Citi analysts expect a “variable speed” global economic boom led by the US in 2021, broadening to the world in 2022. Citi analysts see world GDP growth averaging near 5% in both 2021 and 2022. The acceleration could depend on how COVID-19 departs.
In our earlier Outlook for 2021, Citi analysts argued for a “mean reversion” investment environment, a set of strategies that typically only succeed in the early period of recovery from recession. True to form, the worst performing global sectors of 2020 (ex. financials, energy) are the best performing sectors of 2021. There are now fewer mean reversion opportunities available in 2H2021.
While our asset allocation still tilts toward cyclicals (Citi analysts overweight real estate and country markets such as the UK and Brazil), a number of markets now discount a full recovery. This has led Citi analysts to upgrade higher quality growth opportunities such as healthcare, with expectations of adding further to our “Unstoppable Trends.” Conversely, Citi analysts have reduced lower quality shares that have already rebounded most aggressively.
Citi analysts believe we are moving to a new normal, not backwards to 2019’s economy. The “new and different” economy expected post COVID-19 could benefit from a windfall of knowledge, new government actions and a different US-China relationship. “Digitization” is affecting every industry and those businesses that adapt best may win the greatest share of revenues and profits. Governments could spend more on strengthening infrastructure and “Greening the World.” The “G-2” competition between the US and China is just one underlying driver.
The next leg of economic growth may come from a recovery in the deeply depressed “traditional services” sectors. However, digital services that helped the world adapt during the pandemic could drive economic growth in the years to come. E-commerce, financial technology and mobility may have lasting effects on real estate, business travel, medicine and professional services even after COVID-19’s departure.
Citi analysts do not expect “mean reversion” to restore markets to the same relative valuations that existed pre COVID-19. The unwinding of the shock and the new economy anticipated suggests an active portfolio strategy for the next several years.
Central banks have swerved from their forty-year battle fighting inflation. Inflation could be allowed to trend higher as a result. Therefore, investors may need a different mix of portfolio assets (with lower levels. And different fixed income assets) during this period of sustained low rates in order to earn returns that exceed inflation.