Market Update Dominick Hardy, CPA, CA, CFA Gopa Nair, CFA - RBC Dominion Securities Inc - RBC Wealth Management
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RBC Dominion Securities Inc. Market Update Dominick Hardy, CPA, CA, CFA Gopa Nair, CFA Portfolio Advisory Group October 2020 | RBC Dominion Securities Inc.
A number of factors keeping investors nervous this year
“And the survey says…”
OUTCOME OF
PANDEMIC 30 7
VACCINE TRIALS
SLOW ECONOMIC
25
RECOVERY
ELECTION 20
RISING TENSIONS
10
WITH CHINA
Source: Portfolio Advisory Group
2 October 27, 2020
COVID-19 3
COVID-19 4 October 27, 2020
COVID-19 5 October 27, 2020
COVID-19 6 October 27, 2020
COVID-19
Positivity rate takes the fear out of the numbers….but not always
Source: Johns Hopkins University of Medicine
7 October 27, 2020
COVID-19
Positivity rate takes the fear out of the numbers….but not always
Source: Johns Hopkins University of Medicine
8 October 27, 2020
Economic recovery
Some bright spots but growth will be tempered
Source: RBC GAM
9 October 27, 2020
Vaccine development Fast response times may be the new norm 10 October 27, 2020
Vaccine development Different development stages 11 October 27, 2020
Vaccine development Considerations 12 October 27, 2020
COVID-19
Canada
Vaccines deal signed by Canada ~350 million doses secured
Pfizer/BioNTech (PFE/BNTX) Johnson & Johnson (JNJ)
• Messenger RNA • Non-replicating viral vector
• At least 20 million doses • Up to 38 million doses
Moderna (MRNA) AstraZeneca (AZN)
• Messenger RNA • Non-replicating viral vector
• Up to 38 million doses • Up to 20 million doses
Novavax (NVAX) Medicago – working with GlaxoSmithLine
• Protein subunit • 76 million doses (Quebec based).
• 76 million doses • Has manufacturing capacity for 100
million doses
Sanofi (SNY) Precision NanoSystems
• Protein subunit • BC based company
• 72 million doses • Produce vaccines and therapeutics drugs
13 October 27, 2020Some encouraging trends 14
A rough year for global equity markets 15 October 27, 2020
ISM Manufacturing readings are above 50…
…signaling the end of the recession
ISM Manufacturing ISM Manufacturing New Orders
Source: Institute for Supply Management, Haver Analytics, Credit Suisse
16 October 27, 2020Positive sloping yield curve indicates economic expansion
Yield curve has been a reliable recession indicator
Spread between the 10-year U.S. Treasury Note and 1-year Note
Source: U.S. Census Bureau
17 October 27, 2020United States 18
Sector leadership defined by benefits from WFH & lockdowns
Technology sector has been the best performer year-to-date
Cloud, Digital payments, S&P 500 year-to-date performance by sector
Cybersecurity, Gaming,
5G, Video conferencing S&P 500 / Information Technology -SEC
S&P 500 / Consumer Discretionary -SEC
E-commerce S&P 500 / Communication Services -SEC
S&P 500 / Materials -SEC
SVOD OTP streaming, S&P 500
Video advertising, Gaming S&P 500 / Health Care -SEC
S&P 500 / Consumer Staples -SEC
S&P 500 / Industrials -SEC
S&P 500 / Utilities -SEC
S&P 500 / Real Estate - SEC
S&P 500 / Financials -SEC
S&P 500 / Energy -SEC
-60% -50% -40% -30% -20% -10% 0% 10% 20% 30%
Source: Portfolio Advisory Group, FactSet, Note: YTD 2020 data through September 23
19 October 27, 2020Stock market is more top-heavy
Investors have piled into big technology stocks
• This is a narrow market dominated Percentage of market cap (weight)
by extraordinary gains by a very in the S&P 500
small segment
Top 5
- Top five stocks together represent Companies
about 22.4% of the S&P 500 vs.
