Internationally, leaning into financials, materials and industrials is a way to position portfolios for the global recovery and to hedge a potential overshoot in inflation, according to Gabriela Santos, Global Market Strategist at JP Morgan.
“The pandemic’s initial effects proved to be disinflationary, as demand for services and commodities plunged. This year, pent-up demand is set to be unleashed, fueled by the reopening of activity and fiscal stimulus. As the global economy operates above potential, inflation should move higher. While the debate will continue as to whether a structural shift has taken place, the cyclical uptick in inflation should lead to a surge in nominal economic growth.”
“Corporate earnings growth should be strong, with consensus expecting 35% earnings per share growth for the MSCI All Country World ex-US index in 2021. This compares with expectations of 25% growth for the S&P 500. The greater cyclicality of international markets explains the difference: cyclical sectors make up 57% of international markets versus only 38% of the US. It is exactly sectors such as financials, materials and industrials whose earnings are the most geared to nominal economic growth.”