Co-Chief Investment Strategists Emily R. Roland, CIMA, and Matthew D. Miskin, CFA, evaluate how their top portfolio ideas performed last year and share how they’re positioning for 2021. The co-strategists explain why they’re looking for some parts of the equity markets—including traditional value sectors, mid caps, and emerging markets—to catch up to the hot performance of dominant mega-cap stocks in 2021. In fixed income, they discuss why they’re more constructive on high-yield corporate debt, even though they still like high-quality bonds such as U.S. Treasuries for diversification and some protection if high-flying stocks falter this year. Finally, Matt and Emily offer their thoughts on the recent turmoil in Washington and how markets and the economy may be affected by the election results.
John Bryson:
Hello, and welcome to the Portfolio Intelligence podcast. I'm your host, John Bryson, head of investment consulting at John Hancock Investment Management, and this is our first podcast of 2021. The goal of this podcast, as always, is to help investment professionals deliver better outcomes for their clients and their practice. Today is January 7, 2021, and a great way to kick off this year is to have back two perennial guests, Emily Roland and Matt Miskin, our co-chief investment strategists at John Hancock Investment Management. Emily and Matt are the engine behind our quarterly capital markets outlook piece titled Marketing Intelligence. So we're really excited to hear about what they have to say about 2021. So Matt and Emily, welcome, and thanks for joining us.
Matt Miskin:
Thanks for having us, John.
Emily Roland:
Great to be here.
John Bryson:
All right, Matt, I'm going to start with you. I want to recap a little bit around 2020. I want to hear about what you and Emily were telling advisors and clients to think about as they position their portfolios in 2020 and how that worked out overall.
Matt Miskin:
So as we go, went into 2020, we actually believed we were late in the economic cycle and we were, in essence, positioning for that. We were looking at the leading economic indicators; they have been decelerating. The Fed had already started cutting. And then, of course, COVID hit and that was an exogenous shock that's incredibly unpredictable, but the positioning actually held up pretty well based on those inputs. So we were overweight the quality factor, businesses with higher return on equity, technology, communication services, and healthcare sectors. We had an overweight to U.S. equities versus international developed, which actually played out pretty well for the calls that we had. Within fixed income, we believe that the Fed was going to be doing a massive amount of quantitative easing, cutting interest rates to zero, and we had positioned in the intermediate part of the curve with investment-grade corporates is our number one call. Those were of the best-performing parts of the overall fixed-income markets and did well for us.
Matt Miskin:
So a pretty good year overall. One thing that I look back on that I think we also did well on, or managed to do okay on, is rebalancing and talking to advisors and clients. As that volatility hit, we were talking about dollar cost averaging into it or rebalancing fixed income to equity assets over the course of the year. That was a bit of a tailwind also to performance. And in the fourth quarter, some of our calls did lag. I mean, risk assets really ran in the fourth quarter, but we were able to participate in that kind of environment as well. And we're ready, really, to start 2021, although we are shifting gears to some extent.
John Bryson:
Now I know that you and Emily have worked hard over the holidays to think about 2021 and put your work together, and you're going to be releasing that over the next couple of days. So people should look for that on our website, but can you give us a sneak peek as to how your thinking has evolved as we move forward?
Matt Miskin:
So we have taken the quality theme that we've already been talking about for last year, and we're, in essence, splitting that up with more of a value theme. So value sectors like healthcare and industrials are parts of the market that we're looking at more opportunistically. Mid caps—they have a larger allocation to industrials. They are a beneficiary of the rotation out of the mega-cap parts of the market and are becoming a place that we like more. We're adding to emerging markets, a beneficiary of a weaker dollar, and some of a reflationary or, in essence, a better global growth backdrop. Within fixed income, we're not making significant changes, but in essence, kind of balancing credit risk in duration risks. So we were overweight quality last year within fixed income. This year, we're saying you've got to really just kind of balance credit risk with duration and we're neutralizing high yield is an allocation within fixed income, saying that you want to have some of that high yield to buffer if interest rates do rise.