16.8% on 12/31/2019
• Masking weakness of the broader 22.4%
market
• Any tumult in the tech sector could
exacerbate a broader downturn
77.6%
Bottom 500
Companies
Source: Portfolio Advisory Group, FactSet
Note: YTD 2020 data through September 23
20 October 27, 2020Stock market returns under different political leadership
U.S. system’s checks and balances protects the economy
• Returns for the market have been best under a unified Republican government
or a government with a Democrat President and split or Republican Congress
Average S&P 500 returns when different political
parties are in control of government
Source: RBC US Equity Strategy, Haver, Includes years since 1933; the 2000 election resulted in a 50/50 tie in the Senate (with a Republican VP acting as
the deciding vote after inauguration). However, midway through 2001 one Republican Senator left to become an independent and caucus with the Democrats
21 October 27, 2020Biden is ahead in national polls and betting markets
Major policy platforms
Betting markets indicate Joe Biden Joe Biden Donald Trump
is positioned well Position: Centrist Position: Right
Platform: Platform:
• More active regulatory • Further deregulate
approach business landscape
• Partially reverse Trump • Maintain corporate and
corporate tax cuts and income tax cuts
increase taxes on upper • Payroll tax reductions and
income earners capital gains cuts
• Expand health coverage • Reduce the cost of
• Pass infrastructure bill prescription drug prices
• Reduce use of fossil • Pass infrastructure bill
fuels and increase use of • Raise funding for defense
clean, renewable energy and veterans
• Expand immigration • Restrain immigration and
Source: Real Clear Politics. Note: Data as of September 23
• Multilateral vs. bilateral construct border wall
deals • More bilateral rather than
• Raise minimum wage multilateral trade deals
Sectors expected to do well under • Student loan forgiveness • Impose further economic
a Trump or Biden Presidency sanctions on China
Impact: Impact:
• Economy: ST neutral, LT • Economy: ST positive, LT
Biden Utilities, Renewable energy neutral neutral
• Equities: Neutral to • Equities: Moderately
Trump Technology, Banks, Defense
slight positive positive
Source: Portfolio Advisory Group Source: Portfolio Advisory Group
22 October 27, 2020Escalating U.S.-China tensions
Businesses face uncertainty
Key disagreements
Source: RBC Global Asset Management
23 October 27, 2020Q2/2020 GDP recorded steepest contraction since Q4/2008
Contracted at annual rate of 32.9% as COVID-19 paused the economy
• RBC GAM is forecasting U.S. GDP decline of -6.0% for 2020
Seasonally adjusted annual U.S. GDP 2020 annual GDP growth forecasts
8.00%
6.00% 5.20%
4.50%
4.00% 3.40% 3.30%
2.33%
1.64% 1.40% 1.40%
2.00% 1.17% 0.75%
0.00%
U.S. Canada Eurozone U.K. Japan
-2.00%
-4.00%
-6.00% -5.30%
-6.00%
-8.00% -7.00% -7.00%
-10.00% -9.00%
2019 2020E 2021E
Source: U.S. Bureau of Economic Analysis, CNN Source: RBC GAM; estimates as of September 2, 2020
Note: Seasonally adjusted at an annual rate
24 October 27, 2020Pace of U.S. job creation is slowing
Jobless rate is still high and 10.6 million workers remain unemployed
• Employers added >11.4 million jobs from May through September combined,
partly offsetting the ~22 million jobs shed in March and April
• Unemployment rate for September fell to 7.9% vs. April’s 14.7% as payrolls
rose
Total nonfarm payrolls Unemployment rate
Source: Labor department, WSJ Source: Labor department, WSJ
Note: Seasonally adjusted Note: Seasonally adjusted
25 October 27, 2020 Portfolio Advisory GroupExpecting an earnings recovery for 2021
Corporations are evaluating the impact of COVID-19 to revenue & EPS
• 2020 consensus EPS estimate of $131 vs. $165 in 2019 (-20.4% Y/Y)
• Consensus is forecasting a 26.5% Y/Y earnings recovery to $166 in 2021
- 2021 EPS estimates appear too optimistic. Unlikely that earnings will recover
to their pre-COVID-19 levels not until 2022
2020 and 2021 consensus EPS growth estimates
$180 $165.00 $166.16
-20.4% +26.5%
$150 $131.36
$120
$90
$60
$30
$-
2019 2020E 2021E
Source: Bloomberg as of September 21, 2020
26 October 27, 2020Equities tend to bottom 3-6 months before a recession ends
Markets bottom before fundamentals
U.S. recessions since 1945 and stock market performance
Source: NBER, C.D. Howe Institute, RBC, J.P. Morgan, Goldman Sachs
27 October 27, 2020Equities tend to bottom before unemployment peaks
