Here’s what will drive markets in a post-COVID world

Kristen Bitterly, Citi Private Bank Regional Head of Investments for North America, joins Yahoo Finance Live to discuss how markets are faring amid the pandemic and outlook for economic recovery in the latter half of 2021.

Video Transcript

JULIE HYMAN: Let's talk about this with Kristen Bitterly. She's Citi Private Bank Regional Head of Investments for North America. Kristen, it's good to see you again. I do want to talk about some of these themes in the sense of where you go right now, right? In addition to what Myles was just talking about, if you look at year to date-- and therefore, quarter to date, because we're on the last day of the quarter-- energy is the best performing sector. Is that something you're in? Is that something you stick with? What are you thinking here?

KRISTEN BITTERLY: Yeah, the March action is really interesting. One of the indices that we follow at Citi is basically an index that breaks down the US equities, and it ranks them in terms of their exposure to value as a factor. And so it's long the top 50%, short the bottom 50. So you could say it's basically a proxy for value over growth. And that has had its largest outperformance-- so its best performance since the second quarter of 2009.

So this price action that we're seeing, I think there's a couple of things that are going on. So one is what we call the mean reversion trade. So this is obviously the whole what we call COVID defensives, COVID cyclicals-- what all of you were just talking about. What worked last year is not necessarily working this year. That kind of catch-up trade-- that as we can see on the horizon an opening of the economy, more people getting vaccinated, those sectors are basically benefiting in that regard.

The other thing that I think is happening that the market is grappling with a little bit-- but I think it's healthy-- is within the COVID defensives. So all of those sectors-- tech dominated, e-commerce dominated 2020. What the market is saying right now is, what's going to drive results going forward? And it's almost a return back to fundamentals and real earnings.

So delineating between those companies that really just had a big tailwind in the stay at home, work from home, and those companies that are delivering substantial results in terms of revenues and earnings growth, and trying to make that distinction. So I think that price action is what we're seeing, both the mean reversion as well as focusing on who's really delivering and has the potential to deliver earnings going forward.

MYLES UDLAND: Well, Kristen, related to that, I'm wondering if there's maybe a little bit of self-deception perhaps happening to some investors. You know, stock goes up because it's a COVID cyclical, as you said. And then all of a sudden it's like, new paradigm. World has changed. Everything has come to this business.

How long it might take for someone to realize, actually, that was a one-time event. And I know I made a ton of money on the trade, but it's probably time to kind of bail out and look at something else here. I feel like right now, there is a lot of denial around how much did or did not change. I'm just curious how you guys have sort of maybe thought about and what you've heard from folks on that front.

KRISTEN BITTERLY: Yeah. And this is something that we're hearing a lot from our investors. And I think you have to separate it into two different things. So on one hand, I think for a lot of investors, seeing is believing. Right? So we can talk about this catch-up trade, and the mean reversion, and some of the price action that we've seen-- whether it's in energies, financials, and industrials.

But we still look at the $1.3 trillion sitting on the sidelines in money market funds looking for a place to go. So there are a number of investors that have been waiting this out. We see this in cash on the sidelines. And I think for them-- I mentioned that 15% of the global economy that's still shut down, they're not necessarily going to confidently put capital to work, confidently invest until they actually see that in terms of some of the activity.

So you do have some of those headlines that are helpful, that by August, hopefully, every adult that wants a COVID vaccine within the US should be able to get it. But I think some of that reopening is going to have to happen before you see those cash flows.

I think then, what you have to break out is, where are these areas that are long-term unstoppable trends regardless of whether we're in a pre-COVID world, post-COVID world I want to be invested? I'm not as sensitive to the entry point, because these are long-term secular trends that are going to play out over three, five, 10 years. Areas like longevity and global health care is an area where we've spent a lot of time. Digitization, hyperconnectivity, cybersecurity-- those areas. And actually, some of the recent price action has created some really attractive entry points. So that's how we've been breaking it down in terms of where to put capital to work,

BRIAN SOZZI: Kristen, how do you determine what is an attractive investment right now? Are you more focused on P/E multiples, price to sales multiples? How do you judge things at the moment?

KRISTEN BITTERLY: It's a great question. I think on the P/E multiples, there's a couple of different areas where you can say, what does seem cheap? Because I do think that the indices are not telling the full story. So this is an area where you really have to look outside of the US, right? So if you're looking at P/E multiples, what hasn't really experienced that full snapback in terms of pricing in a COVID recovery, a post-COVID world?

I would point to areas like UK equities is a great example. They've done a fantastic job with their vaccine rollout. They have substantially underperformed the last year, UK equities versus US equities, to the tune of about 30%.

And it also provides that diversification in terms of if you're worried about inflation, if you're worried about some of the headlines that we've seen that could impact US equities. Global health care is another area. Lowest P/E ratio on a relative basis compared to global equities that we've seen in over 10 years. And again, that's an area that we want to be invested for the longer term.

So I think to answer your question, yes, we're looking at P/E ratios. But I think another fundamental factor that's really driving where we're putting capital to work is the interest rate environment, and this idea that looking at rates-- where are you going to find yield? Which means that we have actually increased some of that equity exposure within our portfolios to make sure that our clients are not overweight cash and overweight duration in this interest rate environment that we're in right now.

JULIE HYMAN: Yes. You can't forget about rates, for sure. Kristen, it's always great to get your thoughts here. Kristen Bitterly is Citi Private Bank Regional Head of Investments for North America. Thanks.