January 2021
Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer
Marchello Holditch, CFA, CAIA, Vice-President and Portfolio Manager
CI GAM | Multi-Asset Management

Without a doubt, 2020 was a “loss” year. Individually, we lost
the ability to live our normal way of life. Globally, currencies
lost their purchasing power as central banks added US$9
trillion to the system (leading to price increases in almost
everything, including stocks and properties), and over 1.8
million people lost their lives due to COVID-19.
It is fair to say that the current scenario of higher asset prices
during a recession is not normal. The natural conclusion is
that we are in a bubble, and we do not disagree. However, it
is not a typical bubble where the issue is price speculation in
a single asset. Rather, this bubble formed due to increased
central bank balance sheets (or money supply). From 2011
to 2020, central banks printed approximately US$17 trillion,
and half of that is attributed to 2020 alone. Imagine a
transaction where someone is selling an asset and getting
currency in return. The seller then demands more units of
currency in exchange as the currency supply has dramatically
increased, even though the asset supply has not changed and
demand may have slipped.

Expanding for longer?
The question is, when will this bubble burst? In other words,
when will central banks shrink their balance sheets?
Expanding is usually an easier decision than shrinking, as
decreasing money supply has the opposite effect of lower
asset prices, which is typically perceived as negative. Unless
we have a very strong economy to offset, then this is usually
the last thing on policymakers’ minds. Using history as a
guide, central bank balance sheets last peaked at US$16.0
trillion in 2018. With effort, mainly by the U.S. Federal
Reserve, that balance fell to US$15.2 trillion in 2019. You may
notice the reaction to reduce spending was extremely slow
compared to the growth since 2008.

With interest rates already at or close to zero, central
banks have aggressively used money supply as a tool to
combat the market disruption brought on by the
pandemic, similar to the Global Financial Crisis of 2008-2009.
Policymakers seem very comfortable leaving the
bubble as is, and most of us are not complaining as higher
prices is not a problem for investors. However, this
doesn’t mean economies are growing rapidly. Rather, the
wealth gap is widening in favour of those who own
For example, inflation – as tracked by the Consumer Price
Index (CPI), which measures changes in consumer prices
– has been mild over the last decade. However, we
believe the basket of data used to calculate CPI does not
accurately capture the inflation of assets such as real
estate. According to CPI, prices have grown at an average
annual rate below 2% over the last 10 years, but Toronto
real estate has gone up by more than 8% per year over
the same period. Potential homeowners have effectively
been priced out of the market because they do not own
inflated assets to sell and they cannot save enough to
keep up with the rapid price increases of real estate. As a
result, asset owners become wealthier, while those with
little net worth fall further behind. That being said, we
believe central banks are still likely to focus on boosting
prices for the “majority” of the population. This means,
the large increase in money supply and renewed
currency debasement could continue for years if not
decades to come. While unfair, it is not up to us to

What to do in unusual market conditions?
While central banks are aggressively printing money, we
believe being defensive and “hiding cash under the
mattress” is a losing strategy. Over the last few months,
our goal has been to protect our investors’ purchasing
power in these very unusual market conditions, and we
have actively deployed cash and trimmed government
bond holdings for larger equity exposure. As always, we
continue to monitor market conditions and may from
time to time cut back on our equity exposure to manage
downside volatility.

Combined top 15 equity holdings as of October 31, 2020 of the Evolution 40i60e Standard portfolio with Alpha-style exposure:

  1. Microsoft Corp
  2. Amazon.com, Inc
  3. Alphabet Inc.
  4. Brookfield Asset Management Inc.
  5. Royal Bank of Canada
  6. Alimentation Couche-Tard Inc.
  7. CGI Inc
  8. Booking Holdings Inc.
  9. Visa Inc
  10. Apple Inc.
  11. Empire Company Ltd.
  12. Fortis Inc
  13. Canadian Tire Corporation Ltd.
  14. Constellation Software Inc
  15. Franco-Nevada Corp.

Source: Bloomberg Finance L.P. and CI GAM | Multi-Asset Management as at January 11, 2021.

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