Looking beyond Covid-19


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CYCLICAL plays may still appear attractive in the short to medium term, as they continue to give investors the opportunity to ride on the economic recovery from the Covid-19 pandemic.

However, it is not the best strategy for the long term.

According to Citi Global Wealth, what’s ideal is a portfolio that could reflect a “new and different” economy post-Covid-19.

Advising investors to transition their portfolios to align with a new normal, the financial group argues the global economy is not going to return to how it was before, as the Covid-19 pandemic has catalysed important structural changes to the world.

“Covid-19 has changed the world economy, largely via adaptations and efficiencies made to cope with pandemic restrictions; macroeconomic management and the scale of government involvement may have also changed for the long run, ” Citi says in its mid-year outlook report.

The group is optimistic that the end of the global pandemic will be at hand in the coming quarters, with a strong multi-year recovery ahead.

It is of the opinion that the strongest “bounce back” investment returns have already been earned. Although certain sectors and markets may still offer upside potential, the range and scope of opportunities is narrowing, it says.

Citi shares that the group has already started positioning its asset allocation for mid-cycle conditions.

“We favour exposure both to assets that still have untapped recovery potential and to reasonably valued long-term growth assets, ” Citi shares.

“While we have started increasing portfolio quality, this in no way implies a negative outlook, ” it notes, adding that fixed-income assets and cash in general remain unappealing presently.

Different world

Citi analysts see the world moving to a new normal, not backwards to 2019’s economy. The unwinding of the shock and the new economy anticipated suggest an active portfolio strategy is needed for the next several years, it argues.

On that note, it has identified five major themes as its guiding investment principles in a world beyond Covid-19. These are positioning for the Group of Two (G2, namely China and the United States) polarisation; deepening digitisation; extending healthcare’s frontiers; reshaping of the real estate; and greener initiative.

On G2 polarisation, Citi expects that the economic struggle between the United States and China will intensify over the coming years.

“An important implication of our ‘G2 world’ case has always been that global investors should have meaningful exposure to both the United States and China in their portfolios. We believe that intensified strategic competition could accelerate the two countries’ growth, ” it explains.

“We think this could benefit appropriately-positioned portfolios. Likely investment beneficiaries include producers of semiconductors, satellites, software, renewable energy and commodities in the United States and China, as well as markets in South-East Asia, ” it adds.

Citi points out that continued efforts to diversify supply chains from companies that want to serve both the United States and China will benefit South-East Asia, with increased investment from G2. Such a shift was already underway, with Asean taking a greater share of imports for both China and the United States.

Huge opportunities

It is undeniable that digitisation has taken a great leap forward during the pandemic. But Citi believes there is much more to come in this area and this calls for long-term portfolio exposure to potential beneficiaries.

“Covid-19 restrictions have accelerated digitisation in many areas of business and consumer life.

“We believe this unstoppable trend will persist even after the world returns to normal, ” it argues.

It says the age of hyper-connectivity is set to benefit many other areas within digitisation. And the rollout of the fifth generation of wireless data technology (5G) will enable a vast increase in the number of devices connected to the Internet.

“Investors are currently focusing on assets that stand to benefit from economic reopening.

“We continue to emphasise the importance of long-term exposure to digitisation, ” Citi stresses.

“Our favoured areas include e-commerce, online gaming, streaming entertainment, cybersecurity, telehealth, mobility, connected cars, factories of the future, robotic surgery and fintech, ” it notes.

Citi also sees huge opportunities in the healthcare industry, as innovations and breakthroughs become increasingly important as the world’s population ages.

“We see many possibilities for gaining exposure to potential healthcare advances over the coming years.

“These include some of the largest, quality enterprises, which pay high and growing dividends, ” it says.

“We also favour companies specialising in life sciences and tools, which enable the manufacturing and research efforts of healthcare innovators.

“Medical technology – which can reduce patients’ time in hospital settings and lower costs – is another important potential growth area, ” it adds.

For suitable investors, Citi has identified attractive potential opportunities among early-stage biotech companies that are not represented on public markets. These are accessible via experienced private managers of biotech strategies, it says.

Meanwhile, the pandemic has had very different effects on various sectors within real estate. Amid this complicated landscape, Citi has also identified various attractive opportunities.

New trend: People wearing protective face masks walk at the financial and business district of La Defense in Nanterre, France. Business travel and commuting may initially resume significantly as the pandemic retreats but increased remote working and video conferencing are here to stay. — ReutersNew trend: People wearing protective face masks walk at the financial and business district of La Defense in Nanterre, France. Business travel and commuting may initially resume significantly as the pandemic retreats but increased remote working and video conferencing are here to stay. — Reuters

Despite some ongoing deep distress in the hospitality sector, pent-up demand is expected to drive a strong recovery globally. In the near term, Citi anticipates that leisure travel will drive most of the demand, while business and convention travel will lag.

“To capitalise upon the opportunity, we recommend seeking partners with proven expertise in value-add, asset repositioning, or developing assets in the hospitality sector throughout market cycles, ” Citi says.

e-commerce surge

The industrial sector, on the other hand, will continue to benefit from the surge in e-commerce activity, including online grocery shopping, it says, noting that the trend is fostering billions of dollars in new industrial real-estate development.

“Niche sectors of the market are 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, ” Citi says, noting that Covid-19 pandemic has increased people’s reliance on and accelerated the need for digital infrastructure.

Citi is also reiterating the case for long-term exposure to the unstoppable trend of “greening the world”, adding that governments in the United States, China and European Union are poised to spend heavily on green infrastructure.

It points out that while traditional energy use and investments suffered in 2020, alternative energy has advanced.

“Despite a recent reversal, we expect further progress for alternatives and energy efficiency. Plunging fossil fuel consumption during lockdowns may have given us a preview of the future, ” Citi says.

“Business travel and commuting may initially resume significantly as the pandemic retreats; but we believe increased remote working and video conferencing are here to stay, ” it argues, adding that advances in energy efficiency can ease the mass adoption of electric vehicles.

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