Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 382

Four themes to set your portfolio for economic recovery

We are only months into the start of a new economic cycle, and this is a perfect opportunity for investors to get positioned for years of economic growth ahead. The cycle is already off to an unusual start, kicking off with a pandemic and unprecedented government and central bank stimulus.

Not surprisingly, there is good and bad news for investors looking to reposition their portfolio. The good news is that there are clear thematics that long-term investors can take advantage of over the next decade.

The investment themes guiding the next cycle

Some of these thematics have been driven by health risks stemming from COVID-19, including those that resulted from a shift in consumer spending and businesses re-orientating operations.

Niche technology groupings like eCommerce, digital payments and collaboration/productivity tech are expected to benefit from the post-COVID-19 behavioural shift. But let’s also not forget the value end of the market that is set to benefit from the growth recovery and especially from a vaccine. We’re keeping an open mind for COVID-19 therapies and vaccines that are plausible, plentiful and potent that would see a normalisation of consumer services and underpin cyclical sectors.

The not-so-good news is volatility is not going to vanish in the short term, and there is still a lot of stimulus and accommodative monetary settings required to recover from COVID-19. Policy co-ordination will be paramount to ensure sustainable economic gains do not vanish once temporary programmes and initiatives fade.

The Reserve Bank announcements this week have taken measures even further, including reducing the cash rate to 0.1%, setting the 3-year government bond target to 0.1% and expanding asset purchases (quantitative easing) to $100 billion of Commonwealth and State bonds. 

Looking forward, investors can consider the following thematics as crucial to their portfolio construction.

1. Borrowers cash in on debt

Governments will take advantage of a low yield environment to finance long term infrastructure spending, which is expected to be a large driver of growth and a primary tool for reducing elevated unemployment rates due to the pandemic.

Businesses will also be opportunistic to borrow at 'rock bottom' yields to fortify their balance sheets and it is expected that balance sheet management will be a key part of strategy as the economy re-energises, and as we’ve seen the correlation between balance sheet weakness versus balance sheet strength is a key measure between performance and underperformance.

For investors, fixed income opportunities will arise in both the primary and secondary 'over-the-counter' bond markets as new issuances are created to finance corporate and government objectives. 

2. Identifying sectors with long-term growth potential

The vaccine is key to long-term stability as economic recovery kicks in. This means that investors will be more guarded and cautious, particularly until the vaccine becomes a reality.

Given we already have high valuations in some sectors, like tech, we have a mid-2021 ASX200 target of 6200, and it will not just be an upward trajectory. We expect sector rotation from COVID-19 beneficiaries such as the tech sector/health sector to the cyclical sectors that includes resources and industrials especially if there is firmer footing in a broad economic recovery.

But we can also see an expectation that government, central banks and regulators will maintain discipline in nudging the recovery forward.

3. Consider elevated risk the new normal

Volatility is here to stay, and investors should prepare their portfolios accordingly. Risk remains at elevated levels, with some of the key risk-factors including:

  • The US presidential election fallout and post-election destabilisation
  • Racial inequality unrest
  • Global trade restrictions, particularly as a result of any escalation of US-China tensions
  • Second waves of COVID-19 across continents or key countries as the northern winter settles in
  • Any failure or significant setback of promising vaccines.

Our recommendation through this period of heightened volatility is not to play the short game and avoid trying to time the market.

Investors can consider structured investments, which can be tailored to produce income in flat, falling or rising markets. We anticipate a flat equity market, with crowded investment positions shifting away from out-of-favour sectors, such as industrials, materials and financials, until growth becomes sustainable and delivers heightened production and economic activity and rising yields.

4. Seek balance and remain allocated through the investment cycle

Citi prefers a balanced portfolio that allows diversification to play its role as a modifier of risk, and includes income assets, like corporate and selective high yield bonds, that provide cash-flow stability. This is especially true with rates and yields sitting at the bottom of the curve, and we expect it to remain this way for several years.

Equities remain an important part of asset allocation and will form an increasing percentage of a portfolio as the recovery gains traction. However, it’s likely many investors are sitting on equity portfolios built up in the previous economic cycle, and require adjustment to suit the next set of anticipated thematic trends.

In the current market we remind investors to remain open-minded to adding cyclical and value-driven stocks to their portfolio, particularly if they are under-allocated to equities after selling down their portfolios in response to the chaos caused by the virus.

We reiterate our long-maintained stance to remain allocated through the investment cycle, as sitting on the sidelines means you miss out on the best days in the market, which may mean forgoing initial recovery periods that can often include healthy indices increases.

 

Simson Sanaphay is Chief Investment Strategist for Citi Australia, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

For more Citi articles and papers, please click here.

 


 

Leave a Comment:

RELATED ARTICLES

Five factors driving the great Australian recovery

What we don't know: five strategies for uncertainty

Four fruitful themes show plenty of juice in the market

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Reform overdue for family home CGT exemption

The capital gains tax main residence exemption is no longer 'fit for purpose', due to its inequities, inefficiency, and complexity. Here are several suggestions for adapting or curtailing the concession.

So, we are not spending our super balances. So what!

A Grattan Institute report suggests lifetime annuities as a solution to people not spending their super balances. The issue is whether underspending is the real problem or a sign of more fundamental failings in our retirement system.

Latest Updates

Shares

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

Superannuation

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Shares

The naysayers may be wrong again on the Big Four banks

While much of the investment industry recommends selling the banks, many were saying the same thing 12 months ago. The reporting season shows why bank shareholders should be rewarded for ignoring the current market noise.

Superannuation

Unpacking investment risk in superannuation

Understanding investment risk in superannuation is crucial for your retirement account. Here's a guide on how to define, take, and manage risk to select the right investment mix tailored to your unique circumstances.

Economy

This 'forgotten' inflation indicator signals better times ahead

Money supply provides an early and good read on whether the cash rate setting is transmitting to accelerating, steady or slowing price pressures. This explores recent data on money supply and what lies ahead for inflation.  

Investment strategies

The biggest and most ignored catalyst for emerging market stocks

Relative valuations and superior GDP growth alone are not compelling enough reasons for an improvement in emerging market equity returns. Earnings growth looks more likely to revive the asset class’s strong long-term record.

Property

Has Australian commercial property bottomed?

Commercial property took a beating in recent years as markets adjusted to higher interest rates. From here, strong demand tailwinds and a sharp fall in fresh supply could support solid returns for the best assets.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.