Risks To Our Outlook
Disorderly yield growth and inflation risks remain our biggest near-term concerns. Any indication of an impending tapering of quantitative easing may cause investors to overreact, resulting in a possible pullback (as we witnessed last week).
Coronavirus variants remain at the forefront of possible risks, given their propensity to spread more quickly, the capacity to be more deadly and the potential to disrupt economic reopenings. Additionally, stimulus-driven volatility is likely to persist until a package has been passed.
We are also monitoring valuations. Bitcoin’s recent surge indicates investor exuberance, with price momentum reaching dot-com, bubble-era levels. While a short-lived, sentiment-driven correction is possible, economic and earnings growth should continue to underpin investor confidence.
Best Ideas
We continue to believe U.S. small caps offer value and remain favorable, as they are poised to benefit from a re-opened economy and stimulus. Overall, our key investment theme centers on looking for quality across geographies, sectors and industries. Additionally, technology and consumer-related industries within emerging markets appear attractive.
In Focus: Continued Recovery In Financials
The financial sector was one of the biggest laggards of 2020, but is now the second-best performing sector in the S&P 500 this year, behind energy. The combination of vaccinations, stimulus and better-than-expected consumer-credit quality and savings have helped the sector return to more-normalized valuations, especially within the banking and consumer-focused credit card industries. While certain earnings drivers may remain weak (e.g., loan growth), we expect financials to be a relative outperformer, given improving fundamentals supported by economic growth, rising rates and improving capital return, especially in the second half of 2021.
Following a decade of relative underperformance outside the U.S., we believe that the sector is benefiting from similar top-down tailwinds. We have observed a broad swath of European banks making positive revisions to their fourth quarter 2020 earnings – something we have not experienced in the last five years. Furthermore, the quality of these revisions has been much higher than expected, based on solid balance sheets, fee income strength and lower credit costs.
Investors have already accounted for many of these improvements and tailwinds. However, we believe the rotation away from growth and defensive areas into more value and cyclical names will continue to drive the financial sector in 2021, improving the capital return environment for yield-hungry investors.
Saira Malik is head of global equities at Nuveen.