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2020 and 2021 will be ‘distorted years’ for the market: Strategist

COVID-19 cases are rising, impacting the economic outlook as investors look toward 2021. CITI Private Bank Global Chief Investment Strategist Steven Wieting joins Yahoo Finance Live to discuss.

Video Transcript

- A little bit more on that front on how investors should be bracing for some of these changes as we look out to 2021 here with our next guest. Steven Wieting is Citi Private Bank Global Chief investment strategist. And he joins us now, as well, here. And Steven, I mean, when we look at this, the expectation here is for rates to remain lower for quite some time. I mean, when you look at that aspect here and think about companies investing not only in their businesses, but perhaps in some technology to boost things, as well-- we've been talking a lot about this rotation here out of tech, out of growth, into value, where are you seeing things shaking out here in 2021?

STEVEN WIETING: Well, 2021 will be markedly different by the end of the year, and for the reasons that you've just mentioned. That if you take a look at three or more vaccine providers, we can see 5 billion doses probably globally over the course of the year. You combine that with the measures on social distancing, we will probably end the pandemic phase of this crisis at midyear.

Now that doesn't give everyone instant satisfaction over the next few weeks in the economy, but it will majorly change what will be distorted years-- both 2020 and '21 will be distorted years by the coronavirus-- but the economy will have a very, very different exit point next year. That there are many severely depressed services industries that can have a pretty remarkable recovery, that can look a lot like services industries in China, where domestic industries are simply not being impacted by a pandemic that has been-- because of social restrictions isolating them.

So I would think about 2020 and how many of the things that we've used to cope with coronavirus-- the tools that we're using right now and have this video conference, for example-- those sorts of things have been boosted tremendously in value. They're not going to suddenly go into disuse, but they're not going to be able to repeat the kind of performance that they have. And we have many industries that are still depressed-- 35% off, for example-- that will have a very good year next year.

So that's why, again, we have with these very low interest rates, room in portfolios to keep some of the longer term digitization by investments. These things that have a very good growth rate, but we're not expecting these to repeat in terms of performance, but start investing in many depressed industries in real estate and financials and energy. These sorts of industries will have a bounceback in the coming year, and that can provide us with some tactical performance.

- And on that front, Steven, you've laid out the mispricing of securities is one key reason why you think investors should act right now. And you pointed to some sectors there, but are there any particular names that you think offer real value right now, especially given that the declines they've seen as a result of the pandemic?

STEVEN WIETING: Well, I would look at it from a geographic perspective. Out of our overweight in the equity markets, we're still dealing with sectors that are off 13% from their all time highs. Now the one component that has already reached an all time high this year have been US small cap stocks. But if you take a look geographically around the world, we have a lot of other areas that are quite depressed.

So for example, in our latest addition to our asset allocation, we added outside the United States and outside of China to markets that have led the recovery in 2020. If you take a look at Southeast Asia, for example, double digit declines. If you take a look at Latin America, we were off as much as 50% at the middle of the year. Of course, things are not going well when you're off 50%, when you have COVID as a shock. But take a look back at 2009-- Latin America rebounded 98% after dropping 55.

So these are the sorts of things that we're looking back as mean reversion trades for the coming year. But these, again, are tactical overweights. But then there are some examples of just longer term growth trend-- some that have not performed, as well. Health care, generally. Concerns about this election, concerns about pharmaceuticals and regulation in the United States have impacted global pharmaceuticals. And we want to continue to invest in longevity. We want to invest in clean energy. These are things that are not really impacted by COVID that we would still have a strong allocation to.

- And Steven, when we think longer term here, I mean, obviously, we've been celebrating kind of the remarkable advancements we've had on the vaccine front. That's obviously a positive. Still awaiting whatever kind of fiscal measures might be coming here from Congress to kind of bury the gap here until we get those vaccines out to the general public. But there have been concerns-- maybe you could point to Bitcoin reaching another all time high here-- about what could happen as we get that record stimulus spending here. Are there any concerns for you longer term when you think about how much money is coming out to kind of address the shocks to demand that we've seen here due to the pandemic? And what that can do to slow growth over the long term?

STEVEN WIETING: Well, look, I think over the medium term, the Federal Reserve will not want tighter financial conditions to get in the way of having a very complete recovery. And so we essentially would call this financial oppression-- keeping interest rates negative in real terms deep into the recovery. Their expectation is that 2 and 1/2 years from now, the unemployment rate will be 4% again, but their policy rate will still be 0. Now, whatever that might do for Bitcoin, I put aside for the moment.

But if we take a look at long periods of history prior to the last 40 years when we had high real interest rates falling now to these low levels over multiple decades, you could go very long periods without earning a real return in fixed income or cash. And so that requires us to have in more conservative portfolios, even-- some alternatives. This involves harnessing volatility. It involves investing in more secure dividend paying companies, where you can get twice the global bond deal and equity dividends.

And many of these are in fact, companies that didn't surge in 2020, that were not part of the solution set for COVID. That were actually harmed by it, and are likely to rebound in the coming couple of years. So creating a new income portfolio with dividends and other tools are really required here to get past this financial repression.

Now I think, again, the overall issue as to whether this is going to be a long term harmful effect-- I bear in mind that when we had 100% debt to GDP ratio in 1945, we did bring that down all the way to 25% by 1975. Maybe it doesn't take that long this time, but we did end up inflating away debt burdens over a very long period of time with a sustained negative interest rate.

- And Steven, finally, we've gone a little more clarity on President-elect Joe Biden's economic team with Janet Yellen being officially nominated to the post of Treasury Secretary. She has indicated in the past that she believes that additional spending is needed in a more significant way to keep this economic recovery on track. How supportive do you think that's going to be for the markets? How much of that do you think of her policies have actually been priced in?

STEVEN WIETING: Well, look, I would say this is a highly practical appointment. This is not a political appointee who has a set of policies aimed away from the broader economy. She will focus very clearly on restoring the American economy to its potential. And, you know, again, one of the skills required of a Treasury Secretary is negotiating with the other side.

Now that's something perhaps we haven't seen Janet Yellen do before, but at least I think markets can take great comfort in her history, her structural ability to act as an economist-- the first rate economist since Larry Summers in this position. And I think markets are taking great comfort that this is not some project that's off to the side. It's very central to economic recovery, and that's the right kind of appointee for that.

- Yeah, a lot of people are applauding what she did as Fed Chair and now what she could do as Treasury Secretary. We'll see if she gets that confirmation there. Steven Wieting, Citi Private Bank Global Chief investment strategist. Appreciate you joining us to chat today.