January 27 Benefits and Pensions Monitor Daily News Alerts

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Equity Markets Only Alternative

When U.S. Federal Reserve Chairman Jerome Powell cut interest rates to zero last March, he said they are likely to keep interest rates at zero for the next couple of years. In a zero bound interest rate environment, says Phil Orlando, chief equity strategist at Federated Hermes, the only alternative for investors looking for yield or for performance is equity markets. He told its ‘2021 U.S. market outlook: Post-Election Post-Mortem’ this has been a driving force of 75 per cent increase in stock prices since the bottom of the market last March. In the second quarter last year, the U.S. was in the depths of the deepest recession in its history. “We started to come out of that in spades in the third quarter,” he said. The strong equity market returns over the course of this year will continue. However, “we were going to measure inflation differently now than in the old days.” In the past, when core inflation reached two per cent, the Fed would start to raise interest rates. Now it has said it will wait for core PC inflation to average two per cent for at least a year before it starts to increase interest rates as it wants to stay lower for longer to allow “the economy to run hotter for longer to ultimately stimulate the labour market get back to where it was before the pandemic.” The one problem, he said, is that Powell’s term as chairman of the Federal Reserve expires at the end of January next year. If a new chairman comes in, will they maintain the same approach, he asked.

ETFs Have Record Breaking Year

Canadian ETFs experienced record breaking flows in 2020 as $41 billion in assets poured into the industry, eclipsing the record established in 2019 in just seven months, says Mackenzie Investments’ ‘2021 ETF Outlook Report.’ At year's end, total assets under management (AUM) stood at a record $257 billion, up from $192 billion in 2019. It says more than 115 new ETFs were launched in Canada in 2020. There are now more than 1,000 Canadian-listed ETFs available from 39 providers. Equity ETFs continued to be the most popular asset class in Canada, taking in more than $23 billion in AUM in 2020. Fixed income also performed well, bringing in more than $13 billion in AUM in 2020. The report noted that, as the world celebrated the 30th anniversary of the first ETF in 2020, a growing awareness among Canadian investors about the advantages ETFs provide fueled continued adoption. While compared to the U.S., the Canadian ETF market is relatively smaller and still maturing, demand from investment professionals and investors will inevitably result in larger allocations from more investors as the benefits of ETFs become more apparent. As well, more products designed for the needs of Canadian investors will give them more reason to use Canadian-listed ETFs instead of U.S.-listed ETFs. Canadian-listed funds offer investors many advantages such as the choice of currency exposure and therefore may not be impacted by currency fluctuations. As well, other factors such as the timing of currency conversion and withholding taxes applied to specific asset classes make U.S.-listed ETFs suboptimal for certain investment accounts as compared to Canadian-listed ETFs. However, this means investors will be looking for providers that offer a full suite of ETFs. This will put pressure on investment firms to provide a variety of well-priced products that fit a wide range of investor needs. Michael Cooke, senior vice-president and head of ETFs at Mackenzie Investments, says, "With their transparency, cost effectiveness, and flexible passive portfolio tools, we expect ETFs will continue to help both retail and institutional investors navigate uncertain markets in 2021."

For details on these stories, visit www.bpmmagazine.com

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