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Citi

COVID-19: Reassessing Portfolio Allocation

Market reaction

  • US stocks fell sharply in volatile trading on Thursday as investors worried that COVID-19 may be spreading in the US. Dow Jones Industrial Average fell 4.4%, the S&P 500 Index slipped 4.4% and the Nasdaq Composite dropped 4.6%. The S&P 500 hit the lowest in 19 weeks with its sixth consecutive decline and the largest single-day fall in more than eight years.

 

  • This is in contrast to the S&P 500 Index and Nasdaq Composite setting record highs last week. The overnight losses put the three US major indices in correction territory, which is defined on Wall Street as a fall of 10% from their recent high.

 

Economic disruption, albeit temporary

  • The tragic public health shock is not the primary mean of economic dislocation. It is government travel restrictions, quarantines, supply chain disruptions and changes in individual behavior that are primary sources of short-term economic disruption.

 

  • As seen in previous global and regional health epidemics, economies typically rebound sharply when the health threat itself has passed.

 

  • Citi analysts have reduced their 2020 global growth forecasts from 2.7% to 2.5%, nearly the weakest since the global financial crisis. China’s growth forecast for 2020 has been reduced from 5.8% to 5.3%. Visibility on the economic outlook has been reduced by the latest virus news and the transmission of the Chinese economic slowdown to the rest of the world implies more downgrades to the global growth forecasts could be further ahead. Elevated volatility is likely in the near-term as markets continue to digest the economic and earnings impact of COVID-19.
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GIC Asset Allocation – Shift from Overweight to Neutral Equities; Increased Overweight to US Treasury and Gold

  • With markets reacting very rapidly, both positive and negative scenarios may play out in coming months, arguing for a more neutral asset allocation. Citi’s Global Investment Committee has turned neutral on global equities (from overweight) and added allocations to US Treasuries and Gold due to their relatively more safe haven properties.

 

  • Equities: While equities have stronger valuation support than global fixed income markets compared to their long-term history, equities are far more volatile and contingent on economic strength. A previously-anticipated earnings recovery in 2020 is now likely to face significant delay. In equities, Citi analysts continue to favor higher quality firms that have balance sheets able to weather an economic disruption. Dividend growers also remain particularly appealing.

 

  • Fixed Income: Citi’s GIC has decreased the underweight to global fixed income, by adding to an overweight allocation to US Treasuries (USTs). Other US dollar investment grade bonds also remain overweight.

 

  • Gold: An overweight allocation to gold has been further increased, which acts a risk hedge in times of rising volatility

 

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