Seeing light at the end of the Covid tunnel

A RAGING pandemic, global lockdowns, and deep economic recessions marked a truly unprecedented year in 2020. Markets tanked and that ended the 11-year bull run in equities.

Central banks rushed to the fore with rescue packages, even throwing in the proverbial sink, namely the Federal Reserve's "QE Infinity" policy.

Towards the end of the 2020, US election uncertainties also gave investors pause.

But positive developments in the discoveries of Covid-19 vaccines renewed hopes that the world can move forward from the pandemic.

Where do we go from here? Can the equity bull trend continue?

The concerted efforts of governments and global central banks propelled markets into a high-octane rebound from the March 2020 trough, which saw equity prices rise some 60 per cent - more than the 20 per cent hurdle, which by definition, heralds a start of a new bull market in equities.

But does this rally have legs? As the old adage goes, "Bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria".

Given the large amount of funds parked in cash and money market funds today, it does not suggest to me that equity markets are at "euphoria" phase. Rather, we are likely in the "scepticism" phase.

Moreover, macro indicators and sentiments have improved, and I believe this portends the start of a new cycle. The new year should see companies emerge stronger and nimbler. Corporate earnings are set to rebound as business normalcy is expected to resume.

A healthy, broadening market rally

Those who doubt the sustainability of the uptrend in equities need to look no further than what is happening in the "value or cyclical" sectors of the market.

At the start of the pandemic, economic lockdowns and macro headings hit these sectors hard. But vaccine discoveries triggered a market rotation, resulting in cyclical and laggard sectors - such as travel-related companies, energy, and banks - outperforming growth sectors such as technology.

In the longer term, however, I do not see their recent outperformance as the start of a new cycle. Technology as a sector remains in a secular growth trend.

More important to note is that the market has now become broad-based, which I believe makes the current uptrend sustainable, vis-a-vis one that is only led by Big Tech stocks.

The ensuing war against Big Tech

In October 2020, the opening salvo against Big Tech was fired when the US Department of Justice filed an antitrust case against Google - this received rare bipartisan support. This landmark lawsuit may herald the start of changing power dynamics between governments and corporates in the years to come.

But will the wings of Big Tech be clipped? I do not think so. Investors should stay calm as spinning off a business division can result in value creation. At the same time, we estimate the value of the sum-of-parts of individual businesses within these Big Tech companies is worth more if the company is spun off into separate entities. I believe too that the prevailing geopolitical realities suggest that policymakers may not be too draconian in their pursuit to regulate Big Tech. A rational course of action will likely be the approach.

I.D.E.A. - The champions of the new world

Without a doubt, technology will continue to be relevant as the world becomes increasingly digital. At the DBS Chief Investment Office, we have coined the acronym I.D.E.A. to encapsulate the types of companies that will be winners of this new digital world.

I.D.E.A. refers to Innovators, Disruptors, Enablers and Adapters - such companies will thrive in a world fast transforming into a digital world. Investors should focus on these winners to ride the irreversible trend of digitalisation.

Hunker down on healthcare

In the face of a global pandemic, our call to favour the global healthcare sector has certainly gained traction. A standout is the area of biotechnology.

Looking ahead, there are several secular growth themes impacting the industry with favourable long-term ramifications for healthcare spending and drug development. These include the broad demographic trend and major advancements in medical science. I am optimistic on the trend related to the discovery and development of new drugs.

Bolster portfolio with "safe plays"

In this environment of ultra-low rates and heightened market volatility, investors should reposition their portfolios to add resilience.

I believe that credit is the new "safe play" as an income-generating asset, after the Federal Reserve included corporate bonds into their quantitative easing (QE) toolkit. The sweet spot in terms of yield/default rate ratio is BBB/BB-rated credits in Asia and Europe.

Gold continues to be a good hedge against volatility. Despite the successful development of vaccines and an anticipated economic recovery this year, global monetary policies are expected to stay accommodative throughout 2021 to support the recovery.

QE has the effect of providing liquidity into the system, bringing bond yields down, weakening the dollar, and driving inflation higher. These factors are tailwinds for the price of gold.

In the long term, gold exhibits dual characteristics of being negatively correlated when the equity markets are down and positively correlated when equities are up. This makes it a good risk diversifier that will enable the overall portfolio to be resilient in a volatile environment.

Continue with a Barbell portfolio

I remain convinced that our Barbell strategy will continue to win in this brave, new world.

Our CIO Barbell Strategy entails allocating assets into two areas of focus: (a) growth and (b) income. The growth component comprises equities that benefit from secular growth trends, such as I.D.E.A. companies, while the income component comprises corporate bonds and dividend-yielding equities including Reits.

We include gold as a "risk diversifier" to add portfolio resilience against a volatile world.

On the back of historic efforts to immunise millions across the world against Covid-19, we will see light at the end of the tunnel in 2021. I believe the new year will reaffirm the continuation of market recovery.

• The writer is chief investment officer, DBS Bank.