Citi Wealth Insights

Citi analysts prefer equity portfolios that focus on high quality balance sheets as they may be better able to withstand severe economic headwinds.

The COVID-19 pandemic is causing a widespread cash flow crisis for European companies and significant downgrades to earnings forecasts is expected. Citi analysts believe that some of the downgrades and equity price falls could be overdone and may create opportunities.

In the coming few weeks, the roller coaster in broad equity and credit markets is expected to continue, with equities potentially biased to further retrenchment. Nevertheless, Citi analysts remain convicted to the view that 6-12 month equity returns after 20% corrections have historically been strong.

The Euro STOXX 600 index had its biggest ever one-day fall, down 11.48% on 12 March after the European Central Bank’s (ECB) response to COVID-19’s impact underwhelmed investors.

Global health crisis have typically seen a short-term negative impact on markets followed by a substantial rebound thereafter. However, with economic vulnerability high, the concoction of shocks from containment measures, persistent uncertainty, financial market turmoil and unprecedented oil price collapse lead Citi analysts to believe that global growth could potentially be dragged down close to 0.0% in 2020.

Brent crude prices fell by more than 20% from Friday’s close of US$45.27 after Saudi Arabia announced price cuts and output increase. This led to substantial losses in equities and energy credit that were already weak from COVID-19 contagion. At the time of writing, Brent at US$33 is the lowest since 2004, with the exception of a few weeks in early 2016.