Investment Themes in 2021

Light on the Horizon

2020 was a year like no other. Normally that statement would invoke eye rolling and head shaking and grumblings about hyperbole and exaggeration. But 2020 is destined for the history books as an extraordinary year. Hopefully it will also be noted as a one-time event. The good news is we believe there is a light on the horizon with vaccinations starting to roll out and the worst economic scenarios forecast back in early 2020 failing to materialize.

Citi GPS has published our Investment Themes report each January since 2012. We typically include a mix of economic and sector thematic pieces we feel are most relevant for the upcoming year. For 2021, we’ve deviated from this formula and only focus on articles looking at the economy and the inputs shaping it versus sector themes. Although there are still amazing things happening on a sector level, we feel the true driver of both thematics and sectors over the next 12 months will be whether and when the global economy can recover from COVID-19. Once we have a better handle on the general direction of the global economy, we will shift our focus back to the themes and technologies shaping the rest of the decade.

Timetables for a return to pre-COVID-19 levels of GDP are stabilizing as vaccination programs have rolled out, but recovery will be asynchronous with advanced economies expected to recover sooner than emerging markets and sustained GDP momentum not expected until 2022. Massive fiscal policy measures during COVID-19 have been costly, but a post-pandemic recovery requires fiscal stimulus beyond a life preserver. For emerging markets, virus spread remains a serious concern in the very near term and vaccinations aren’t expected to create herd immunity in 2021. But, the removal of ‘Trumpian uncertainty’ should help trade growth and capital inflows remain strong to the region.

In Asia, 2021 looks to be a positive year for fundamentals and financial assets with countries like Philippines and Malaysia benefitting the most from a vaccine growth beta and China’s economic growth should be driven by the return of consumption. However, some countries in the region are at risk of ‘Japanification’ as they face deflation, some economic scarring, and precautionary behavior by consumers. Structural changes are also expected with China’s ‘Beautiful China’ campaign.

Although trade had a tough year in 2020, goods and cargo rebounded after their initial deep contraction. Merchandise trade may only be a modest contributor to global growth in 2021 as robust business investment is needed for it to strengthen. On the services side, consumer services expenditure will likely remain sluggish until a vaccine is widely available. Global labor markets have also been significantly affected by the pandemic with unprecedented labor force exits and extensive furlough schemes. Unemployment rates may remain higher for longer as labor force participation normalizes and furlough schemes are dialed back and as many of the hardest hit sectors remain sluggish.

Finally, we revisit the Global Bear Market Checklist, which we have included in the Investment Themes report for the past three years. It continues to tell us to buy the dips, despite rising to its highest level since 2009.

We are pleased to present our Investment Themes for 2021, and we wish all readers of our Citi GPS series a healthy and safe year ahead.