Move into 'unloved' sectors for returns in 2021

Equity investors should turn to unloved areas this year as there will be rotation out of some markets that have traditionally returned well, according to American Century.

American Century senior investment director of Asia Pacific, Chris Chen, told Money Management that 2021 would be another good year for equities as economies would start opening up again but there would be risks associated with how countries tackled the COVID-19 pandemic and vaccine roll outs.

“Investors need to pay attention to valuations and where they are investing. They should be selective but 2021 is shaping up to be a good year,” Chen said.

Chen stressed the importance of being selective and for advisers to be “extra careful” with fund managers that did well historically but did not have the flexibility to move into “less loved” areas.

“I would favour strategies that are more concentrated and broadly invested,” he said.

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“As we look at segments of markets that have done well over the past decade such as those which was tech oriented sectors, internet-based – all those high flying sectors and stocks –  I think in the year 2021 some of those areas on the fundamental basis may continue to do well, but we’re already seeing some rotation out of those areas into some more unloved areas.”

Chen said that some areas of the market that experience severe pain last year would come back strongly such as travel.

He said Booking.com was one of his top holdings and that aircraft parts makers and other travel related names had been added to his portfolio.

In terms of unloved sectors, Chen said the automotive sector was more unloved and that he was trying to look for companies with individual company specific drivers that drove a positive acceleration in earnings profile, and so that cyclical improvement was an added benefit.

“What we’re seeing in the auto space is the trend of increasing electrification of vehicles so increasing the number of electrical components in cars. We have a number of component makers which are a benefit in this trend. As the cyclical economy improves these companies will benefit,” he said.

“A lot of this high growth or tech kind of areas, the risk reward does look more challenged, but some of the more cyclical areas, the risk reward looks better. So we’re looking at travel, autos and some rate sensitive areas could also benefit like insurance especially when we look at emerging markets within Asia where we are seeing the fundamental growth – that is very strong – and the benefit in terms of rate sensitivity as well.”

Healthcare was another sector Chen like as it had been a beneficiary of the COVID-19 pandemic.

He said besides biotech and pharma firms, there were many life science tool companies worth looking at that supplied parts for research and development and diagnostics to healthcare firms.

“Another additional benefit is that they are trading at a discount in terms of valuation against the board market and historically they do not trade at a discount,” Chen said.

“This is also an area that as we get some stabilisation in the political environment healthcare is a space where we are finding a lot of opportunities.”

Chen noted that banks would continue to be challenged this year as, while some value would remain, there were still headwinds in that area. He said unless there was more normalisation in the sector, the risk reward equation was not attractive.