The world has been battling against the Covid-19 pandemic for 1½ years and this period has been called one of the most challenging periods in modern history. But thanks to governments’ initiatives to fight against this pandemic, Citi Global Wealth is finally seeing the light at the end of this tunnel.
In its latest report “Mid-Year Outlook 2021 – Travelling to post-Covid world: New portfolios for a new economy”, the private bank sees a recovery from the pandemic. “We believe the world is heading for a full recovery from Covid-19. Thanks to vaccine rollouts and unprecedented fiscal and monetary stimulus, most economies are reopening, albeit unevenly,” says Jim O’Donnell, head of Citi Global Wealth. For example, pent-up demand for travelling and spending will bode well for a rapid recovery and expansion that could last several years.
However, some things have been changed forever and investors’ portfolios should be adjusted accordingly. “Covid-19 has catalysed important changes to the global economy that need to be reflected in your portfolio,” says O’Donnell.
For much of 2020, Citi has made the case for investing in the assets hit hardest by the pandemic. Many of these have since rebounded powerfully. Nevertheless, Citi still sees opportunities to get exposure to the recovery, especially in nonUS markets, although the breadth and scope of their potential appreciation is no longer as great. Certain real estate assets and select national markets, such as Brazil and the UK, are among the possibilities identified.
In the near term, Citi continues to see a narrowing set of opportunities in “exploiting mean reversion” that focuses on investing in areas hardest hit by the recession and riding the recovery.
Additionally, Citi’s eyes are also on the many governments that intend to make greater investment in infrastructure reshaping their own economies.
“Long before the arrival of effective vaccines, we made the case for a full recovery in the global economy. We advised clients to remain invested and to add to their equity allocations starting a year ago,” said Ken Peng, Asia Pacific head of investment strategy at Citi Private Bank. “Now, we look to exploit the trends that will reshape the world after Covid-19. We caution, however, that many of the best near-term investments aren’t necessarily those we envisage leading markets higher longer-term. We want client portfolios to evolve and reflect the transformational opportunities to come.”
Mean reversion
This is the time for recovery, according to Citi, which believes that the pandemic will end in the next 6–12 months. But, the way Peng sees it, this recovery will be rather sporadic and dependent on how each government controls the virus outbreak.
To that end, Citi has indicated some near-term opportunities that investors can focus on for the rest of 2021. Citi believes that mean reversion is one way of exploiting the pandemic’s distortions towards the global economy.
Exploiting mean reversion involves investing in assets whose prices were hit hardest by Covid-19, with the aim of riding the rebound from depressed levels. This theme remains relevant as of early June 2021. However, there are now fewer such opportunities and less upside potential, Citi warns. For example, there is no longer scope to earn extraordinary returns in cyclical manufacturing firms and consumer goods producers, as these have already snapped back.
Growth stocks, such as those in the healthcare, glove and supermarket industry, may pause after their powerful 2020 performance. However, Citi believes that there are still Covid-cyclical sectors that will recover sharply only when the full global economy reopens in 2022.
These include travel, hospitality, certain real estate sectors and, more broadly, services. Even these sectors have already staged a significant recovery. The same is true of certain other sectors and regional markets that are lagging in their recoveries from the pandemic.
“The recoveries in retail, airlines and hotels in Asia have barely begun and there are some firms that are lagging. I think when the recovery reaches this region, we should be looking at these [sectors] even though they have not been invested darlings of the past,” says Peng.
Mean reversion is also a geographic phenomenon. For one, while the US is currently priced fully, China has already seen declines from peak equity prices. “We think China could perform well after its markets finish consolidating. The likes of Brazil and the UK have not yet seen their recoveries take flight. And Southeast Asia also looks anaemic, even though its demographics are strong. The region stands to be the biggest beneficiary of US-China polarisation,” according to the outlook.
Once the pandemic is declared over, Citi believes a strong global economic recovery will ensue, such that the world will see more traditional expansions and mid-cycle conditions, somewhat resembling some level of normalcy or pre-Covid times in both business and personal lives. During the final stages of mean reversion, areas that were big winners during the pandemic will pause or suffer real downturns.
