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Allocation with Risks and Recovery in Mind

  • Citi analysts have revised down 2020 global growth forecasts from -2.3% to -3.1%, with the decrease mostly in Japan (from -1.9% to -4.7%). However, the record pace of economic contraction as a result of COVID-19 is likely to be relatively short with an improvement expected by 3Q. Comparatively, the contraction in equities has not been proportional to the economic decline. From its peak in February, the S&P 500 Index had fallen 35% at its March-low, while earnings-per-share (EPS) is expected to fall more than 60% in 2Q. With market volatility at a record high, Citi analysts believe that investors should show patience. This means holding a balanced asset allocation rather than chasing sell-offs and rallies.


  • In equities, the thematic preference remains for secular growth shares in healthcare and the digital economy over the longer term. However, this favors US large cap equities whose strong outperformance in the year-to-date suggests more limited gains ahead. In comparison, US small- and mid-cap (SMID) equities and most non-US markets have lagged 12-15% behind.


  • With “COVID defensive” assets strongly outperforming, Citi’s Global Investment Committee (GIC) prefers to add selectively to investments with a greater mix of both higher- and lower-risk characteristics. With this in mind, the GIC has kept overall asset allocation to Global Equities at neutral while differentiating between market risk and opportunities ahead.


  • Developed Markets equities: Adding to US SMID. Allocations have been reduced in Eurozone shares across all market caps as the slower pace of Eurozone recovery in the past cycle, despite extreme monetary easing, suggests a deeper, longer setback. While staying neutral to US large cap equities, an increased allocation to US SMID comes as an outperformance for SMID versus large cap shares has typically come while recession is still unfolding.


  • Emerging Markets equities: Adding to Asia and Latin America, while reducing in Central Europe, Middle East and Africa (CEEMEA). China’s economy is growing again as it starts to reopen. Away from China, a wide dispersion of economic and financial outcomes is seen across emerging markets.


  • Gold remains an overweight but with a smaller allocation. Speculative long positions in gold futures are at record highs and while further gains on gold could be expected on prolonged monetary easing in years ahead, gold has already benefited from large declines in certain equity and credit markets as volatility surged.

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