Markets bottom before fundamentals
S&P 500 compared vs. U.S. Unemployment rate
Source: JPMorgan, Portfolio Advisory Group
28 October 27, 2020Valuations leave less room for disappointment after rebound
• S&P 500 is currently trading at a forward P/E multiple of ~20x, a premium to its
20-year average of ~15x
S&P 500 Forward P/E multiple
Source: Factset as of September 23, 2020
29 October 27, 2020Asset allocation guide recommendation changes
• Equities: Upgrade to Neutral
- U.S. Equities: Maintain Neutral
- Canadian Equities: Maintain
modest Underweight
- International developed: Maintain
Neutral
- EM Equities: Maintain Neutral
• Fixed Income: Reduce to Neutral
from modest Overweight
- IG Corporate: Reduce to Neutral
(from modest Overweight)
Source: Portfolio Advisory Group
30 October 27, 2020Canada 31
Economic Outlook
United States Canada
Source: GI Monthly, RBC DS
32 October 27, 2020S&P/TSX Index
Canada - Gold and Technology stocks
300.00 Shopify
+163.7%
250.00
200.00
Gold +44.9%
150.00
TSX Composite -3.1%
100.00
TSX ex. SHOP -7.0%
TSX ex. SHOP & Gold -11.1%
50.00
31-DEC-2019 to 30-JAN-2020 to 02-MAR-2020 to 31-MAR-2020 to 30-APR-2020 to 01-JUN-2020 to 30-JUN-2020 to 30-JUL-2020 to 31-AUG-2020 to
02-JAN-2020 31-JAN-2020 03-MAR-2020 01-APR-2020 01-MAY-2020 02-JUN-2020 02-JUL-2020 31-JUL-2020 01-SEP-2020
S&P/TSX Composite Index TSX ex. SHOP TSX ex. SHOP & Gold Shopify, Inc. Class A Gold
33 October 27, 2020COVID-19 Canada 34 October 27, 2020
Canada Recovery by sector 35 October 27, 2020
Canada Oil production remains low 36 October 27, 2020
What countries appear stretched 37 October 27, 2020
Themes 38
Megatrends we are following
These are some
really HUGE
trends peopleDividend paying stocks are looking better
Changes in dividends
35
30 29
28
25
20
15 13
10
10 9
6 6
5 4
3
2
0
April May June July August September
Source: FactSet, Thomson, RBC DS Dividend increases Dividend cuts
40 October 27, 2020Dividend paying stocks are looking better
Dividend Increase by Sector
12
11
10
8
6 6
6
5
4
4
3
2
2
1
0 0 0
0
Source: FactSet, Thomson, RBC DS
41 October 27, 2020Fifth-generation wireless technology (5G)
Allows other devices in addition to mobile phones to connect to network
Investment Thesis 5G Connecting the Community
• 5G is the latest iteration of cellular
technology which will:
- Improve network capabilities
through faster speeds, greater
reliability, and lower latency; and
- Boost functionality across a
variety of applications like
healthcare, smart homes, virtual
reality and self-driving cars Downloading Speeds
Latency Time
Network type Milliseconds (ms)
3G Network 120ms (actual)
4G Network 45ms (actual)
5G Network 1ms (theoretical)
42 October 27, 2020Cybersecurity
Data breaches are driving greater investments in cybersecurity
Investment Thesis
• Companies are using AI to extract
patterns from large data sets to
understand market trends and
consumer preferences in order to
provide personalized service
- Growth in big data and cloud 2018-22 Software Growth ($ Billion)
adoption is driving demand for
better information security, data
protection and privacy controls
• High-profile data breaches are
driving regulations around data
privacy, such as Europe’s General
Data Protection Regulation (GDPR)
43 October 27, 2020Tech. investments in healthcare to cut costs & raise care
Healthcare is a huge part of the U.S. economy
• Healthcare spend continues to rise and is approaching an unsustainable level
National health expenditures as a % of GDP
Source: Center for Medicare & Medicaid Services, RBC Capital Markets
44 October 27, 2020Tech. investments in healthcare to cut costs & raise care >250K people die each year in U.S. from medical errors (Johns Hopkins) 45 October 27, 2020
Tech. investments in healthcare to cut costs & raise care
Digitizing delivery of healthcare improves patient outcomes and cut costs
Investment Thesis
• Healthcare has been
slow to adopt
technology and cut
waste
• Available software
packages:
- Electronic Health
Records
- Digital test results
- E-prescribing
• Full access to a
patient’s medical
history could prevent
medical errors
46 October 27, 2020Thank you This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibili ty or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under licence. © 2016 RBC Dominion Securities Inc. All rights reserved. 47 RBC Dominion Securities Inc. | Market Update
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