The global economy — and cyclical stocks — could have a big comeback in 2021, spurred by the distribution of coronavirus vaccines. Investors should look outside of the U.S. to take full advantage of the recovery, according to Gabriela Santos of JPMorgan Asset Management.
“When you have a cyclical recovery like we expect in 2021, it’s really international’s time to shine,” Santos, a global market strategist, told Yahoo Finance Live. “We think it’s really important for investors to have a balance between U.S. equity exposure and international exposure as we go into the year of the vaccine for 2021.”
Santos said that one-third of U.S. equities are classified as cyclical. That jumps to more than 50% for international stocks.
Tech shares in the U.S. have dominated returns this year, with the S&P 500 Information Tech Index up more than 35%. That momentum has shifted over the past three months, with financials and industrials taking the lead.
The thesis that coronavirus vaccine developments should unlock further gains for cyclicals has been gaining traction among strategists. Keith Lerner, chief market strategist at Truist/SunTrust Advisory Services told Yahoo Finance, the U.S. economy will be “spring-loaded into late 2022” once logistics of vaccine distribution are worked out.
There are other factors that could give international stocks a leg up over U.S. equities, said Santos. One is their relatively attractive valuations. Whereas JPMorgan expects 4.1% annualized returns from U.S. stocks because price-to-earnings ratios are historically high, “we do expect to be able to pick up between 200 and 300 basis points extra annualized returns from developed and emerging equity markets,” she said.
In terms of where, specifically, investors should look, Santos wrote in a note, “We expect outperformance to continue for Europe, Japan and EM ex-Asia”
Julie Hyman is the co-anchor of Yahoo Finance Live, weekdays 9am-11am ET.
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