Ken Peng, Citi Private Bank
Many industries and companies serving “stay-at-home” business and consumer activities prospered during the lockdowns last year, while firms operating in sectors dependent on social behaviour struggled or closed.
Investors quickly identified the trend, and as Citi PB data shows, stock price returns for baskets of stocks in each category showed a wide divergence, with digital technology and e-commerce sectors driving market indices higher, even as cyclical sectors weakened.
However, a return to normal economic and social activities should boost revenues and profits among last year’s unfashionable sectors, and lift lagging share prices, according to Ken Peng, head of Asia investment strategy at Citi PB.
“Investors should exploit mean reversion,” he told a media briefing of the bank’s 2021 outlook this week.
Attractive industries include energy, financials, and travel & leisure, he argued, as global GDP growth recovers to at least 4% next year.
Among countries and regions, Peng believes most value can be found in Latin America, where stock markets have fallen severely since November, as well as Southeast Asia, Hong Kong, and the UK, where market price-to-book ratios are trading at below their 10-year averages.
“People should stay invested, but adapt their portfolio for the new economic cycle,” said Peng.
His view chines with strategists such as Victoria Mio, director for Asian Equities at Fidelity, who believes that the prospect of an effective Covid-19 vaccine being introduced this year should boost cyclical industries that have suffered most during lockdowns, while also accelerating structural trends.
Other strategists, such as Kevin Anderson at State Street Global Advisors, are reluctant to make the shift, preferring growth and quality names to value stocks due to uncertainty about government fiscal stimulus and persistent geopolitical risk.
However, continued low interest rates support higher valuations for equities and real assets, while cash and most developed market investment grade fixed income are losing to inflation, said Peng.
“Investors should add exposure to beaten down assets that could recover with the reopening of economies, and seek dividend income from recovery stocks,” he advised.
These trends are digitisation, longevity, new energy and Asian development.
Digitisation includes new technology infrastructure upgrades (especially 5G), satellite internet, autonomous vehicles, telemedicine and “smart cities”.
Increased population longevity provides “opportunities across healthcare infrastructure and pandemic preparedness, personalised medicine and cancer treatment, and remote monitoring device,” said Peng.
He identifies three complementary energy shifts consistent with “green” imperatives. These are alternative sources of energy, electrification and the enablers of smart cities, which are being boosted by green fiscal support in the US, Europe and China.
“The winners from the transition will be new energy consumers, electric carmakers, battery makers, infrastructure suppliers and installers, and smart appliance makers; the losers will be traditional fossil fuel industries,” said Peng.
Finally, Asia’s rise will continue, he said.
The region (ex-Japan) accounts for 27% of global consumption and is increasing, there will be 1.5 billion more people entering the middle class in the coming decade and 100 more cities with populations of over one million, and there is fast development and adoption of technologies, according to Citi PB’s assessment.
“Although US-China tensions are likely to continue, the Regional Comprehensive Economic Partnership [signed in November 2020] created the largest free trade area in the world, and countries in Southeast Asia are growing both suppliers and consumers,” said Peng.