Investors are warned of a possible sector rotation when the Covid-19 situation improves globally, according to Tai Hui, Asia chief market strategist at JP Morgan Asset Management.
Currently, he recommends being positioned in sectors that are resilient to the pandemic, such as technology, healthcare and telecommunications.
However, when vaccines are developed and distributed, he believes that economic recovery will be more “comprehensive”, which will result into a broad rotation to some lagging sectors, such as materials, industrials, energy and financials.
“The ability to be nimble between the pandemic resilience and comprehensive growth sectors is an important investment strategy. But timing can be tricky because value rallies come very quickly,” Hui said in a recent webinar.
However, that does not mean investors should completely abandon technology when the global economy recovers.
“This is because many of these tech companies are still expected to deliver long-term value to shareholders. While tech’s price momentum has been formidable in the past 6 months, it is one of the few sectors that is expected to deliver positive earnings growth in 2020 and 2021,” he said.
Instead, he recommends a more diversified portfolio.
“A more diversified equity portfolio doesn’t necessarily mean selling down tech stocks. This diversification can be achieved by making idle cash work harder and investing in value stocks.”
On the fixed income front, Hui is positive on emerging market bonds.
“Emerging market debt is immediately more appealing than developed market bonds as real yields – yield adjusted for inflation – are positive. A weaker US dollar environment should also help to promote more inflows into EM assets,” he said.
He also likes US high yield, as valuations continue to be attractive.
Hui acknowledged that US high yield defaults have picked up. However, the defaults have been concentrated in sectors that were negatively impacted by the pandemic, such as the retail sector.
“There are still plenty of sectors with very low default rates, such as the industrials sector,” he said.