Active opportunities from extreme polarisation in equities

from MoneyMarketing April 2021

‘Proposed Reg 28 amendments the opposite of prescription’

BY JANICE ROBERTS Editor: MoneyMarketing

Setting the scene for the rest of this year, Fabiana Fedeli, Global Head of Fundamental Equities at Robeco, believes that vaccines, central banks and government stimulus will support the macro recovery. Equities are Robeco’s favourite asset class – and within equities, emerging markets are favoured – while in fixed income, credit is preferred to government bonds.

Importantly, the extreme polarisation in equities witnessed in 2020, will provide “significant investment opportunities for active investors”, Fedeli says. In addition, there are three clear long-term trends that investors will have to take exposure to: China, sustainability and smarter value. However, she warns that investors will need to stay selective.

The policy trilemma

Policymakers are confronted with a trilemma between public health, the economy and personal freedom when it comes to managing the COVID-19 outbreak. “The solution to this is the vaccine – the timeliness, the effectiveness, and a return to a new normal will shape 2021,” Fedeli says.

Robeco’s base case is premised on four elements:

1. Additional vaccines are approved in the first half of 2021. Global distribution is largely achieved but not without temporary hiccups and setbacks, while some social distancing measures remain.

2. Fiscal and monetary policy remain (very) accommodative with a high degree of mutual cooperation.

3. The outbreak is a disinflationary shock, but as economies open up and continue their recovery, inflation starts to turn, and earnings to rise.

4. US elections: The victory of the Democratic party with a relatively small majority in Congress means more fiscal expenditure and a limited increase in taxes.

“Our favourite asset class this year is equities. We favour emerging markets equities, followed by Europe. And we also see some interesting but selective opportunities in Japan. Within emerging markets, we like North Asia, but we’re also starting to see opportunities elsewhere,” Fedeli says.

She sees global equities as gaining between 10% and 16% this year.

The most important element to monitor for the equities outlook is COVID-19, as investors shift their attention from infection rates to vaccination rates. In the technology sector, Robeco is not keen on what Fedeli calls “the high-flying digital COVID defensive sectors”, preferring other areas in the sector, particularly hardware and lesser known companies.

“We like the enablers of sustainability as a theme – sustainability has done very well in the market. We like materials, healthcare and discretionary consumption and we like financials, but we’re sticking to the higher-quality balance sheets.”

China, value and sustainability Fedeli sees three clear trends unravelling as the path to normalisation continues.

1. China is destined to become a core allocation China is the second largest equity market in the world. It’s a third of the size of the US market but is far larger than other markets. “We can’t ignore it. China’s presence in the MSCI index is also increasing because the government is frequently opening investment in the domestic market to foreign investors,” she says.

2. Smart value will return According to Fedeli, value investing will continue its return. “We’ve seen this since November 2020, but we believe that we have to look for smarter alpha value. Cyclical stocks will do well but we also believe we have to be careful. We really have to look at those companies that are able to innovate.”

3. Follow the green signs as COVID-19 has increased the stakes Sustainable strategies have had far stronger inflows than the rest of the mainstream strategies in equities. “We believe this is a trend that is destined to continue, and it is a trend to which investors should gain exposure, as governments will continue to pour more fiscal support into environmental protection.”