Inflation a risk for 2021.
2021 continues to shape up as another good year for risk assets like equities but another COVID-19 wave, particularly in Europe, remains a threat, as does the prospect of rising inflation, according to American Century senior investment director, Chris Chen.
Mr Chen said as the year progresses, he expects the global economy to continue to reopen with the rollout of multiple vaccines and monetary stimulus propping up global economies, but investors need to pay particular attention to valuations.
“Notwithstanding any hiccups on the vaccine front, early signs are encouraging for a good year in global equities. However, investors do need to look at where they’re investing and be very selective.
“Equities have come off a strong year in 2020 so there’s valuation risk; global equities are trading at 20 times more than earnings. There’s good reason to expect valuation to be supported at the high range but high equity multiples carry increased risk so it’s important to be selective and carefully assess where the best opportunities are,” he said.
Mr Chen said while inflation remains relatively tame for now, expectations of a possible rise have increased in recent weeks, but “unless we see a material change in that inflationary picture, the Federal Reserve should continue to be accommodative”.
“We favour sectors that aren’t necessarily those that have been doing well, including tech stocks. He believes while these sectors will fundamentally continue to perform, there’s likely to be rotation out of these areas into other sectors, making diversification key.
“Having flexibility to move into less traditionally growth areas will be important this year as the economy opens up. Some of the areas that have gone through severe pain stand to be some of the areas to bounce back strongly. Travel is a good example, so too aircraft parts manufacturers. There’s also likely to be opportunities in insurance and traditional banking services,” he said.
Commenting on the latter, he said while the banking sector has been challenged for some time, some value remains.
“If you’re looking at traditional banks there’s some headwind there, albeit a normalisation of the risk vs reward equation may not be enough of an incentive for some investors. The banking sector is a challenged but interesting space to watch this year,” he said.
As an obvious beneficiary of COVID-19, the healthcare sector is another sector of note for the remainder of 2021, particularly across subsectors such as biotechnology, pharmaceuticals and diagnostics. The sector has been trading at a discount, which isn’t historically the case with healthcare, and it typically attracts lower levels of volatility than the broader market.
“Global healthcare is a different space to Australian healthcare; globally, it’s a more well-balanced space, which is why in terms of volatility and value it’s a lot different, but over the long term, it’s been a good sector and one of the best performers overtime.
“Healthcare can be a good diversifier for Australian investors as global healthcare is a strong dollar play. Australian equities in general have been better in a weak dollar environment, so investing in global healthcare is a good structural allocation,” said Mr Chen.
