2021 3rd Quarter Market Outlook

25 June 2021 by National Bank
Q3 market outlook

An encouraging economic environment provides potential investment opportunities, notes the portfolio manager of the NBI Corporate Bond Private Portfolio (1), Fiera Capital Corporation. Read the comments of the portfolio manager of this fund, which is included in many NBI Private Wealth Management profiles.

Markets in brief

The current market environment is positive for credit:

  • Vaccinations are well underway
  • Reopening is starting in North America
  • Pent-up demand is strong
  • Savings are high

As a result, economic growth seems set to expand considerably.

Central banks may be well over a year away from starting to hike interest rates from very low levels. We expect them to go slowly, even when they start removing stimulus. Fiscal spending is also supportive of economic growth. Inflation has been on the rise, but we believe a lot of it is transitory and will settle back down as the economy reopens and supply chain issues are ironed out.


Many bond issuers’ credit spreads have returned to pre-COVID-19 levels, but we still view them as fair value in the current environment. However, some sectors have not returned to these levels and we believe there are investment opportunities. These would include names in the Energy (pipeline), Real Estate (office space, retail, retirement homes) and Transportation (airports) sectors.

Recently there have been some potential acquisition announcements where there could be opportunities with value-added potential. These include Rogers buying Shaw and Canadian National Railway (CNR) buying Kansas City Southern. Both companies will initially leverage their balance sheets, which has caused spreads to widen. We are underweight both names and could potentially add to our positions if we believe management will be successful in paying down debt over time. That said, we would not be surprised if there were other mergers and acquisitions announced.

Chart showing the diverging credit spreads in the telecommunications sector

Outlook and challenges

A lot of good news is already priced into credit spreads. We could have another setback regarding reopenings due to COVID-19 variants. Growth could come in much stronger than expected, bringing the U.S. Federal Reserve (“Fed”) and the Bank of Canada into the picture sooner, which could put some pressure on credit spreads.

If inflation stays high and is not transitory, the markets could fear an aggressive Fed and again could cause credit to underperform. Over the near to medium term credit markets will have to wrestle between growth on one hand and the eventual tapering and rate hikes, on the other.

Fund strategy

We are currently maintaining a slightly shorter duration compared to the benchmark index, at -0.07 years. We are slightly long duration in the Communication Services sector, with an overweight in telecommunications (Telus), and an underweight to media (Shaw).

We are overall short duration within the Energy space, although slightly overweight in pipelines (Enbridge and Pembina), neutral on energy producers, and are underweight in energy generation (Ontario Power Generation).

We are slightly short duration in Financials, with an overweight in insurance (Manulife) and financial services (Wells Fargo), and are underweight in autos (Honda) and banks (TD).

Within the Industrial sector where we are generally short duration, we favour Consumer Staples sector investments such as Loblaws and tend to shy away from names in the Transportation industry like CNR, for example. Finally, we are neutral on Real Estate, and within the sector we tend to be overweight in REITs (Real Estate Investment Trusts) such as Smart and underweight in non-REIT such as the OMERS pension plan.

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1 The information and opinions herein are provided for information purposes only and are subject to change. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

Views expressed regarding a particular company, security, industry, market sector, future events (such as market and economic conditions), company or security performance, upcoming product offerings or other projections are the views of only Fiera Capital Corporation, as of the time expressed and do not necessarily represent the views of National Bank of Canada and its subsidiaries (the “Bank”). Any such views are subject to change at any time based upon markets and other conditions, which could cause actual results to differ materially from what Fiera Capital Corporation presently anticipate(s) or project(s). The Bank disclaims any responsibility to update such views. These views are not a recommendation to buy or sell and may not be relied on as investment advice.

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