Capturing growth on recovery

Many investors would agree that 2020 has been an extraordinary year in many aspects. The global pandemic has forced many countries to introduce large-scale fiscal and monetary stimulus programmes in order to combat recession. Such support has helped markets rebound strongly in both Q2 and Q3 2020. In the last quarter of the year, however, we saw the return of volatility in equity markets against the uncertainties around the US presidential election as well as rising COVID-19 cases in many countries. One positive news was the development of COVID-19 vaccines, and medical advances in the treatment of those infected by the virus. This has led the equity markets to recoup previous losses and even reach new highs. As we move into 2021, should investors expect a roller coaster ride? And from where do we think investment opportunities arise?

Our cyclical models have moved into the recovery stage, led by the growth in both developed and emerging markets. This means that we continue to be positive on equities. Our view is that despite the elevated valuation relative to historical average, the reduction in uncertainty following the US election, an attractive earnings yield gap and the ongoing cyclical recovery could continue to lift equities higher.

Our preference for the technology sector has worked well last year given the structural change of social behaviour, which provides ongoing support of the technology cycle. However, as investors are well aware, valuation has become even more extended in this part of the market. As such, recently we have looked into other areas in order to diversify our exposure to quality and growth. One of the areas that we are constructive on is small cap stocks, which is able to benefit from the economic recovery with relatively attractive valuation. It is also a good diversifier to the existing growth-biased portfolio where small cap stocks tend to favour industrials, real estate and healthcare, in which these sectors are more sensitive to early economic recovery.

Whilst we are positive on the global economic recovery, we are always looking for ways to diversify. Currently, we are still maintaining our allocation to government bonds. We believe that the upside to bonds is limited but central banks will be able to keep a low volatility regime in the rates markets. Duration also remains useful in a portfolio context given our positive view on equities. In addition to government bonds, we believe that currency can also provide diversification and “cushion” to portfolios. In particular, we continue to maintain some exposure to the US Dollar given its hedging characteristics during volatile market environments.

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