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Investors walk in front of trading boards at a private stock market gallery in Kuala Lumpur, Malaysia. Picture used for illustrative purposes. Image Credit: AP

Dubai: Even as economies worldwide gradually mark a turnaround after a tumultuous virus-plagued 2020, stock markets on the other hand, had a year of record gains after a crash that lasted a short while.

“The worst of the coronavirus-pandemic-incited recession is over and the first, immediate part of the recovery has been surprisingly strong, even beating consensus estimates, which were struggling to grasp this unprecedented crisis,” noted Patrik Lang, head of equity and strategy research at Bank Julius Baer.

“Nevertheless, economic indicators are consistent with our expectations of a V-shaped (quick and sharp turnaround in) recovery.”

Although economies started on the road to recovery in the recent months, with an end in sight for pandemic-related uncertainty and fears receding as a result, stock markets had begun recovering long before the economies did.

Even as the pandemic peaked and continues to rage on in several parts of the globe, stock markets are rising as investors want to bank on the fact that the overall market sentiment is improving, and get assets while it stays cheap or before it gets expensive. However, there is reason for caution as there is still chance for some short-term volatility.

“The path to full recovery, i.e. to pre-crisis levels, will be bumpy and we expect considerable divergence between sectors and regions, which will be acerbated by limited fiscal and monetary policy room (limited cash injection potential by central banks),” Lang added.

“Setbacks in overcoming the pandemic due to the growth of regional cases should, however, not endanger the overall improving cyclical economic backdrop.”

How will this impact your investments?

One key investment takeaway this pandemic is that it was a mistake to sell good investments on news events.

If you, as an investor, waited out the worst few weeks this past February and March, you would have benefited much. The markets vindicated the view that high-yield bonds and broker-preferred stocks were massively oversold, and these holdings maintained their pay-outs.

“The hunger for yield will remain the most important driving factor for the bond market,” Lang said. “The inflation targets of mature market central banks were illusive even before the COVID-19 crisis and meeting their mandates has become impossible, even on a longer time horizon.

“Investors are thus forced into riskier segments of the market to secure a minimal return on their investments.”

When it comes to your investments, especially your investments in bonds or fixed income, what analysts are saying is to not rush to withdraw any 2020 profits from the market, with market watchers largely of the opinion that 2021 is looking good for investors.

Since 2021 stands to be quieter than 2020, with no major macro events, banks and real estate markets steadying, and progress on the pandemic, there’s also no urgency among analysts at US-based personal finance advisory firm Kiplinger in recommending investors to withdraw your 2020 profits from the market.

How will your money held in stocks behave in 2021?

Analysts at Bank Julius Baer continue to prefer cyclical stocks over defensives in the current macroeconomic backdrop.

What are cyclical and defensive stocks?
Cyclical stocks represent companies that make or sell discretionary items and services that are in demand when the economy is doing well. They include restaurants, hotel chains, airlines, furniture, high-end clothing retailers, and automobile manufacturers.

A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market. Well-established companies, such as Procter & Gamble, Johnson & Johnson, Philip Morris International, and Coca-Cola, are considered defensive stocks.

“We reiterate our bullish view (for markets to rise) on cyclical sectors like financials, materials and industrials as we continue to see tangible upside in absolute terms but also relative to the rest of the market,” Lang added.

“Historically, rising yields in combination with improving economic growth in a post-recessionary environment have been a very supportive back-drop for the relative performance of cyclicals.”

Top risks, opportunities for investors in 2021

Tensions between China and the US, and between political opponents, after a divisive US election, have several investors feeling cautious.

Others are concerned about the consequences of getting too much of a good thing: If a strong global economy leads to rising interest rates (as it often does) worldwide, that could hurt stock performance in the long run.

Key global stock market benchmarks dropped over 30 per cent in March and yet now they have been hitting all-time highs. One lesson that was learnt was that no one could have foreseen that, and no one knows what 2021 will bring. If 2020 has proved anything, it’s that the market is impossible to predict.

If anything, analysts say 2020 should teach investors that well-established principles, like investing for the long-term with a low-cost diversified portfolio and only checking your investment balance occasionally, is still considered the best time-suited advice.

The approval and gradual distribution of COVID-19 vaccines will be a major obsession in early and mid-2021 for stock market investors. However, the key questions that will play at investor minds and impact their decisions is whether vaccines will work as advertised and will they be rapidly distributed around the world.

How quickly the pandemic fades will have enormous macro-economic and stock market impacts, and analysts largely view that these will hit every single investment sector. Some will be more obvious than others, so they each merits their own discussion. Here’s an overview of which of those will be impacted, and which won’t be as much.

Information Technology (IT) stocks still spearhead

The COVID-19 pandemic has markedly brought out an acceleration in technology-related trends, which were already in place even before the health crisis, which is why analysts widely opine that in 2021 markets will continue to support IT stocks.

“IT stocks have been the equity market leaders ever since the Great Financial Crisis of 2009. In fact, the sector has more than tripled since 2009,” Lang explained.

“We continue to argue that there is more upside because the sector is still supported by outstanding earnings growth and broad-based share repurchases.”

Vaccine to boost pharmaceutical stocks in 2021

If the pharmaceutical industry manages to get COVID-19 under control during 2021, it will be a triumph for science. Public-listed companies involved in the effort will be handsomely rewarded, analysts opine.

Some winners will be obvious, like global vaccine makers like US-based Pfizer (PFE) or US-based Moderna (MRNA)—but companies working on therapeutic drugs like US-based Regeneron (REGN) will benefit, too.

There will be less obvious winners, too. As one key risk includes distributing the vaccine will require an enormous logistics effort and some vaccines require well-below-freezing transport, for example, so firms that sell cooling technology stand to benefit.

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Pent-up demand seen for travel stocks in 2021

Plenty of other sectors are set to jump if the world starts returning to normal in 2021. Pent-up demand for travel could drive a gold rush for long-punished airline stocks, hotels and even cruise lines.

And all that increased economic activity will do wonders for hard-hit tourist countries around the world, too. To know how much, some economists are of the opinion that early vaccine successes could mean near-zero COVID cases in the next six to nine months worldwide.

Newfound investor appetite for restaurant stocks

Fast casual restaurant chains are set to benefit from the potential return to normality.

For instance, on the day Pfizer announced its vaccine had 90 per cent efficacy in Phase 3 trials, there was a widespread market rally among chain restaurants worldwide.

Practise caution on Work-from-Home stocks in 2021

On the other hand, plenty of firms that saw surprising gains in 2020 might be imperilled by a potential return to normalcy after COVID-19, multiple analysts opine.

For instance, work-from-home boomer US-based Zoom Communications (ZM) lost nearly 20 per cent at one point when Pfizer’s announced breakthrough vaccine trial. Food delivery services fell sharply, too, as did similar stocks.