The ASX is starting 2021 on a positive footing as it builds on last year's gains, but those looking for the best returns may need to look offshore.
The S&P/ASX 200 Index (Index:^AXJO) is up by more than 2% since the start of the year and has rebounded by nearly 50% from last March's COVID‐19 low.
There are reasons to think ASX stocks can keep delivering over the next few months with record low interest rates and the earnings recovery. But Citigroup believes you will need to look overseas if you want the best bang for your investment dollar.
International stock markets best placed to outperform
The broker is forecasting a flat return for the MSCI ACWI Index. This index measures the performance of large- and mid-cap stocks across 23 developed and 27 emerging markets.
But within the index, Citi is expecting emerging markets (EM) and the UK share markets to outperform.
It upgraded EM to "overweight" along with the UK, but downgraded US shares to "neutral" due to valuation concerns.
Valuation a growing concern
"Global equities are currently trading on 20x 2021 consensus EPS [earnings per share], well above the 15x long-term median," said Citi.
"The US looks most expensive on 23x. The UK is cheapest on 14x. Valuations constrain our bullishness, but can partly be justified by low bond yields and ongoing [quantitative easing]."
If you are wondering where the ASX sits, the broker rates it "neutral" as well but is urging investors to go underweight on Japanese and European (ex UK) stocks.
Three stock market predictions for 2021
There are also three themes that Citi is predicting for 2021. This includes a weak US dollar, rotation into value stocks and increasing capital flows into Environmental, Social and corporate Governance (ESG) funds.
"Ongoing fiscal expansion should drive the US$ lower, so helping EM equities and commodity stocks," explained Citi.
"10y US treasury yields are expected to rise, which could drive further value rotation. Increasing flows into ESG funds should help more compliant markets and sector."
Best and worst sectors
As for the sectors that are best placed to perform in the current year, the broker upgraded Materials to "overweight". Other sectors that also have an overweight rating include Health Care, Energy and Information Technology.
On the flipside, the sectors that have the dimmest outlook in Citi's opinion include Utilities, Financials, Consumer Discretionary and Consumer Staples.
