Higher Rates vs Global Recovery - Navigating the Volatility
By Celestee Tan
With effective vaccinations surging and infection rates falling, Citi analysts expect global GDP growth to rebound to 5.5% in 2021 and 4.0% in 2022. Despite risk of inflation and higher yields, rising yields are unlikely to signal the end of the equity bull market, as earnings growth in 2021 and 2022 are expected to offset higher and more normal levels of interest rates rising from ultra-low levels. Citi’s Global Investment Committee thus increased its Overweight in Equities, reduced its Underweight in Bonds and reduced Gold from Overweight to Neutral. Real Estate Investment Trusts (REITs) remain Overweight while Cash remains Underweight.
With large-scale production and additional vaccines likely, an end to the global pandemic is expected to begin by mid-year 2021, bringing a potential sharp broadening out of the world economic recovery in the second half of 2021. Citi’s Global Investment Committee thus increased its Overweight in Equities, and increased its Underweight in Bonds. Gold and Real Estate Investment Trusts (REITs) remain Overweight while Cash remains Underweight.
The global economy is likely to recover more quickly and robustly from the COVID-19 recession than after a more typical large downturn. The mispricing of equities caused by COVID-19 could be reversed.
Encouraging vaccine news has boosted confidence in Citi’s base case views. The Citi Private Bank Global Investment Committee has further increased overweights to global equities, adding to developed markets (ex US) and emerging markets (ex China).
Despite near-term uncertainties (US election and risk of rising COVID-19 infections in winter), a supportive macroeconomic policy backdrop and better-prepared health sector suggest challenges may not be nearly as severe as COVID-19’s initial global shock. Citi’s Global Investment Committee thus increased its Overweight in Equities, increased its Underweight in Bonds. Gold and REITs remain Overweight while Cash remains Underweight.
Rather than speculate on what may happen up to and after Election Day, investors should prepare their portfolios for positive economic events that are more likely than not to materialize in 2021.
