Market Insights

While cyclical-value stocks are boasting superior earnings per share growth, Scotiabank economists still think the recovery isn’t fully priced into these stocks, with what could be the strongest pace of GDP expansion in decades still to come. Broad improvement in the market’s risk mood saw the greenback head into April on the defensive, reversing a fraction of its March gains as US bond yields levelled off from a steady climb that began in January. The loonie also slipped as the rapid spread of COVID variants forced another round of lockdowns across much of Canada. Meanwhile, China’s economic outperformance appears to be unaffected by its strained diplomatic relations with much of the world, although the economy could be slowed as the effect of stimulus measures fades.

Scotiabank analysts and economists weigh in on what the pandemic means for equities, foreign exchange and global trade.


  • Recovery isn’t fully priced into cyclical-value stocks yet. Some investors and market commentators recently suggested that brightening macro prospects were already priced into cyclical-value stocks. In short, we disagree. We think cyclical-value equities are still best positioned to benefit from what could be the strongest pace of Gross Domestic Product expansion in decades. Focusing on their recent outperformance is missing the forest for the trees.
  • Focusing on the trees. Granted, the re-opening trade has performed strongly since the US election in early November. Look no further than the steep rise in US small cap stocks to get a sense of the rally. The Russell 2000 gained 53% between October and March. By early February, the index was hovering 40% above its 200-d line, a record high since the index’s inception in 1978.
  • The big picture. We believe taking a step back provides a completely different perspective on the situation. For the most part, those stocks massively underperformed for years and their long-term relative performance has dropped to levels prone to sharp, and sustained, mean-reversion. In some instances, their underperformance has reached two standard deviations below the historical average going back to the 1970s.
  • Relative EPS growth is compelling. Moreover, cyclical-value stocks are now beating growth stocks at their own game, boasting superior earnings per share growth. Earnings revisions ratios also favour cyclical-value areas of the market.
  • Rising bond yields and sector correlation. Furthermore, we continue to see upside in bond yields coming from a firming pace of activity and rising inflation risks. Our fair value (FV) model pegs the FV of US 10s near 2.3%. The relative performance of US cyclical sectors is highly correlated with US 10-year bond yields.

—  Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy; and Simone Arel, Research Associate, Global Equity Research

Foreign Exchange

  • The USD has begun the month on the defensive, reversing a small fraction of its solid gains through March as US yields normalize after climbing steadily since the start of the year. Losses for the dollar have also been supported by a broad improvement in the market’s risk mood given the US’s fast pace of vaccinations alongside additional public spending (and more in the pipeline) that point to a strong US economic recovery upon reopening. The US labour market added more than 900,000 jobs in March, greatly exceeding estimates. Fed officials have, nevertheless, expressed their firm commitment to maintain ultra accommodative policy until its enhanced employment and inflation goals are reached.
  • In Canada, the spread of more contagious (and riskier) coronavirus variants has led to a steep pace of infection in the country’s major provinces. The surge has motivated the return of strict lockdowns, which combined with uncertain crude oil markets given lockdowns in Europe as well, have pulled the CAD to the bottom of the majors table through April. The CAD has weakened 0.5% month-to-date after it led most currencies last month — and still tracking a modest gain for the year. Odds remain that the Bank of Canada will reduce its quantitative easing pace at its April 21 meeting, and that should keep the CAD supported, but the bank is likely to strike a cautious tone given the lockdown-induced economic slump. A clear reduction in cases and a fast rollout of vaccines will be paramount to resume the CAD’s trajectory toward our year-end target of 1.23.

—  Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist

Ripple Effect

  • Political developments in Hong Kong and human rights violations have strained China’s diplomatic relations with various countries globally, but they are not expected to significantly hinder China’s continued economic outperformance, the government’s goal of further trade and investment integration, and the resultant increase in China’s global economic might. While there appears to be bipartisan consensus in the US Congress on being tough on China, the Biden Administration is expected to restore more traditional forms of diplomacy with China, preventing the relationship from deteriorating further.
  • China’s economy continues to recover from the COVID-19 crisis, assisted by supportive fiscal and monetary policies and effective containment of the virus. Solid activity in both the industrial and services sectors has led to a 2.3% expansion in GDP growth, making China an exception among the world’s major economies.
    However, the move by China’s central bank (PBoC) to direct banks to increase lending to affected industries and extend loan maturities last year, may be cause for concern regarding its loan quality, now that the worst of the economic crisis over. We think financial instability is set to increase particularly in 2022 and beyond, as the impact of stimulus measures fades and the country’s economic growth steadies at a lower level.
  • Watch for the Regional Comprehensive Economic Partnership (RCEP) — which will likely be ratified by the member countries over the course of 2021 — to increase China’s influence in regional trade and geopolitical affairs in the coming years, and shift the country’s focus to higher-end manufacturing. The pact between China, Japan, South Korea, Australia, New Zealand, and the 10 ASEAN countries is the largest free trade agreement in the world, encompassing about 30% of the world’s GDP.

— Tuuli McCully, Head of Asia-Pacific Economics