Investment opportunities: Six trends to follow in 2021

A winding path through the woods.

The coronavirus pandemic has defined life in 2020 due to its massive impact on society, economies, and financial markets. That impact could continue well into 2021 and beyond, says Paul Christopher, CFA, head of global market strategy at Wells Fargo Investment Institute (WFII). That means it could also define investment opportunities for years to come.

“The coronavirus pandemic’s impact will be felt for a while,” Christopher says. “Even with a vaccine, it will take time to roll it out to everyone. There are going to be implications and repercussions for some time.”

Here, Christopher shares some key trends that have been driven or accelerated by the coronavirus pandemic, as well as related insight for investors to consider when it comes to positioning your portfolio for the potential opportunities ahead.

1. Growth in home/business tech and communications sector

The equity market rebound from March lows was largely driven by so-called “tech” stocks — many tied to the trend of increased use of e-commerce, streaming media, and entertainment — in the information technology, communication services, and consumer discretionary sectors. That’s been bolstered by the pandemic’s impact on economic activity around the globe.

“Our preference remains in those sectors and what used to be considered straight IT, the ‘old’ tech companies,” Christopher says. “The coronavirus has sped up the move to digital technologies.”

Consumers, many of whom have been working from home and generally staying at home, could remain there in the foreseeable future. As a result, people are investing in more tech for business, personal use, or both because of working at home. “It all points toward increasing and accelerating demand for more technology and tools,” Christopher says.

2. Expansion of health care sector

The movement toward digital platforms is also a trend to watch within health care. This also impacts the expansion of the health care system to manage coronavirus-related cases and other health care needs.

“We expect more health care spending going forward,” Christopher says, pointing to treating patients without seeing them in person (telehealth), as well as an expansion of research and development. That includes how to anticipate and respond to the next virus. “The broad trend of the economy being more technologically oriented is present in this sector, but there’s also a simpler driver: health care is becoming more important to everyone.”

3. Challenges for income-generating investments

For more than a decade now, low interest rates have made it a challenge to generate income through low-risk bonds or cash investments. Even so, Christopher says WFII recommends a carefully selected basket of high-yield and investment-grade bonds, chosen with the help of a bond manager, as well as other options for creating regular income.

“Corporate bond yields are low by historical standards but still pay a premium over and above U.S. Treasury yields. We also favor high-yield bonds for some additional yield. Even when bonds are expensive by historical comparison, we still recommend holding them to help manage risk,” Christopher says. “Consider sectors that are aligned with the technology trend, such as industrial real estate, because it’s associated with warehousing for e-commerce companies.”

Outside of bonds, he says, consider relying more on equities for income, through preferred stocks and dividend-paying stocks. Some high-net-worth investors might look to private equity — tying up some capital and giving up liquidity to seek higher returns or regular income.

“Investors need to decide how much risk they are willing to take, whether it’s holding a stock for the dividend when the share price could drop, or investing in private equity,” Christopher says. “But these moves could be well worth it over time.”

4. An emphasis on diversification

Christopher suggests speaking with your financial advisor about how to stay exposed to growth in today’s favored sectors. They’ve already had a long run-up and some consolidation in September, leaving potential value still for investors. He suggests investing in a sector or trend through mutual funds or exchange-traded funds (ETFs), as opposed to individual stocks.

“Any company can see its value stretched, and get punished in a short-term correction,” he says. “Stay diversified, even within a group, and you may be able to participate in the broad trend and still manage risk.”

5. More government spending

Christopher says we’ll likely see higher taxes and more government spending over time, in response to continuing health care needs in the wake of COVD-19 and potential infrastructure needs.

The materials and industrials sectors, for example, are out of favor right now — and have been for many years. An expansion of infrastructure spending, however, could change that, Christopher says. “Health care is in a great spot here, too,” he adds, “because we’re already seeing increased spending.”

6. A need to rebalance … and keep rebalancing

On the surface, with interest rates near zero, having a lot of cash in your portfolio may not seem like a good idea. But there may be a way to put it to use. If your asset allocation is off, or you believe a segment of the market is overvalued, consider reducing holdings and setting aside the proceeds for a bit, then using them to seek out fresh opportunities.

Let’s say the S&P 500 eclipses WFII’s target range of 3,150 to 3,350 over the next few months. You might peel back your exposure, put the cash aside, and then reinvest when the index declines.

“Set a number for the pullback, maybe 3%, 4%, or 5%,” Christopher says. “Make a plan with your investment professional, and when it hits your number, put in X% of your cash. That takes the emotion out of it, so you’re not scared by the dips. It’s a great way to buy low and sell high. And that’s the whole point, after all.”

Equities securities are subject to market risk, which means their value may fluctuate in response to general economic and market conditions and the prospects of individual companies and industry sectors. Investments in equity securities are generally more volatile that other types of securities. There is no guarantee that dividend-paying stocks will return more than the overall stock market. Dividends are not guaranteed and are subject to change or elimination.