Matt Miskin:
In investment-grade corporates as well, and mortgage-backed securities still are places we think make sense within a portfolio, but in essence, we're targeting about five years of duration with about a 2% yield within fixed income. I know that doesn't sound great, but as assets, well, as risk assets and equities have run so significantly here, we want to still have our bonds act like bonds. And if equity risk does sell off, if I mean, equities have just been going up what it feels like every single day; if it does sell off, you want to have fixed income still be able to be a buffer to the overall portfolio with lower volatility and some diversification benefits. So we're not totally abandoning that, but incrementally, looking at high yield opportunistically in certain parts of the credit markets.
John Bryson:
Excellent. Thanks, Matt. Now, Emily, I want to bring you into the conversation. When we look back on 2020 politics, U.S. politics were a big part of the headlines. And as we go into 2021, that's continued. I'd like to start with the elections in Georgia. Now that we're seeing that they're going to the Democrats, that sets it up so that there's a slight lead in the Senate for the Democrats. What kind of market impact does that have going forward? And what do we need to do consider?
Emily Roland:
Yeah, John, thanks. This script here has really flipped, as it relates to the traditional market reaction that investors have to some of these political outcomes, whether it was a 2020 presidential election or this more recent win by the Democrats in Georgia. A Democratic sweep used to be thought of as a market negative, given the potential for initiatives like more regulation and higher taxes, which can crimp earnings. This time, markets are viewing it as a positive, given the prospects now for more fiscal stimulus to boost the economy. So what we're seeing in terms of market reaction is actually more economically sensitive areas like value stocks in particular, financial, smaller cap stocks, high-yield bonds rallying on the news.
Emily Roland:
One thing that we expected to happen in this scenario was a pricing in of higher growth expectations. Again, due to this idea of more spending, whether it's fiscal stimulus, more one-time checks to folks, spending—a bigger spending package on things like infrastructure, climate change. And we expected to see this priced in via higher yields on the 10-year Treasury and a steeper yield curve, which is exactly what's playing out here with the 10-year Treasury moving above 1% for the first time since the pandemic began. And I think some of the moves that we're seeing right now really do underscore the diversification benefits. They work both ways.
Emily Roland:
So as you've heard us say on this podcast before, we believe in continuing to own high-quality bonds, even though there's a narrative out there saying that you don't want to own bonds anymore because the yields are low. We actually want them as the ballast in a portfolio, but that works both ways. As high-quality bonds benefit investors when we're in a risk off environment, they're going to see some downward pressure from a price perspective when the market is in one of these risks on phases, which is certainly what we're seeing right now.
Emily Roland:
So our view on this as we, again, we're continuing to advocate for a neutral position on U.S. Treasuries—slight overweight in areas like mortgage-backed securities. And we think that there's an opportunity here as yields back up to actually to add to some of those positions, even though we recognize that certainly the yield potential there remains low. And I think it's important to remember that the economic picture here is really entering a very choppy and uneven phase here in the U.S. We're still in a pandemic. There are still a lot of unknowns as far as the rollout of the vaccine goes. And the data's starting to look a little bit weak here.
Emily Roland:
We're looking to the Jobs Report tomorrow. We just saw the ADP Jobs Report this week, which showed a loss of a 100,000 jobs instead of a gain of a 100,000 jobs. That could set up us up for a disappointment as far as the next batch of employment data goes. So we're still in a pandemic, that the economy is still very fragile at this point, and we want to be careful here not to completely abandon our high quality positions in favor of risk.
Emily Roland:
The other thing, just as a final note here, that we're watching is what does the Fed do in this situation. We've heard Jay Powell and the Federal Reserve continue to call on Washington to add more fiscal support to the economy, but, of course, when you do that, you can see that it results in higher yields. That means everything from higher borrowing costs, mortgage rates, et cetera, et cetera. So we've got to think about what that backup and Treasury yield means for the Fed. At some point, they may need to do more in terms of keeping the yield curve flatter in order to continue to stimulate growth. So I think this puts the Fed in a really interesting position. And then I think it all comes back in terms of positioning to what Matt was saying in terms of really balancing duration risk here with credit risk, participating here in market upside, without, again, going over our skis in terms of taking risk.
John Bryson:
Yeah, you and Matt have been very consistent around the balanced approach and it's worked out really well. And you both highlighted some positives going on right now, and some things we need to keep an eye on. The staying with the political landscape, though, if you look at yesterday, I'd be remiss to not mention, and this is an overused word in this time, it's unprecedented political unrest yesterday. We saw protestors storm Congress to interrupt the election certification. So that's shocking news yet the markets tended to seem unfazed. What's your reaction to that?
