What are Markets Pricing In?

Recovery pricing: In considering what a post-COVID-19 rebound period may look like, economic conditions prior to the virus impact are worth noting. In January, global economic data had improved much more than Citi analysts expected. However, certain equity markets seem to not only price in the likely recovery, but also an uninterrupted recovery. This makes Citi analysts concerned that merely temporary distortions to the path of the world economy may lead to greater share price volatility.

“Safe haven” inflows: This may be most true for US equities, which have outperformed non-US equities by 12.3 percentage points over the past year. Citi’s Global Investment Committee (GIC) had recently reduced their overweight in US shares, but acknowledge that the continued “safe haven” inflows into US stocks and bonds from global investors may further assist US dollar assets. How long these will last is significantly linked to the path of COVID-19, which remains an unknown. However, factoring lower yields for investors, current prices and yields do not indicate severe mispricing, which are more consistent with 4-5% trend US equity returns before inflation, but accompanied with higher volatility.

Prefer strategies for a more volatile backdrop: Despite their increasingly dear price, treasuries and gold remain overweight in GIC’s asset allocation, which may aid in broad diversification. The large overweight to short-term US Treasuries can also be considered a cash equivalent that could be re-deployed if market opportunities arise. Furthermore, both traditional defensive and “hyper-growth” equities have strongly outperformed of late. In Citi’s view, this leaves equity dividend growth assets particularly appealing for the more volatile and less robust overall market returns now envisioned.