Importantly, the endpoint for mean reversion is unlikely to see particular asset valuations simply restored to their pre-Covid levels. The relative value of many assets will have shifted in a way that is not entirely reversed with the end of the pandemic. The same technologies that helped the world exist under pandemic restrictions will have a significant and lasting impact on demand in the economy. This does not mean continued isolated living or working entirely remotely. Instead, it will involve accelerated adoption of certain technologies whose transformative effects will long outlast the reopening of the world economy.
“We have begun to prepare for this. While optimistic about the economy, we are not complacent. The pricing of developed markets assumes a fair amount of good news. As in any expansion, we know things could go wrong,” says Citi.
New normal
In many ways, the pandemic has introduced a new set of realities. One of these is in the state of global relationships. The steady rise of China and the tumultuous political climate in the US reflect the economic tussle between these two superpowers that will persist for decades to come, despite a new president in the US.
The US and its Western allies see threats from China. These include old ones such as the lack of intellectual property protection and new ones including real competition in new industries, such as electric vehicles, where China’s intent is to go head-to-head with leading manufacturers worldwide.
This then points to the emergence of a “G2 world”, in which a single global economy bifurcates. This separation will not occur evenly or everywhere. However, it does mean that in strategic industries such as semiconductors, two distinct markets are likely to evolve. This will also apply to capital markets themselves. China’s currency could push to earn a reserve status and thus compete against the US in executing financial and trading activities.
A second reality that Citi has indicated is the devolving relationship between governments and their constituents. The pandemic itself has unfortunately worsened growing divides, as governments using the crisis to augment their power, possibly triggering stronger push-backs.
Polarisation in politics is bound to affect the global economy. Apart from tariffs, trade distortions and cyberattacks, for investment portfolios, Citi observes that it is possible to make the argument that the “G2” bifurcation and the growing discord in some Western economies will create potential for diversifying portfolios. That represents the best-case scenario, in which increased competition, the rise of new capital markets and the speed of technological advancement combine to birth fresh investment opportunities that rise and fall in less correlated ways.
“However, there is also a potential downside, where disjoints in markets follow breaks in geopolitical relationships. The role of the trusted partner has therefore become more important, as it is not possible for one individual or one family office to follow all of these events and act upon their implications alone,” says Citi.
Unstoppable trends
In the longer term, Citi has identified what it calls “unstoppable” trends that were prevalent before the pandemic and have since become even more relevant for investors.
It highlights the biotechnology sector that will continue to power rapid advances in treatments for cancer, diabetes and many major types of illness, while robotics, telehealth and digital medicine will allow medical personnel to deliver treatments from distant locations. As competition in this space is rampant, with critical implications for data transmission, cybersecurity will subsequently advance to protect businesses and governments.
As daily chores and activities are being transformed with digitalisation, Citi sees digitalisation as the driver for the next generation of commerce. Already, e-commerce marketplaces, online gaming, content streaming platforms and e-sports competitions are a big thing now and these trends will likely continue and accelerate.
To that end, businesses will start to ramp up digitalisation efforts and rely more on technology. TCiti expects that factories will become fully flexible, able to respond to changes in consumer demand more quickly, while warehouses will adapt to “in-an-hour” delivery requirements. Workplace offices will become flex-spaces and working from home will become working from anywhere.
These and other developments will then have important implications for the need for and use of buildings and other properties.
The industrial sector continues to benefit from the surge in e-commerce activities. This is fostering billions of dollars in new industrial real-estate development. Several niche sectors of the market are also seeing strong new demand from institutional investors in assets such as self-storage, life sciences, single-family rentals, data centres, and other digital infrastructure, a hybrid of real estate and infrastructure.
“We favour exposure to digital infrastructure investments that have benefited from recent tailwinds. Other trends related to digitisation — such as cloud computing, mobility, big data, 5G rollout — were strong entering 2020. The Covid-19 pandemic has increased our reliance on and accelerated the need for digital infrastructure,” says Citi, while noting that demand for smart devices has grown tremendously, hence increasing the demand for the ground-up development of new data centres and cell towers globally.
Even before the pandemic, FinTech has steadily been gaining popularity worldwide. And with rapid advancement in this space, investors should relook the way they manage their assets.
“Portfolios will benefit from improved implementation of strategies like the ones reviewed herein. Digital currencies will lead us to digital assets. Even the way we obtain advice and engage with advisors will be enhanced. Every single one of these is investable, enabling us to build portfolios that are tilted toward the future,” says Citi.
Photo: Bloomberg
