4 investment themes to explore as the economy rebounds

August 11, 2021

WELCOME TO THE GREAT REOPENING. With more than 4 billion vaccine doses administered globally to date^1, “the world is gradually normalizing from the coronavirus pandemic,” says Ehiwario Efeyini, director and senior market strategy analyst in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank.

“The United States economy, in particular, has moved from retreat to recovery,” adds Efeyini, author of a recent CIO Investment Insights report, “The Great Reopening.” “This creates opportunities for investors in everything from technology to traditional industries battered by the pandemic.” Here, Efeyini and Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, detail what’s behind the recovery and the risks that could slow things down.

Consumers fuel the expansion

After long months of pent-up demand, consumers are in the mood to spend saved-up cash. “Amid extraordinary government support, U.S. household incomes actually rose during the pandemic even as salaries and wages declined,” Hyzy says. U.S. savings peaked at 33.7% of disposable income, with similar trends seen in Europe and Japan², he adds. All told, consumer spending is expected to drive a 6.4% increase in real gross domestic product (GDP) in 2021on forecasts from the International Monetary Fund, he notes. That activity, along with a likely surge in government infrastructure spending, suggests potential investment opportunities in these four areas, among others:

Technology. “Sales of personal computers and other connected devices, which surged during the pandemic lockdowns of 2020, are continuing to grow,” Efeyini notes. “The digital economy was already expanding, and the coronavirus only hastened the adoption of video streaming, internet retail, telemedicine and other technologies by households and businesses.”

Travel and entertainment. “Airline passenger miles, hotel stays and restaurant dining are still one-third or more below the pre-pandemic levels of February 2020,” Efeyini says. As economies around the world continue to reopen, the number of consumers looking to participate in these in-person experiences that were restricted during the shutdowns will only increase, he believes.

Infrastructure. “Physical and digital infrastructure in areas such as transportation, communication, energy and manufacturing is the main target of the Biden administration’s proposed American Jobs Plan,” Efeyini says. This would include new spending on bridges, highways, roads, water infrastructure, high-speed broadband and next-generation manufacturing, with opportunities for companies and industries supporting this expansion.

Environmental Sustainability. “We expect climate change to remain a major global theme over the coming years as all signatories to the Paris Agreement pursue their national de-carbonization goals,” Hyzy says. And with China’s technological prowess on the rise, “the United States and Europe will look to enhance their competitiveness with new investment in areas such as semiconductors, networking equipment, advanced materials and component suppliers for electric vehicles, solar energy, wind power and battery storage,” he adds.

Minding the risks

Inflation concerns have risen in the U.S., propelled by expected higher consumer demand, supply chain disruptions and accommodative Federal Reserve monetary policy. An extended run of high inflation could undermine the recovery and push interest rates higher, says Hyzy. And while stocks generally perform well during periods of modest inflation, higher inflation levels tend to drive their valuations down. Yet while unchecked inflation remains a risk to watch, global competition and lower price pressures from technological improvement should help prevent a 1970s-style extended rise into the double digits, Hyzy believes.

Likewise, government spending raises concerns over the extent of U.S. and international debt, he adds. In the United States, public debt is expected to rise from 102.3% of GDP this year to 107.2% of GDP in 2031, according to the Congressional Budget Office.³ “That would essentially match the levels reached in World War II,” Efeyini says. Yet because of stronger economic growth, the underlying stability of the U.S. economy and markets, and the dollar’s importance as a global reserve currency, “we see less cause for concern over the prospective increase in public debt and would expect the coming fiscal expansion to remain manageable,” he adds. Of greater concern is rising debt overseas, particularly among emerging economies located outside of Asia. A combination of high spending and relatively slow growth, along with weaker credit ratings, could lead to market volatility in those countries. 

Portfolio considerations

Despite these potential risks, “we look for the longer-term bull market to remain intact,” Hyzy says. In addition to consumer confidence and government infrastructure spending, markets should get a boost from millions of millennial investors. “This cohort is entering its peak earning and investing years, while benefiting from a multigenerational transfer of wealth expected to stretch into the tens of trillions of dollars.” For the balance of 2021, “we expect the Great Reopening will extend the current market advance and that new investment themes will develop.”

While bonds remain essential for balance and risk mitigation, the current outlook argues for an ongoing emphasis on stocks over bonds, Hyzy adds. It’s important to ensure that any investment decisions align with your overall strategy designed around personal goals, risk tolerance and time horizons. With that in mind, he says, “Now may be the time to consider key sectors primed to benefit as the world, at last, reopens.”