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Citi

Building Resilient Portfolios for Volatile Times

Based on data through Q3 2018, US economic growth for last year could top 3% for the first time since 2005. Despite a relatively healthy economy and no risk of inflation, the S&P 500 index lost (-9.2%) in December to produce an annual loss of (-6.2%) the first negative performance year since dropping (-37%) in 2008 due to the Global Financial Crisis.

 

Factors leading to market underperformance

  • Less Dovish Fed Rate Hike – The US central bank raised rates, as widely expected, by 0.25% on 19 December. However, markets were surprised by the Fed's less dovish tone and its commitment to tighten monetary policy, despite rising risks to growth.
  • Partial US Government Shutdown – One of the first problems the 116th Congress will grapple with is the partial government shutdown. While the shutdown itself should not have a material impact on the US economy, continued deadlock is likely hurting sentiment.
  • Global PMIs showing signs of moderation – Fears were fueled by reports that economic activity weakened across much of Europe and Asia in December due to the US-China trade tensions.

 

Citi analysts believe that “Fear is moving markets, not fundamentals”. Last month’s market correction was the worst December in 7 decades and this suggests a higher probability of a rebound in 2019.

 

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For US equities, Citi analysts continue to maintain their neutral stance as the economic resources that drove the US recovery of the past near-decade are no longer there to drive a “second recovery”. In 2019, Citi analysts are maintaining focus on income producing equity and fixed income assets, raising portfolio quality until a new expansion is in sight. 

Citi’s longer-term conviction lies in Emerging Asia. In 2019, Citi analysts expect the sharp underperformance in 2018 to reverse, at least partially. Underpinning is the likelihood of ongoing Asian growth accompanied by contained inflation, easing financial condition as moderating US growth limits the extent of US rate rises and dollar strength together with significant easing in China helping to offset most of the drag from trade tensions.

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