Emily Roland:
Yeah. The scenes that we saw yesterday out of Washington were frankly astonishing, and I think trying to connect the dots here with the investment landscape is incredibly hard to do. And I think that's what Matt and I are always trying to do. And I think this underscores the fact that the stock market is so disconnected from the economy and what's happening on the ground and in the real world. And I think that's one of the harder concepts for investors to grasp right now. And really, the most important driver of this market, as we've talked about, has been liquidity. And you saw it over the last couple of days, the markets are up risk assets are rallying, despite the fact that we have these astonishing events taking place in Washington. And the prospects for more stimulus, as a result of the Democrats winning these Georgia Senate seats, turned out to be a more important narrative for investors than the unrest in DC.
Emily Roland:
And again, it's hard to make investment conclusions here, but I think you can see it in our positioning. We're respecting this liquidity-driven rally, as Matt talked about. We want to embrace parts of the value complex to participate in it; we want to participate thoughtfully, but we also want to recognize that this type of liquidity injection that we've seen from policymakers is never going to happen again. The amount of fiscal and monetary stimulus is just unparalleled to anything we've seen in history. We might be looking at something like $10 trillion in total spending on economic stimulus from both the monetary and fiscal side. That's about 50% of GDP, and now it looks like we might get even more. And I think markets are pricing that in to a certain extent.
Emily Roland:
So while we do see a light at the end of the tunnel, where we're very encouraged by all the developments around the vaccine, and we do expect, at some point, that life will get back to normal. We're still in a tough spot here, and I think it's unlikely that we're ever going to see anything like this repeated. So it's not surprising to us that we're seeing financial assets rally on this news of more stimulus, but it's going to be hard to see it ever repeated again, which is a reason we want to kind of temper the amount of risks we're taking in our portfolio and maintain that balanced approach.
John Bryson:
Thanks, Emily. You and Matt have shared some positives and some support to the markets, and you've shared some things that we need to look out for. I would say, Matt, for you, any closing thoughts on what we haven't covered for 2021, or anything you want to emphasize that you have covered?
Matt:
Yeah. As you go back on 2020, I think it was really about some of the mega-cap stocks that did a lot of the heavy lifting and what I think you're going to see and what our research suggests that you see is, is a catch-up potential in other parts of the market. So don't abandon the value side of a portfolio on the equity, within equities; don't abandon some of that international exposure, that mid-cap exposure. All of those, in the parts of the diversified portfolio that hadn't been working as well last year, could really kick into gear for you this year.
Matt:
And even rebalancing some of those assets away from some of those great performing parts of the market last year into those that have lagged makes a lot of sense for us. So you're going to see an emphasis into value next year, for us industrials is a sector, mid caps, as a market capitalization, all look like relative opportunities. You don't want to go overboard. I think we don't want to emphasize that across the portfolio again, within fixed income, we want to maintain some of that higher-quality bias, but within equities, that shift is something that we would look to exploit here early in 2021.
John Bryson:
Great. And Emily, anything you'd leave our listeners with?
Emily:
Yeah. Please make sure to check out the Q1 version of Market Intelligence. We're really excited about some of the new content in there. And as always, we're doing our best to provide the most thoughtful and compelling illustrations that you can use to help really communicate some of these concepts to investors. So best of luck, stay safe, and stay healthy in 2021.
John Bryson:
Excellent. Emily, I want to let the audience know that I am excited to see your material. I'm excited to have you both back in 2021. I follow you both on Twitter. I encourage our audience to do the same. Emily is @emilyrroland, Matt is @matthew_miskin so please check them out. Thanks for the insight, and folks, if you want to hear more, please subscribe to the Portfolio Intelligence podcast on iTunes and certainly visit our website, jhinvestments.com, to hear all the things we have to say about what's going on in markets, macro trends, portfolio construction, and ideas for 2021. I'll echo Emily's comments. Everybody stay safe and thanks so much for listening to the show.
Disclosure:
This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA,SIPC. The views and opinions expressed in this podcast are those of the speaker, are subject to change as market and other conditions warrant and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.