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Equities investors may be looking forward to a post-Covid world, but that could still be months away.

As vaccines make their way across the western world, Europe and parts of Asia, it could take six months to a year before they hit emerging economies, according to Scott Berg, portfolio manager, Global Growth Equity Strategy, with T. Rowe Price Group. The biggest threat is that “the underlying virus itself still could mutate meaningfully between now and [then],” he said in a Jan. 4 interview.

What does this mean for markets over the coming months? Continued volatility, similar to what investors experienced through the latter half of 2020, noted Berg, who’s also a vice-president at T. Rowe Price.

“I wouldn’t be surprised that we get some real bouts of volatility, where some of the more beaten-down value names rebound as people really do see the light at the end of the tunnel.”

Still, there are opportunities for global equities investors.

“Global equities as an asset class could still very reasonably yield 5%, 6%, 7% annualized return,” he said. “While it’s not as good as what they’ve been doing for the last decade, I think [it] still is a really good return in a world where interest rates are nearly zero.”

Berg uses a three-year timeline when investing in companies. He’s bullish on two sectors: e-commerce and financials.

In the e-commerce sector, he likes European retailer Zalando, which has a one-year return of more than 110%, as well as U.K.-based luxury retailer Farfetch, which has a one-year return of more than 445%. He also likes U.S.-based online retailers Etsy and Wayfair.

He’s overweight non-bank financials because these companies “don’t really have meaningful credit exposure [and] benefit from a lower-interest rate environment.” This includes U.S. capital-markets companies Morgan Stanley, Goldman Sachs and Charles Schwab. He also likes alternative asset managers Brookfield Asset Management and KKR, as well as insurers Chubb and Zurich.

Another company Berg is bullish on is Zoom Video Communications, which he said has 50% free cash-flow margins and efficient business models that are running at scale. He noted the stock peaked at more than US$500 in late 2020, and currently sits around US$350.

In terms of regions, he’s overweight Asia-Pacific and Europe.

Asia is “where markets are deepening the most, economies are growing the most, [and] most new billionaires are being formed,” said Berg, adding that Europe is cheaper and has experienced positive developments due to its Covid recovery efforts.

“While currencies are hard to predict, my best guess would be that we’re more likely to see a U.S. dollar weaken in strength, and that would probably also play on the margin into making a bit more money in Europe and Asia.”

Meanwhile, Berg said the global energy sector remains a “tough place to be.”

Why? “Post-Covid, we still have some real weakness in demand as more people are working from home and travelling less. We also still have excess supply on the back of some dysfunction at OPEC, and the number of countries there just desperate to basically earn more foreign exchange and pump oil even though the market’s oversupplied.”

Risks in 2021

Aside from Covid, there are several risks investors are worried about, noted Berg. The quick market rebound has caused valuations to rise, creating bubble-like conditions.

However, “I don’t think valuations look extreme relative to alternatives,” he said. “We are early in a new bubble, but bubbles can go for quite a long time. The underlying health of the companies we own in the portfolio are still relatively very good for the relative valuations.”

There’s also a risk that interest rates and inflation could rise. “Governments are borrowing money around the world and part of the reason they can do [that] is low inflation and rates. So there’s a fear of at some point that changes,” he noted.

Finally, this week’s Georgia Senate runoff could result in a divided Congress if Republicans win one of the two seats up for grabs. If they do not, then Democrats would control the Senate, House and presidency, which would give them the opportunity to impose higher taxes on corporations.

“A meaningful tax increase is not off the table yet,” said Berg.

This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

Funds:
Canada Life Global Growth Equity - mutual fund
Canada Life Global Growth Equity - segregated fund
Canada Life Global Growth Balanced - mutual fund
Canada Life Global Growth Balanced - segregated fund
Fonds:
Équilibré mondial de croissance Canada Vie - fonds commun de placement
Équilibré mondial de croissance Canada Vie - fonds distinct
Fonds d’actions mondiales de croissance Canada Vie - fonds commun de placement
Fonds d’actions mondiales de croissance Canada Vie - fonds distinct