Opinions as of June 15, 2020
The views expressed in this tactical update apply broadly to all Sun Life Granite Managed Portfolios, whereas the tactical highlights and allocation data in the chart below are specific to Sun Life Granite Balanced Portfolio. For the latest information about other Sun Life Granite Managed Portfolios, including Sun Life Granite Managed Income Portfolios, please refer to our quarterly fund reviews.
On March 23, with COVID-19 spreading rapidly and the economy crumbling, the S&P 500 was down 33%. With so much uncertainty, it seemed like a very deep hole to climb out of. Then just two weeks later, the market, ignoring depression-era unemployment numbers, started to rally. The rebound continued into May, energized by a better-than-expected U.S. jobs report and firming oil prices. And on June 8, the S&P 500 turned positive for the year – easing all of its bear-market losses.
Investors (particularly retail) appear to be betting that a V-shaped economic recovery is underway, as COVID-19 cases decline, major economies slowly reopen and vaccine trials advance. Bond yields, which had come close to turning negative in March, also rallied in May, suggesting that pessimistic bond investors were reconsidering the pace of recovery.
Nevertheless, we continue to hold to the view that the recovery may take longer than the market is currently pricing in. For starters, it remains to be seen just how quickly it will take for major economies to recover and whether the feared second wave of COVID-19 occurs. As well, there could be permanent structural changes in the labour market, with large numbers of workers left behind.
In addition, the current rally has been driven largely by individual investors, while institutional (so-called smart money) has largely remained on the sidelines. This is the opposite of what normally happens in a recovery, when institutional managers do the initial buying. And it may be an indication of the risk that they still see in the market.
Political uncertainty is also rising with the hardening of attitudes in the White House over Beijing’s push to take full control of Hong Kong, and its failure to contain the early spread of COVID-19. Also, as we get closer to the U.S. presidential election in November, the market may not react favourably to the possibility of a Democratic sweep, fearing a reversal of the Trump administration’s 8% corporate tax cut. Which, if repealed, would drastically reduce earnings-per-share forecasts for the S&P 500.
As a result, we have a cautious view on equity markets and remain generally underweight. In terms of fixed income, we believe the recent rise in yields may be temporary. As such, we have maintained our current exposure to U.S. Treasuries and Canadian bonds. However, we continue to favour high yield corporate bonds. Fear of bankruptcies as the economy contracted, knocked down the price of corporates. But we expect spreads to contract as risk eases and the Fed continues to buy corporate bonds. In order to add to our position we reduced the cash weighting in the portfolios.
While cautious on equities, we are still overweight U.S. and emerging market stocks. The U.S., the world’s strongest economy heading into the COVID-19 crisis, continues to reopen. Supported by the U.S. Federal Reserve’s decision to cut its key interest rate to effectively to zero, and with $2 trillion in stimulus spending (and more possibly to come), we believe the U.S. could be strongest economy coming out of the pandemic.
In terms of investment styles, we favoured U.S. growth over value as the market rallied. We now believe value could play catch up, and added call options on U.S. financials where we see long-term potential. While there is still surplus in the market, we bought call options on oil in the U.S. as prices rebounded and could possibly move higher from here. We continued to hold put options for downside protection.
As noted, we maintained our overweight position in emerging markets. Overall, we are concerned that some emerging market countries my have difficulty reopening their economies. As well, others, including Brazil and India, have failed to contain the COVID-19 outbreak. We favour China, which appears to have the epidemic under control; its economy is slowly picking up and has introduced new stimulus measures. In particular, we see strength in China’s technology sector.
The European economy was struggling before we saw large outbreaks of COVID-19 across the region. The European Central Bank responded to the pandemic by increasing its quantitative-easing program. The EU (after a protracted debate) also agreed in May to introduce a US$826 billion economic stimulus program.
There are still risks beyond the pandemic. For one, trade negotiations between Europe and the U.K. have stalled – again raising the possibility of a hard Brexit, with the accompanying economic dislocation. However, once the EU’s rescue package is implemented the Eurozone economy could improve. In anticipation of this, we reduced our underweight exposure to European equities.
The Canadian market, hit by both the COVID-19 selloff and falling oil prices, is our largest underweight. In response to the pandemic, Ottawa introduced over $200 billion in economic stimulus measures. As well, the Bank of Canada cut its key interest rate to almost zero, and for the first time undertook a quantitative easing program.
Like the U.S., Canada had a strong jobs report for May. On the other hand, household spending, a key driver of the Canadian economy, has been hampered by COVID-19 and high personal debt levels. Moreover, real estate prices could soften, and with low oil prices also continuing to hurt the economy, we maintained our underweight position.
Reduced underweight to European equities
COVID-19 cases dropping; EU stimulus package could help economy
Added corporate high yield bonds
Spreads may contract as risk decreases
Maintained current exposure to U.S. and Canadian bonds
At these levels, investment grade bonds still provide some downside protection
Added call options on oil and financials
Oil prices could rise; if they hold companies may regain value. Financials may benefit in shift to value investing.
Tactical Allocations | Sun Life Granite Balanced Portfolio
The graph shows the tactical allocations for the Sun Life Granite Balanced Portfolio. It is a stacked bar graph with each bar being the same height, representing 100% of the total asset allocation for the fund.
There are no numbers on the graph. It is intended to provide an approximate representation of the Funds’ asset allocation.
The X-axis represents the months from June 2019 to May 2020.
The Y-axis represents the percentage allocated to 12 asset classes as follows:
For May 2020, Canadian equity, U.S. equity, and International equity are large segments at the top of the bar, representing approximately 45% of the bar. Next, Emerging market equity, Global equity and Real assets segments make up about 15% of the bar. Next, Canadian Bonds makes up approximately 20%. U.S. Bonds is approximately 5%, and the remaining 10% is comprised of Global Bonds, Emerging Markets Bonds, High yield bonds and Cash.
The months prior to May 2020 show variations of these values, illustrating shifts of asset allocation over time as some asset classes shifting the others higher or lower as a percentage of the total.
Allocations are as of month-end and subject to change without notice.
Sun Life Granite Managed Portfolios invest in mutual funds and/or exchange traded funds (ETFs). Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Investors should read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
This document is published by Sun Life Global Investments (Canada) Inc. and contains information in summary form. This document is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by Sun Life Global Investments (Canada) Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.
Information contained in this document has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy. This document may contain forward-looking statements about the economy, and markets; their future performance, strategies or prospects. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.