(Yicai Global) Feb. 22 -- China and the United States remain the most popular investment destinations as the two largest economies lead the world’s post-Covid-19 recovery, according to the global strategist of Wells Fargo Investment Institute.

“To the extent that geographic supply chains truly broaden, opportunities will be greatest in close proximity to the large and dynamic China market along with those in close proximity to the US and best able to meet changes in product demand,” Gary Schlossberg said in a recent interview with Yicai Global.

He also warned risks from unexpected flare-up of the pandemic, delayed rollout and acceptance of the Covid-19 vaccine, or from an unexpectedly sizable increases in interest rates responding to strong economic growth and rising inflation.

Below are excerpts from the interview.

Yicai Global: As growth is expected to bounce back in most economies this year, do you think investors will be more willing to take risk than in 2020? How will the economic recovery manifest itself in terms of investment behavior?

Gary Schlossberg: Investors’ tolerance for risk already has been on the rise since early last November, timed with the promising results of the first of the coronavirus vaccines. The ‘risk on’ trade has been evident in relatively strong performances by small-cap and other economically sensitive sectors of the market and in gains by lower-quality bonds.

Adding support to the risk-on trade has come more recently from talk of more aggressive fiscal stimulus by the Democratic-controlled White House and Congress. The global growth recovery, hopefully supported by a smooth reopening of economies here and abroad plus added policy support, will provide an added tailwind to stocks and other risk assets later this year by boosting further corporate profits.

The risk of a reversal comes from an unexpected flare-up of the pandemic, delayed rollout and acceptance of the coronavirus vaccine or from an unexpectedly sizable increases in interest rates responding to strong economic growth and rising inflation.

YG: As China and the US remain at the leading edge of the recovery, will those two countries become the most popular investment destinations? Will investors in advanced economies be more inclined to stay at home?

GS: Yes, in sheer dollar terms because of their economic size, in addition to their economic performance. Certain other emerging markets, particularly the tech-oriented economies in northern Asia, should remain magnets for foreign investment too.

Parts of Europe should begin to do well as the worst of the pandemic recedes late this year. Commodity producing emerging markets will begin to enjoy the benefits of rising exports as they experience a delayed reopening of economies in 2022.

YG: The Wells Fargo 2021 Outlook said there may be long-term investment opportunities in sectors that faced the biggest challenges in the pandemic as well as in some traditional cyclical sectors. Can you elaborate on that and give a few examples of each?

GS: Our view is that hard-pressed services industries and other sectors most exposed to the pandemic will enjoy initial support from the release of pent-up demand, particularly in leisure and hospitality, retailing and face-to-face personal services.

I’m not sure that we see these sectors as being particularly favorable long-term opportunities. However, we anticipate online retailing and services to enjoy longer-term benefits from changes in shopping and living patterns after the worst of the pandemic, despite a partial rotation back to brick-and-mortar retailing and other shopping.

Technology, social media and other infrastructure and other support for online activity should continue to do well from the increase in online activity, which is why we’re continuing to view favorably social media and high tech.

YG: There is a lot of discussion about business reshoring and supply-chain flexibility. What are the implications of this for investment in the coming years?

GS: First, I would say that business reshoring and supply-chain diversification/ flexibility may be more limited than expected, confined to those areas -- those touching on healthcare, key materials, tech inputs and, more generally, areas touching on other national security.

Elsewhere, we think reshoring will occur only where it makes sense. Likewise, supply-chain flexibility will be limited by the risk of complexity, inadequate local markets, added costs or simply inadequate labor and infrastructure needed to minimize costs.

Investment opportunities likely will be greatest for those goods tied most closely to national security. To the extent that geographic supply chains truly broaden, opportunities will be greatest in close proximity to the large and dynamic China market along with those in close proximity to the US and best able to meet changes in product demand.  

YG: Governments are becoming more and more directly involved in the economy. Will this limit investment opportunities?

GS: Government involvement in the economy will affect investment returns and investment flows in at least two ways. First, through more burdensome regulations in such regulatory sensitive industries as energy, health care and financial services. Second, and more generally, through greater exposure to less efficient government risks suppressing economic growth and with it, across-the-board investment opportunities.   

YG: What factors will be likely to hinder economic growth in 2021? Based on those factors, which investments would you not be bullish on?

GS: The biggest threats to economic growth in 2021 come from a slow reopening -- or a temporary reversal -- of the economy during the latter part of the year, unwillingness of households to spend much of the government’s financial support immediately or a larger-than-expected backup of US interest rates on heightened inflation worries.

However, these are viewed as risks rather than baseline outcome, which anticipates strengthening, above average growth and a gradual rise of interest rates during the balance of 2021. For that reason, we are cautious on Treasury securities, particularly longer-dated, long-duration investments in that sector of the market, favoring instead higher quality corporate, high-yield and municipal securities.

In the equity market, we favor US tech, communications services and cyclically sensitive sectors at the expense of defensive and interest sensitive utilities and consumer staples. REITS also are viewed as unfavorable because of their yield sensitivity.

Overseas, we view emerging market stocks favorably, mainly because of a positive view of Asia, and other developed markets unfavorably because of a cautious view of European markets.