Hello, I’m Bill McMahon, Chief Investment Officer of Active Equity Strategies. I see four key themes that will affect the global equity environment for active investors over the next 12 to 18 months. The need for income, digital acceleration, sustainable energy, and greater onshoring.
The first theme I want to touch on is the need for income. Interest rates have become so low because of the economic slowdown in central banks buying securities that a lot of retirees are going to need to find income.
Dividend paying stocks in general underperformed the broader market the past year pretty markedly, but I believe a lot of overly penalized companies could rebound in 2021, and that dividends will provide a key source of income in a low rate environment. So I think there’s some opportunities in the dividend space that investors should take a look at both in the US and foreign markets. I think investors have over-rotated in what today view as secular winners. They may be great companies, but what I would suggest is look at some cyclical companies too to add to the portfolio because they will get the biggest benefit of a COVID vaccine and lockdowns being eased globally. So a balance between secular growth-oriented stocks and a more cyclical areas of the market.
Within the broad equity markets, we expect value under-performance in market concentration to normalize in a post-COVID world and provide a ripe environment for active stock selection. Two areas we see opportunity are digitalization and sustainable energy.
The pandemic has accelerated some themes already in place. And one of those themes is moving towards digitalization across a variety of industries. And by that I mean companies are using technology more, whether it’s retail, online shopping, or more digital tools across industrials.
Companies that have very strong online and e-commerce presences are generally doing very well. Those that don’t are not doing as well. And I think that trend has really been accelerated by the COVID pandemic.
I think a lot of people who have experienced these digital benefits are going to like them and want to keep them around. So this theme is lasting in my mind, secular not cyclical. However, investors should try to be discerning within the technology space. Digitalization is a major theme, but not all companies may benefit the same. It likely will come down to picking companies, as well.
Sustainable energy is a global secular theme that we think investors need to consider. Here in the US, we expect to see a boost from the new administration, but there’s more of an economic case to be made around it versus just a political case. Sustainable energy has become cheaper to employ, so we’re starting to see the cost disadvantage dissipate. That said, while I view this as a secular theme, I think that sustainable energy businesses may be overheated in the short run. Investors may want to wait for a better entry point to get into sustainable energy companies because it’s generally been very strong as of late. So pick your spots and look to add exposure on weakness.
The final theme that I want to highlight is the theme of more onshoring, less globalization.
US companies in particular have really benefited over the past 20 years from moving their supply chains to places like China and Southeast Asia. But I think now, given our relationship with China and the pandemic, we could see companies start to move some of their manufacturing operations back to the US, closer to home. This could be beneficial for the United States, particularly in the middle of the country. If you move manufacturing back to Cleveland, for example, banks that are centered in Cleveland could see a boost as more and more people work there. So there’s the impact on the companies themselves, plus the tangential companies that cater to those businesses.
From a sector perspective, healthcare and semiconductor companies are two areas that I expect to benefit from this theme, but it really comes down to identifying those specific companies that will win by onshoring.
In closing, I would reinforce the fact that just because something hasn’t worked in the past doesn’t mean it’s not going to work in the future. Value areas of the market could provide some good returns going forward. I also think investors should consider a balanced approach with a blend of secular and cyclical names. If you haven’t already, you may want to start thinking about adding some value in cyclical exposure.
