With help from Friday’s “mere” quarter million job gains, long-term US yields have risen only half as much as they did in the immediate aftermath of the Global Financial Crisis. Citi analysts believe the largest reason yields have not risen faster is the near-record level of COVID-19 infections globally, in spite of vaccine success in developed markets. In Citi’s view, it is only a matter of time and vaccinations before the global recovery accelerates and Citi analysts expect bond yields to reflect a substantial change in economic activity.
Citi analysts think the world is likely to see a multi-stage recovery as COVID-19 is eradicated more slowly in some regions than others. It is therefore important to assess relative valuations.
Citi analysts suspect that markets may be range bound in 2Q with some volatility from policy uncertainty, but this is a necessary process as investors get accustomed to a more normal policy backdrop. In summary, Citi’s analysis of sensitivities to rising US yields and to tightening Chinese credit conditions supports a neutral allocation in China, Korea and Taiwan equities, while remaining overweight in Southeast Asia.
Strong returns in global equity returns are expected in the year ahead. However, this could be lessened compared to the powerful rebound from the crisis a year ago in anticipation of economic recovery and could also be less evident at the broad index level. With global equities gaining 25% since the end of 2019 and 10% year-to-date (as of 22 April), Citi’s Global Investment Committee (GIC) has moderated down their global equity overweight and reduced their global fixed income underweight by allocating more to variable rate bank loans.
Citi analysts are bullish on the US growth outlook, but believe this may now be significantly embedded in equity valuation. Instead, Citi analysts see the weak performance of many emerging market equities and their low valuations as potential opportunities.
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.
