U.S. equities International equities Fixed Income
equities • Consider adding to • Consider less constrained strategies • Favour flexible strategies that can seize opportunities wherever
• Favour a selective U.S. equities. that can seek out opportunities they may be.
approach to • Look for opportunities to wherever they may present • Consider using different types of bonds for different objectives,
Canadian equities. take advantage of market themselves. whether it is downside protection or enhanced yield.
• Consider dislocations. • Opportunities may exist within the • Be mindful of the potential currency impact on global allocations.
diversifying • Consider dollar-cost emerging markets, specifically in the
business risks, not averaging into equities. Asia ex-Japan region.
just sectors.
Source: Manulife Investment Management as of September 30, 2020. For illustration purposes only. Performance histories are not indicative of future returns. The information in this document does not replace or supersede KYC
(know your client) suitability, needs analysis or any other regulatory requirements. Clients should seek the advice of professionals before making any investment decisions.
35 | Market IntelligenceAccess our Manulife Investment Management experts It starts with our Portfolio managers investment sales team Access to the professionals managing the Among Canada’s most reputable sales forces, money, to gain from their market insight and over 100+ professionals strong. Your contact in further understand portfolio construction and the centre of the wheel to connect you with the resulting positioning. strategies, services and experts that Manulife Investment Management has to offer. Capital markets and strategy Private company advisory Market and economic analysis leading to guidance Creating shareholder value for business owners and commentary on strategies, asset allocation by advising on mergers, acquisitions and weightings and specific portfolio recommendations corporate finance transactions. with the goal of helping advisors manage their clients’ portfolio objectives, regardless of the market environment. Tax, retirement and estate planning specialists A team of legal, accounting and industry‑leading experts focused on identifying advisor opportunities within changing regulatory market environments. 36 | Market Intelligence
The opinions expressed are those of the contributors as of September 30, 2020, and are subject to change. A rise in interest rates typically causes bond prices to fall. The longer the average maturity of the bonds held by a fund, the more sensitive a fund is likely to be to interest-rate changes. The yield earned by a fund will vary with changes in interest rates. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a fund’s investments. The opinions expressed are those of Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Manulife Investment Management disclaims any responsibility to update such information. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management Limited, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Unless otherwise specified, all data is sourced from Manulife Investment Management. Manulife, Stylized M Design, and Manulife Investment Management & Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and its affiliates under license. MBPSCS4465EN TBR 10/2020 AODA
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