Focusing on the key themes of our 2021 outlook (… and why recent jobs data doesn't matter!)

It was a busy week of activity in the markets and with economic data (and let’s not forget GameStop!). If you want a quick assessment of the environment, here it is:

Any weaker economic data reported over the next few weeks won’t really matter to our 12-month investment outlook.

Some may be concerned with the U.S. Nonfarm Payrolls report that showed a modest and below consensus net gain of 49,000 jobs for January 2021. Additionally, the Canadian labour force employment report that showed 212,000 jobs were lost in January may dampen the optimism by some market participants. However, we’d argue that little can be gleaned from either of these releases that we didn’t already know. And that’s the crux of the challenge with economic data that’s looking backward.

It’s only common sense to understand that with renewed lock-downs come renewed weakness in some of the economic data. What we need to do for proper reasoning is ask whether this is a trend or a temporary anomaly? As we saw after the spring lock-downs, COVID-19 cases are once again falling in Canada and the United States, and as such, we expect a similar rebound will follow in the labour market and other data in the coming months.

While the job gains have flattened out over the past few months in the United States, we expect a second wave to the labour market recovery to take place in the back half of 2021 in our rapid reopen thesis.


This chart shows the monthly U.S. Nonfarm Payrolls report from March 2020 to January 2021.

After three quarters of negative year-over-year EPS growth, earnings recovery has begun

The first week of February 2021 was also met with continued strength in the U.S. manufacturing economy with the Institute for Supply Management Manufacturing Purchasing Managers Index (ISM PMI) that showed a reading of 58.7. It was a tick lower from the recovery high of 60.5 for December, yet still at a very encouraging level for forward earnings growth. Recall that one of the Capital Market Strategy team’s favourite indicators is the ISM PMI because of its ability to forecast trends in S&P 500 earnings growth. The recent data have been confirming our belief of a very strong earnings recovery for 2021.

We’re approximately 60% of the way through the fourth-quarter earnings releases for S&P 500 companies and the results are showing promise. With 292 companies having reported at time of writing, earnings growth is coming in at a better-than-expected 6.81%, with sales growth gaining 2.37% year-over-year (YOY). We believe 2021 earnings may not only reach 2019 levels but exceed them. This supports our favourable view towards equity markets in 2021 on what looks to become a very strong earnings recovery.

Here’s a chart comparing the ISM PMI to the year-over-year S&P 500 Index earnings growth, from 2000 to 2021. There’s a strong correlation between the two: as the PMI moves up or down, the S&P 500 Index moves in the same direction.

This is an attractive environment for the Emerging Markets

In our 2021 outlook, we introduced our Growth/Inflation Momentum Matrix. It’s a culmination of the team’s work on varying growth and inflation environments for the U.S. economy, with data going back to the 1950s. We believe 2021 will be characterized by an accelerating growth and accelerating inflation environment. Certain asset classes are at their best in this environment; in particular, emerging market equities tend to outperform when growth and inflation are accelerating. We continue to hold a favourable view towards China, and the broader emerging markets as a whole.

Capital Markets Strategy team — Growth/Inflation Momentum Matrix

The Capital Markets Strategy Growth/Inflation Momentum Matrix, shown here, illustrates how individual asset classes perform in accelerating and decelerating growth and inflation environments, on an average four-quarter basis.

Two thousand and twenty-one is the Year of the Ox in the Chinese zodiac. A quick search on Year of the Ox reveals that oxen have an honest nature and are known for their diligence, dependability, strength, and determination — which is an appropriate theme for 2021 as we advance through the global pandemic. We should also remember that the Chinese New Year brings a lull in economic activity at the beginning of the year while the country engages in New Year celebrations.

As is typical, the January China Purchasing Manager’s Index (PMI) data came in modestly weaker on a month-over-month basis, while remaining in expansion territory at 51.9. We’d expect to see additional softening of the PMI in February as well. We don’t see this as a sign that Chinese economic growth is in jeopardy of exhaustion but rather seasonal and temporary. As with the labour market data noted above, investors would be well served to take any near-term weakness in Chinese economic data as typical for this time of year. We point to recent rail freight, electricity usage, and auto sales data that, as of December, would argue the positive growth trend remains intact.

This chart shows Chinese economic data for rail freight, electricity usage, and auto sales, from 2010 to 2021. After a significant drop in 2020, the data for all three areas is showing an overall upward movement.

Lastly, as it pertains to the earnings outlook for 2021, our work would suggest that the earnings recovery will be broad and include the emerging markets. We’ve long-held South Korean trade data as a bellweather for the global economy. We’ve seen a strong relationship between South Korean exports measured on a year-over-year basis and earnings growth for many indices, but in particular, for the MSCI Emerging Markets Index (as we would expect given South Korea has representation in the Index).

South Korea is the fifth largest exporter in the world and its exports include a diverse array of products, which is why it’s a good indicator for global growth. As you can see from the chart below, we believe emerging markets (EM) earnings growth is set to shoot higher, as indicated by South Korean export growth that’s up 11% YOY. The current data suggest earnings per share (EPS) growth expectations of 25% plus for EM with risk to the upside. As EM is also exhibiting much better valuation than the S&P 500 Index currently (a spread of five multiple points on price-to earnings), we’d expect more of the earnings growth to be priced in to EM — combined with our matrix output, that would suggest significant outperformance potential relative to U.S. or EAFE Index stocks.

Our favourable view towards emerging markets equities manifested itself as we added a 5% allocation to the emerging markets in our model portfolio at the end of the third quarter last year. We continue to favour the emerging markets and, at the end of the fourth quarter last year, increased our model portfolio allocation to 10%. While we believe 2021 will be a good year for global equities overall, we believe there exists the potential for emerging market equities to enhance portfolio returns over the course of the next few years.

Here’s a chart showing a strong positive correlation between the year-over-year South Korean exports and the MSCI EM trailing earnings, from 1996 to the 2021.

Philip Petursson

Chief Investment Strategist and Head of Capital Markets Research
Manulife Investment Management

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Kevin Headland, CIM

Kevin Headland, CIM, 

Co-Chief Investment Strategist

Manulife Investment Management

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Macan Nia, CFA

Macan Nia, CFA, 

Co-Chief Investment Strategist

Manulife Investment Management

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