This article first appeared in The Edge Malaysia Weekly on February 1, 2021 - February 7, 2021

THE global economy is expected to recover this year, and investors should take advantage of this trend by diversifying into Covid-19 cyclicals or the leave-your-home basket of stocks, according to Sumaira Franicevic, regional head of wealth advisory at Citi.

Covid-19 cyclicals or the leave-your-home basket of stocks refer to companies that have suffered during the pandemic, such as banks, hotels, restaurants and retail real estate investment trusts (REITs). On the other hand, Covid-19 defensives or the stay-at-home basket of stocks include companies that have benefited from the work-from-home trend and other Covid-related disruptions.

“The global economy is expected to recover a lot more quickly and robustly from the Covid-19 shock, compared with a typical large downturn like the 2008 global financial crisis. Covid-19 is an external stress put on the market. When you have this sort of event, you will have a fast recovery when the external event is handled,” said Franicevic at The Edge-Citigold Wealth Webinar Series 2020 on Jan 23.

Her session, titled “New economic cycle, new opportunities”, was attended by 819 participants online. It was the last session of the four-part webinar series and was moderated by The Edge Media Group publisher and group CEO Datuk Ho Kay Tat.

“While the economy was in a tailspin [last year], the financial markets told a different story … The reality is, although the economy is in bad shape and there is a health crisis, there are opportunities for savvy investors to make money,” Ho said in his opening speech.

In the first quarter of 2020, most asset classes were in the red. But in the subsequent quarter, global financial markets recorded a sharp recovery and are expected to continue rising this year, Franicevic observed.

Global GDP is expected to grow 5% this year after shrinking 3.7% last year, with inflation remaining low at 2.2%, according to Citi analysts. Developed economies are forecast to grow 4.1% while emerging markets are expected to rebound by 6.2%.

The optimism for an economic recovery and view that the tech sector’s valuations are stretched inform Franicevic’s recommendation that investors should diversify out of stay-at-home stocks.

“We are seeing a tactical shift. The stay-at-home [basket of stocks] have done exceptionally well. If you have been exposed to that, [we advise you to] take the gains and get exposure to the leave-your-home basket [of stocks], which are still undervalued and have room to grow,” she said.

“If you have exposure to tech, we are looking at not more than 20% [of your portfolio]. We say to clients that they should take profit from the large-cap tech stocks and reinvest it in small or mid-caps, or leave-your-home stocks, where there are opportunities for growth.”

However, headwinds will still remain due to the resurgence of Covid-19 infections in various countries, warned Franicevic.

How successful the rollout of the vaccine programmes by various governments turn out to be will be the key to recovery, she added. This is necessary for the global economy to achieve its full potential. Until the vaccines have been fully rolled out, investors can expect volatility in the near term.

Adding to that, stimulus packages will be crucial to ensure sustained recovery. Already, massive amounts of fiscal stimulus and quantitative easing programmes have been introduced across the globe.

“We’ve seen central banks slash interest rates across the board. The US Federal Reserve cut its policy rates to the zero lower bound in 2020 and it is expected to maintain this lower-for-longer interest rate environment well into 2023,” said Franicevic.

Political tensions are another risk that investors should be mindful of. However, the new US administration led by President Joe Biden signals more stable trade relations between the US and its partners, she observed.

Citi analysts are overweight on equities, especially those in Europe, the UK, Southeast Asia and Latin America. Franicevic also presented four investment themes for 2021.

The first is the renewal of investors’ portfolios in the new economy cycle by diversifying away from large-cap tech stocks into small- and mid-cap stocks and select cyclical sectors. Additionally, investors should be exposed to long-term trends such as the rise of Asia, increasing longevity and digital disruption.

“We are expecting 1.5 billion people in Asia to join the middle class in the next few years. [This is] a huge amount of people having the financial confidence and ability to drive consumption and demand,” said Franicevic.

Meanwhile, the sharp rebound in global trade is expected to benefit Southeast Asia, as will the implementation of the Regional Comprehensive Economic Partnership, she added.

The global ageing population is expected to drive demand for healthcare services and innovation while the developments in 5G will accelerate digital disruption.

“At the moment, there are about 250 million subscribers for 5G and we are expecting that to grow to 3.6 billion subscribers by 2025,” said Franicevic.

In this age of hyperconnectivity, sectors such as cybersecurity, fintech, artificial intelligence, data storage and the Internet of Things are preferred, she added.

Another growing trend in this theme is new energy, as clean energy became the cheapest new source of electricity in the world last year.

“The MSCI Global Alternative Energy Index outperformed global equities in 2020. We foresee that continuing as people make that transition to clean energy. At the end of the day, if your bills can be cheaper and you are also looking after the world, you will make that switch,” said Franicevic.

The second theme is the power of investing with purpose, which refers to the increasing popularity of environmental, social and governance (ESG) investing with a focus on mitigating climate change.

“2020 was probably the pivotal year when the world finally decided to reverse climate change. It has been a year of horror, not just because of Covid-19 but also the impact of climate change in terms of fires and storms ... I think we will see [countries realising] they have to do something. China’s net zero pledge is huge in itself since it is one of the largest contributors of greenhouse gas. US President Joe Biden is expected to make going green a major priority,” Franicevic pointed out.

The third theme addresses investors’ hunt for yield in the lower-for-longer environment. She said investors could achieve this by looking at US high-yield and emerging-market debt, dividend-yielding equities and REITs.

In particular, “fallen angels”, which are investment-grade issuers that have been downgraded to high yield, which boasted returns that exceeded the broader high-yield category by about 17 times for the past 23 years.

Lastly, investors should position for extended US dollar weakness and a stronger renminbi. The yield differentials may favour the euro, pound sterling and gold, while currencies such as the Australian and New Zealand dollars may benefit from the recovery in China, said Franicevic.

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