How to prepare your portfolio for economic recovery

Bad times will eventually give way to good times. And this is what you need to do to cash in.

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So we're in the midst of a COVID-19 recession.

Millions have lost their jobs and interest rates are virtually at zero. Many others only have employment because of unprecedented government support.

This is a stark contrast to the 10-year run of good times investors had between the global financial crisis and the coronavirus.

But eventually the economy will recover. Bad times don't last forever, just as good times don't.

"We are only months into the start of a new economic cycle and it indicates a period of opportunity to get positioned for years of economic growth ahead," said Citi Australia chief investment strategist Simson Sanaphay.

"However, it did not start with a typical euphoric end to a boom/bust cycle. This time round, we started with a pandemic and unprecedented government and central bank stimulus. We are not in ordinary times."

So how do investors prepare their portfolios to take advantage of the recovery?

A recession like no other

The current economic downturn is strange in that share markets have still gone gangbusters, thanks to the strength of growth stocks.

For example, the Nasdaq Composite Index (NASDAQ: .IXIC) is up almost 60% since the March trough, despite some corrections in the past few weeks.

Despite this, Citi has a mid-2021 target of 6,200 points for the S&P/ASX 200 Index (ASX: XJO), which is currently 6,019.6 points.

And Simson is expecting this climb to be driven by other shares, rather than already overvalued tech companies.

"We expect sector rotation from COVID-19 beneficiaries such as the tech and health sector to the cyclical sectors that includes resources and industrials, especially if there is firmer footing in a broad economic recovery."

Even though value shares have lost a running battle against growth shares for more than a decade, Simson believes this is where the investment opportunity lies.

"We remind investors to remain open minded to adding cyclical and value-driven stocks to their portfolio, particularly if they are under-allocated to equities after selling down their portfolios in response to the chaos caused by the virus."

Betashares senior investment specialist Cameron Gleeson shared that sentiment in an interview with The Motley Fool earlier this year.

"If the global economy shifts to a reflationary environment it is broadly expected that value will outperform and growth will lag."

While interest rate increases might be on ice for the next couple of years, from a base of zero or negative there is only one direction they can go in the long term.

"Expectations of increasing inflation and re-opening of economies may be triggered by the announcement of an effective COVID-19 vaccine, for example," Gleeson said.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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