Repositioning for the reopening

Quick read:

• One of the key investment themes of 2020 was the outperformance of stocks that benefited from the global lockdown – and the social distancing and working-from-home trends that emerged – versus those aligned to the physical economy.

• This trend reversed on positive vaccine news in November, with those stocks poised to benefit from the reopening theme the clear winners, while social-distancing stocks trailed.

• Now, given the supportive macroeconomic backdrop of higher rates and higher inflation expectations, many investors are seeking to position for the reopening.

The “social distancing winners” of 2020 were undoubtedly the largest beneficiaries of lockdown, while many cyclicals were left behind. Positive vaccine announcements in November, vaccination progress since and continued fiscal stimulus have paved the way for a post-COVID world, and increased certainty with regards to economic and earnings outlooks. Many previously unloved “lockdown losers” have now become “reopening winners” and are in pole position for a continued recovery, with attractive valuations and sensitivity to the business cycle further supported by higher rates and higher inflation expectations.

Taking advantage of the reopening

The manifestation of the “reopening winners” versus “social distancing losers” theme is pervasive in several areas of the market. Cyclical sectors, including financials and energy, have been leading the market turnaround and recovering some of their underperformance of 2020. Value stocks and small-cap stocks are also making a comeback, with higher risk stocks favoured in the current market environment.

Buying into specific sectors has always been a popular way of expressing market views. From cyclicals to defensives and vice versa, investors can choose the appropriate sector exposure to benefit from both “risk on” and “risk off” market themes. Against the current backdrop, banks, automotives and travel are among the most popular to benefit from the cyclical rotation.

Investors with lower conviction toward a specific sector – who prefer to implement more broad and diversified exposures – often utilise value and small-cap factor strategies. Value strategies use rules-based approaches to identify stocks that are cheaper compared to their fundamental value. Small-cap exposures, on the other hand, are portfolios of stocks with smaller market capitalisation. Both strategies are highly sensitive to the business cycle and thus positively linked to the reopening theme.

Looking ahead

If the global vaccine rollout leads to a successful reopening of the economy – bolstered by continued fiscal and monetary stimulus – we believe that 2021 will be a positive year for cyclicals and factor investing. The cyclical rotation that took place in late 2020 has continued into 2021, with record flows into these strategies highlighting market participants’ conviction here. We believe investors can take advantage of the “risk on” theme via various implementation ideas ranging from high conviction sectors to systematic diversified factors.

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