Rising inflation remains a threat for equities

Despite a relatively positive year ahead equity investors should be alert to the possibility of another COVID-19 wave and rising inflation and remain selective while paying close attention to valuations, according to American Century’s senior investment director, Chris Chen.

Equity investors should be aware that although inflation remained relatively tame for now, expectations of a possible rise might increase however without a significant change in inflationary landscape, the Federal Reserve should remain accommodative.

When it came to sector, Chen said investors’ attention should not necessarily go to those sectors that were doing exceptionally well, like tech stocks, which would continue, according to him, perform and most likely there would be rotation out of these areas into other sectors.

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This would also mean that flexibility of moving into less traditionally growth areas would be important and some of the sectors, that had gone through a difficult period, would be expected to bounce back strongly, including travel sector and aircraft parts manufacturers.

On top of this, there would be opportunities in insurance and traditional banking services as well.

“If you’re looking at traditional banks there’s some headwind there, albeit a normalisation of the risk versus reward equation may not be enough of an incentive for some investors. The banking sector is a challenged but interesting space to watch this year,” Chen said.

Another sector worth watching would be unsurprisingly, the healthcare sector, and in particular its subsectors which included biotechnology, pharmaceuticals, and diagnostics.

However, Chen stressed, global healthcare would be a very different space to Australian healthcare.

“Healthcare can be a good diversifier for Australian investors as global healthcare is a strong dollar play,” Chen said.

“Australian equities in general have been better in a weak dollar environment, so investing in global healthcare is a good structural allocation.”

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