Diversify into leave-your-home stocks to ride on global economic recovery

Franicevic: We say to clients that they should take their profit from large-cap tech stocks and reinvest it in small- or mid-caps or to leave-your-home stocks, where there is an opportunity for growth.

Franicevic: We say to clients that they should take their profit from large-cap tech stocks and reinvest it in small- or mid-caps or to leave-your-home stocks, where there is an opportunity for growth.

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KUALA LUMPUR (Jan 25): Investors should diversify away from their stay-at-home basket of stocks into the leave-your-home basket of stocks in 2021 as the global economy recovers from the Covid-19 pandemic, said Sumaira Franicevic, the regional head of wealth advisory at Citi.

The stay-at-home basket of stocks refers to companies benefiting from the lockdown orders implemented due to the pandemic, such as Netflix, Amazon and Zoom. On the contrary, the leave-your-home basket of stocks includes those in the tourism, airlines and retail industries.

“Citi analysts believe that the gap [between these two baskets of stocks] is going to narrow in a dramatic way once the world normalises past Covid-19,” said Franicevic, who was speaking at
The Edge-Citigold Wealth Webinar Series 2020 on Saturday (Jan 23).

“We are seeing a tactical shift. The stay-at-home [basket of stocks] has done exceptionally well. If you have been exposed to that, [you should] take the gains and get exposure to the leave-
your-home basket [of stocks] that are still undervalued and have room to grow.”

Franicevic’s session, titled “New economic cycle, new opportunities”, was attended by 819 participants online. It was the last session of the four-part webinar series and was moderated by The Edge Media Group publisher and group chief executive officer (CEO) Datuk Ho Kay Tat.

Franicevic's recommendation for the tactical shift was driven by the view valuations in the tech sector were stretched, and by her optimism about a global economic recovery this year.

“If you have exposure to tech, we are looking at not more than 20% [of your portfolio]. We say to clients that they should take their profit from large-cap tech stocks and reinvest it in small- or mid-caps or to leave-your-home stocks, where there is an opportunity for growth,” she said. But investors should not completely pull out from the stay-at-home basket, she added.

When Covid-19 hit in the first quarter of last year, almost every single asset class, apart from investment-grade bonds and gold, was in the red, Franicevic observed. A sharp recovery in
financial markets occurred in the second quarter and since then, returns have been positive.

This growth is expected to continue in 2021. Citi analysts expect global gross domestic product (GDP) to grow by 5% this year after shrinking by 3.7% last year, with inflation remaining low at 2.2%. Developed economies may grow by 4.1%, while emerging-market economies are expected to rebound by 6.2%.

The resurgence of Covid-19 will continue to pose significant headwinds to economies. Political tensions are also a potential risk, but new US President Joe Biden’s administration could add a sense of predictability to global trade relations.

“How successfully the markets roll out vaccines will also be key to recovery. [Policy] stimulus is one of the key factors in ensuring that the recovery is sustainable. We’ve also seen massive amounts of efforts [by] central banks globally to make sure that their quantitative easing policy would ensure continued growth,” she said.

What to invest in?

Citi analysts are "overweight" on equities, especially those in Europe, the UK, Southeast Asia and Latin America. A key theme for investors this year is the renewal of their portfolios in the new economic cycle by diversifying out of large-cap tech stocks and into small- and mid-cap stocks, said Franicevic.

Another key theme is exposure to long-term trends. The rise of Asia, where 1.5 billion people are expected to join the middle class in the next few years, is an example. “The next one is increasing longevity. We have an ageing population across the globe, which will drive demand for healthcare services and drive innovation,” she said.

Digital disruption is another long-term trend, she added, especially within 5G. “At the moment, there are about 250 million subscribers for 5G, and we expect that to grow to 3.6 billion subscribers by 2025,” said Franicevic.

The focus on climate change also emerged in 2020 as more investors demanded companies to consider environmental factors. Additionally, clean energy became the cheapest new source of electricity in the world last year, highlighting new energy as an attractive theme.

“The MSCI Global Alternative Energy Index outperformed global equities in 2020. We foresee that continuing as people make that transition into clean energy. At the end of the day, if your bills can be cheaper and you are also looking after the world, you will make that switch,” she said.

Meanwhile, investors who are looking for yields in this lower-for-longer environment could find opportunities in US high-yield and emerging-market debt, especially in “fallen angels” or investment-grade issuers that have been downgraded into high-yield.

“For the past 23 years, fallen angels’ returns exceeded the broader high-yield [category] by about 17 times,” she said.

The financial markets told a different story of the economy since the pandemic hit last year. The quick and smart investors could have profited from this trend.

“Stock markets around the world are at all-time highs. The reality is that although the economy is in a bad shape and [there is a] health crisis, there are opportunities for savvy investors to make money,” said Ho in his opening statement.

Lam Jian Wyn