This article first appeared in Wealth, The Edge Malaysia Weekly on December 28, 2020 - January 3, 2021

Shaking off a dismal 2020, most fund managers are looking towards the new year with optimism, expecting 2021 to be a year of recovery for both the global economy and financial markets.

Aggressive fiscal and monetary policies are expected to continue next year, especially in Europe and the US, and it is against this backdrop that market players see pockets of investment opportunities in global markets.

However, opinions diverge when it comes to the rate of economic recovery, particularly how it will affect value and blue-chip stocks, whose performance has been subdued during the pandemic. Some experts believe the recovery will be strong in 2021, while others are bracing for a K-shaped recovery (with different sectors of the economy recovering at different rates, times and magnitudes in the wake of a recession).

Ng Chze How, head of retail wealth and distribution at Manulife Investment Management (M) Bhd, opines that investment opportunities can be found in value stocks, which have underperformed during the pandemic, and also growth stocks, which have flourished during this period. “In this new normal, accumulating assets via a barbell investment strategy [which seeks to strike a balance between risk and reward by investing in two extremes — high-risk and no-risk assets] can be quite useful.

“At first, we saw a divergence of performance [between growth and value stocks] in the stock market. However, we have recently seen a convergence of growth.

“Sectoral funds such as technology, healthcare and glove stocks have performed well during the pandemic. But now, the laggards — the blue-chip stocks and value stocks — are catching up as well.”

Although the sentiment towards 2021 is bullish, short-term investment outcomes may still be uncertain. Chze How  lists several overarching trends and themes that will influence an investor’s long-term holdings, such as an ageing population (demographic change) and the deglobalisation of supply chains.

“The size of the ageing population is growing all around the world, and they need drugs, treatment and healthcare. So personally, I think healthcare is a long-term growth investment, but with defensive characteristics,” he says.

“Deglobalisation will also be an important theme in 2021. What started out as trade tensions between the US and China resulted in the Regional Comprehensive Economic Partnership (RCEP). Countries are trying to be self-reliant on supplies and become less reliant on other countries or risk factors outside of their control.”

David Ng, deputy managing director and chief investment officer at Affin Hwang Asset Management Bhd, is also of the view that 2021 will be a recovery year. According to him, current estimates suggest that global GDP is expected to contract by around 5% in 2020. However, it is expected to rebound by 5.4% in 2021 as growth returns along with the reopening of economies.

“So far, economic growth is on the upside, and there are positive revisions to corporate earnings, which will be supportive of risk assets. Effective vaccines will be key in providing a boost for markets. However, because the vaccine will take time to produce, the recovery will be prolonged into 2022 and 2023. Hence, this will be a multi-year recovery,” says David.

“With 2021 being a recovery year, the key investment themes will be the normalisation and recovery plays, including banks, insurers, materials, consumer discretionary, tourism and hospitality. Stocks that were trading at low multiples are now coming back into favour, as we see a rotation to value stocks.”

He says Affin Hwang will adopt a barbell approach in its portfolio positioning, leaning towards a basket of secular-growth counters with multi-year prospects that will continue to grow beyond the development of the vaccine. This is because, despite the market shift towards value stocks, it does not signal the end of technology and growth stocks. He reckons that although valuations are expensive, technology is also one of the sectors that have the ability to grow profits consistently and exhibit secular growth — a characteristic not many sectors can claim.

Although stocks that have underperformed during the pandemic have rebounded sharply following the positive vaccine news, Schroder’s head of Asia ex-Japan equity investments Toby Hudson holds the contrarian view that such a trend will not last. He believes markets are overly optimistic about the vaccine announcements, and that the long-term upswing in the markets will prove to be lacklustre compared with the initial sharp snapback witnessed near the end of this year.

“If widespread inoculation were to happen rapidly over the next six to nine months, global economic activities may quickly return to normal by late 2021. This paints a positive picture for the lockdown losers and cyclical sectors to continue their recent vaccine-led run of outperformance,” says Hudson.

“However, the reality is that many countries still face a very difficult winter, with high levels of Covid-19 infections and continued lockdowns, which will depress demand. Large-scale government support programmes that have propped up consumption in many countries in 2020 will also be rolled out next year.

“The real improvements in mobility in most economies may not be seen for 9 to 12 months yet. And that assumes there are no hiccups along the way in getting new vaccines rapidly rolled out.”

According to Hudson, the sectors to look out for in 2021 are e-commerce and technology. He says e-commerce penetration is unlikely to recede as consumers are now hooked on the added convenience of such services — the quality and scope of which will continue to improve.

The shift towards 5G telecommunications will also continue in 2021, with chipmakers likely to benefit from the rising prices of memory storage after the downturn in 2019 and 2020. With the rapid digitalisation of many areas of the economy, demand for processing power, bandwidth and storage is likely to continue to increase, Hudson observes.

Jeffrey Halley, senior market analyst at US-based foreign exchange company Oanda, believes 2021 will see a K-shaped recovery, mostly propelled by a desperate search for returns globally. “With bond yields stuck at near 0% and central banks backstopping the credit markets and keeping yields artificially low, asset price inflation will continue to increase,” he says.

“Until signs of change are seen from the US Federal Reserve and European Central Bank, the best way to invest is to long equities, real estate, precious metals and commodities.”

He notes that industries such as tourism and airlines will remain in a challenging environment until mid-2021. This is because the vaccines are not a direct and immediate solution to the industry woes and balance sheets, which are laden with debt. He expects these industries to show below-average returns for years to come.

However, Halley thinks the resource sector, such as mining and energy stocks, is likely to be a key beneficiary of the cyclical upturn. Other industries that are expected to outperform in 2021 are high-quality banking stocks, and industrial and business park real estate investment trusts (REITs).

He also foresees gains from technology stocks easing next year, owing to big tech companies facing antitrust issues that will escalate in mid-2021. However, he still believes technology heavyweights will continue to lead the future economy and should serve as the bedrock of any investor’s portfolio.

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