Value and growth stocks can climb together in 2021 as investors split focus between vaccine rollouts and virus scarring, top Wall Street strategist says

• Investor positioning can lift both growth and value stocks in 2021, Seema Shah, chief strategist at Principal Global Investors, said Wednesday.
• Distribution of a coronavirus vaccine "would be a total game-changer" in continuing the November value rotation, she said.
• Yet investors "will continue to gravitate toward the mega-caps" as their healthy balance sheets and cash flows present an attractive hedge against recovery missteps, Shah added.
• Market participants shifting cash to value names should focus on high-quality stocks, as some industries will be permanently marred by the pandemic, Juliet Cohn, a portfolio manager at Principal Global Equities, said.
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Investors spent much of November moving cash from momentum and growth stocks to value and small-cap names. Expect some shifts back-and-forth throughout 2021, Seema Shah, chief strategist at Principal Global Investors, said Wednesday.

News of successful vaccine trials throughout last month lifted investor sentiment and led market participants to position for an economic rebound in 2021. Stocks that stand to gain the most from reopenings surged, while the tech giants that led the summer's rally underperformed. With leading vaccine candidates on the verge of winning regulatory approval, public health experts estimate a shot could reach first responders and vulnerable populations in early 2021.

Successful vaccine distribution in the new year "would be a total game-changer" for stocks, but a widespread rollout is likely still a ways away, Shah said during a virtual event. Logistical risks could delay herd immunity, and there's still the challenge of convincing people to receive the shot, she added.

"Investors will continue to gravitate toward the mega-caps" and other momentum picks for their positive cash flows and healthy balance sheets, the strategist said.

Read more: Zoom has soared 497% this year. 3 analysts — including one of the most accurate in tech — break down whether you should buy, hold, or sell the stock as a vaccine becomes widely available.

The mega-cap bounce and value rotation can coexist, according to Shah, but investors need to differentiate between high-quality cyclicals and those left to languish. Soaring corporate debt piles present sizable risks, and some industries won't recover to their pre-pandemic levels.

For example, the UK and the European Union's latest steps toward boosting renewable energy use will separate the energy sector, Juliet Cohn, a portfolio manager at Principal Global Equities, said. Investors will be less inclined to hold fossil fuel and other traditional energy stocks for the long term, she added.

"Yes, they got too cheap. But they're not going back to where they were beforehand," Cohn said.

She continued: "What we're now trying to do is differentiate between [value stocks] to identify where we're pulled forward future growth and where we've reached another level."

Emerging-market equities are also key to outperforming in the new year, Shah said. Currencies in EM countries are set to strengthen against the dollar in 2021, giving them a leg up through the recovery.

Asia "really dominates" among EM constituents, she added, as populations are so big that "companies in those countries don't really need to worry about the international demand for their products."

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