The private bank reflected on how client portfolios should be set up as some light at the end of the tunnel comes into view. Certain sectors hit hard last year still have some room to revert to their long-term state, although that process is likely to run out by 2022.

Although investors have already started to bet on pandemic-hit sectors reverting to more “normal” conditions, opportunities remain to push into areas which stand to gain as COVID-19 is tackled, according to a mid-year update from Citi Private Bank this week. 

The US banking group sees potential in cyclical sectors such as travel, hospitality, global real estate, and selected national markets such as Brazilian and UK stocks. 

Already, some of the cyclical areas that were hit more than a year ago have recovered on hopes of the pandemic’s demise. (See chart.)

Source: Citi Private Bank

At some point in 2022, however, opportunities for investors to exploit a “mean reversion” trend will run out, Citi Private Bank said.

From today’s vantage point, the bank said that other opportunities include global healthcare equities such as medical technology, life sciences and tools, biotech strategies from specialist private managers, as well as Southeast Asian countries that benefit from trade discord between the US and China. 

Citi Private Bank said it also makes sense for clients to add long-term exposure to strong digital themes when markets correct, in order to enter these areas at attractive levels. Such areas include online gaming, streaming entertainment, e-commerce, cybersecurity and fintech, robotics and telehealth. 

“For much of last year, we made the case for exploiting mean reversion. This involves investing in assets whose prices were hit hardest by COVID, with the aim of riding the rebound from depressed levels,” David Bailin, global head of investments and chief investment officer, Citi Global Wealth, said in a report. “This theme remains relevant as of early June 2021. However, there are now fewer such opportunities and less upside potential. For example, there is no longer scope to earn extraordinary returns in cyclical manufacturing firms and consumer goods producers, as these have already snapped back.”

“Right after the pandemic is declared over, we can imagine a strong global economic recovery that actually feels more normal. Supply chains will be full of goods. Shippers will have the containers and vessels in the right locations to meet demand. Commodity prices that have surged will have stabilised, reflecting better supply-demand equilibria. The interventions of governments and central banks will have subsided somewhat, allowing the economy to function with fewer such unusual measures. All of this suggests that we can expect some level of normalcy in our business and personal lives,” Bailin said.

The bank said that the rapid appreciation in 2020 of Chinese securities, technology shares and US small- and mid-capitalisation companies suggest to some that the best opportunities have happened already, and that investors missed post-pandemic opportunities because of high market valuations. But the bank disagreed. 

“Strong increases in corporate earnings still lie ahead. For many industries, companies and regions, the ability to exceed 2019’s revenue, earnings, cash flow and/or dividends is meaningful. This is because we are still in the early stages of the new economic cycle,” it said.

A number of themes will outlive the pandemic, Citi Private Bank said, arguing that healthcare represents the cheapest sector. The bank is overweight the “unstoppable trend of increasing longevity.” In aggregate, the sector has never posted a year of decline in either sales or profits. However, it trades at a 25 per cent valuation discount to the S&P 500.

Last April, Citi Private Bank cut its equity for the first time since February 2020. Even after lowering its overall allocation, the bank is 8 per cent overweight global equity. It also stays 8 per cent underweight fixed income and cash due to the prevalence of negative real yields in these areas.