The Road Ahead: 1Q 2021 Outlook

Hardly any one could wait for the year 2020 to be over yet the pandemic is still in full swing. However, Stock markets of most economies   ignored the catastrophe that plagues humanity, reaching new records, returning 18% in the US as measured by S&P 500 and 5.6%  in Canada. But when you look under the hood, i.e. what contributed to this performance, you will find that the heavy lifting was done by the so called new economy stocks such as cloud computing, social media, online shopping, electric vehicles and renewable energies. Of these, Canada has some participation in energy and a little in online commerce with the likes of Shopify and Lightspeed.

What we consider old economy today was new economy a  decade or two ago. All businesses, even the boring old telephone companies and pipelines start out as high growth start ups, go through often painful gestation period and then stabilize if properly managed into the old economy stocks often paying dividends. As portfolio managers of Value-Sciences Inc. we primarily invest in that part of the economy as there is some predictability and income. I must admit this has not been a winning strategy for most managers last year. In a way many of us have missed it. Or have we?

In the 1998 to 2000 time period, prudent Portfolio Managers of high tech funds closed their  funds mid 2000 which was somewhat lower than peak value. Had they waited through that “new economy” euphoria they would be down closed to 90% after the dot com bubble busted. Now, of course no two bubbles are the same. We could try to time the market but that strategy is often more wrong than right. I am expressing this to identify the risk aversion process that goes through your managers’ minds.

New economy stocks and sectors like Bitcoin and Tesla are in the process of stabilizing. What we do not know is where these very high priced stocks will settle down or how far this can last. An old saying is that "markets can stay irrational longer than you can stay solvent". This process is akin to us taking risks while we are young. Taking our winnings and investing in something that will produce a retirement income or family wealth is the proper way to assure we get to keep what we earned.

Our job is to prudently allocate your savings into a structure that matches your risk profile. In our parents time period, most placed their savings into a bank account. Banks used this money to lend out to individuals and businesses to start this cycle over. Banks and governments paid a reasonable interest. Most portfolios today use equities and fixed income. With interest rates near zero and little prospect of giving a positive total return anytime soon, fixed income and bonds instead of being a stable anchor for our portfolios now carry  higher risk than in recent times. This limits the options of what we can do to provide a stable lower risk returns on our investments.

Fortunately the segments we predominantly invest in like banks, utilities, telephone companies and pipelines although do not see the  euphoric rise of the new economy stocks, are still providing decent income. We do not see any reason to change our style at this time. Whether the business is conducted online or in person, banks are still a great beneficiary. Same is true of energy whether oil and gas or solar, utilities and pipelines are key providers. Nothing in the new economy changes how we live further affirming our stance of using these sectors to protect our portfolios.