Page 4 - ISQ January 2021

INVESTMENT STRATEGY QUARTERLY

Letter from the Chief Investment Officer (cont.)

importance of ‘clean technology’ and his appointment of a climate #9: Oil Demand To Catch The Crosswind Of
expected to grow. Throughout his campaign, Biden emphasised the
Economic Activity
czar is an early sign that he will follow through on his promise. While
affirmative action will be undertaken by the federal government, 2020 was anything but ‘smooth sailing’ for the oil industry, as
we expect companies will continue to ‘ride the wave’ of setting, the Saudi-Russia oil price war (excess supply) combined with the
adhering, and disclosing their ESG-related goals and principles. virus-induced lockdowns (weak demand) weighed heavily on oil
Whether it be through an exclusion, thematic, or impact approach, prices. As we look ahead to 2021, a sustainable return to normality
we expect investors to have heightened awareness of the sectors is expected to cause the best rebound in global oil demand since
better aligned with positive environmental and societal outcomes. 1973. The gradual rise in oil prices (WTI Crude $60/bbl year-end
target) should put ‘wind in the sails’ of the industry’s lagging
#7: International – Exposure Abroad Will Be A recovery, but there may be more ‘elements’ to face. With the
environment a top campaign issue for Biden, a renewable energy
Balancing Act
‘storm’ is on the horizon. The consumption of renewable energy
The ‘uneven bars’ are one of the four events for female gymnasts, has tripled over the last 20 years, and additional regulatory shifts
but they are also prevalent in our equity allocation preferences, as under the new administration could cause the Energy sector to
our bias toward US equities remains intact. The broad-based global ‘sail’ in a new direction.
economic recovery would typically lead us to be more ‘flexible’ with
our international exposure, but the sector allocation in Europe (e.g., Keeping Asset Allocation Parameters
overweight Financials in the low-rate environment) has garnered the #10: On The Fairway
region a few ‘deductions.’ However, our expectation for a weakening
dollar, attractive valuations and our bias toward Info Tech, Commu- Fortunately for investors, our expectation is for overall market vola-
nication Services, Consumer Discretionary, and Industrials present tility to be more palatable in the year ahead, driven by the gradual
a favorable outlook for emerging market equities, as these sectors reopening of the economy, more stable monetary policy and less
combine for more than half of the Emerging Markets Index. political risk. But just because volatility won’t be ‘on par’ with that
of 2020, does not make adherence to asset allocation parameters of
#8: US Dollar Will Not Have The Inside Track any less importance. With pullbacks still a natural occurrence for the

The COVID-19 pandemic sparked demand for safe-haven equity market, it is critical that investors have a strategy in place for
assets, causing the dollar to ‘clear a jump’ to the highest level since when the times get ‘rough’ so that emotionally-driven investment
decisions don’t lead portfolios into ‘hazards.’ With valuations stretched
January 2017. However, once the panic associated with the start of from a historical perspective, selectivity will be key in 2021, and we
the outbreak was subdued, the dollar weakened to its lowest level in expect that active managers will serve as ‘caddies,’ having insights
two years. The global economy’s recovery, ongoing aggressive fiscal into potential areas for opportunity.
and monetary policy action, a growing budget deficit, and more likely
than not easing trading restrictions with China and our allies will
all serve as ‘hurdles’ in the dollar’s path, preventing it from moving
higher. Ultimately, the weakening of the dollar may ‘pass the baton’
to emerging market equities, emerging market bonds, commodities
and US multinational companies.

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