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Equities | Asset Allocation

A Cyclical Tilt to Equities While Eyeing Risks

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  • Markets are likely to face two major risks looking forward – growth disappointments, and extreme sensitivity to rising interest rates in current market pricing. For now, these two risks may be contradictory rather than overlapping, as monetary policy aims to ensure growth does not disappoint. Later on in economic cycles, rising interest rates can be a driver of risks when inflation becomes a bigger concern.

 

  • Sharp declines in real interest rates year-to-date (as of 21 August) have contributed to a rise in both US growth stocks and gold, more than offsetting declines in other equity prices led by the COVID-19 shock to the economy.

 

  • An immediate move toward higher interest rates seems unlikely as the Federal Reserve and other central banks are likely to maintain zero or lower policy rates long into a coming recovery. However, declines in rates seem unlikely to repeat. Importantly, with sharply higher global bond prices, interest rate sensitivity of broad financial markets has also risen.

 

  • To account for risks of disappointing growth, or in time, rising rates, Citi’s Global Investment Committee’s (GIC) equity overweights are much broader than the equity leadership of 2020’s pandemic-driven markets. The GIC remains invested in “Unstoppable Trends”, with “Digitization” leading performance, while gradually seeking room in portfolios to add regions and industries that have collapsed under COVID-19 and can potentially recover.

 

  • Assets that are not very rate-sensitive include global cyclical and value equities. Being down in price, these are also less sensitive to the growth disappointment risks. While fundamentals in technology, media and telecom (TMT sector) are strong and improving, relative opportunities exist in cyclicals such as Industrials, Financials and Real Estate Investment Trusts (REITs).

 

  • The GIC also added to core European equities (neutral) and global small- and mid-caps (overweight). The European Union has unified around a stronger fiscal expansion and reasonable control of COVID-19 infections in the region may provide support to depressed equity markets. Global small- and mid-caps may catch up to US large cap shares.

 

  • Other areas that the GIC is positive on are Emerging Market (EM) equities in Asia and Latin America. Inflation rates have moved down structurally toward US levels in many EMs and this could benefit EM currencies and related asset markets. Citi analysts also expect the USD to weaken over the longer-term and this may also assist global EMs and many other non-USD asset returns in coming years. In Asia, cyclical equities may catch up. More cyclical markets (Southeast Asia) and industries (Financials, Industrials and Consumer Discretionary) are more sensitive to USD weakness. A small overweight to gold is maintained as a hedge against severe shocks, even as Citi’s base case assumes a robust recovery from COVID-19 over coming years.

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MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

Hong Kong: This communication is distributed in Hong Kong by Citibank (Hong Kong) Limited ("CHKL") and/or Citibank, N.A., Hong Kong Branch (“CBNA HK”, Citibank, N.A. is organized under the laws of U.S.A. with limited liability). CHKL and CBNA HK provide no independent research or analysis in the substance or preparation of this communication. Although information in this communication has been obtained from sources believed to be reliable, CHKL and CBNA HK do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.

This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein
has not taken account of the objectives, financial situation or needs of any particular investor. Any person considering an investment should consider the suitability of the investment having regard to their objectives, financial situation and needs,
and should seek independent advice before making an investment decision. You should obtain and consider the relevant product terms and conditions and risk disclosure statement, and consider if it’s suitable for your objectives, financial situation or needs before making any investment decision. Investors are advised to obtain independent legal, financial and taxation advice prior to investing. Investments are not deposits, are not protected by the Deposit Protection Scheme in Hong Kong
and are subject to investment risk including the possible loss of the principal amount invested.

This communication does not constitute the distribution of any information in any jurisdiction in which it is unlawful to distribute such information to any person in such jurisdiction.

CHKL does not provide discretionary portfolio management services.

Singapore: This communication is distributed in Singapore by Citibank Singapore Limited (“CSL”) to selected Citigold/Citigold Private Clients. CSL provides no independent research or analysis of the substance or in preparation of this communication. Please contact your Citigold/Citigold Private Client Relationship Manager in CSL if you have any queries on or any matters arising from or in connection with this communication. Investment products are not insured under
the provisions of the Deposit Insurance and Policy Owners’ Protection Schemes Act of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme.

This communication is for general information only and should not be relied upon as financial advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person and is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Any person interested in the strategies or concepts mentioned herein should consult their independent tax, legal, financial or other advisors,
as appropriate. This communication does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom
it is unlawful to distribute such information or make any offer or solicitation.

Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making
an investment decision. Interested investors should seek the advice of their financial adviser about the issues discussed herein as appropriate. Should investors choose not to seek such advice, they should carefully consider the risks associated
with the investment and make a determination based upon the investor’s own particular circumstances, that the investment is consistent with the investor’s investment objectives and assess whether the investment product is suitable for
themselves. Although information in this document has been obtained from sources believed to be reliable, CSL does not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from Its use.

CSL does not provide discretionary portfolio management services.

UAE: This document is distributed in UAE by Citibank, N.A. UAE. Citibank N.A. UAE is licensed by UAE Securities and Commodities Authority (“SCA”) to undertake the financial activity as Promoter under license number 602003.

Citibank N.A. UAE is registered with Central Bank of UAE under license numbers BSD/504/83 for Al Wasl Branch Dubai, 13/184/2019 for Mall of the Emirates Branch Dubai, BSD/2819/9 for Sharjah Branch, and BSD/692/83 for Abu Dhabi Branch.

This is not an official statement of Citigroup Inc. and may not reflect all of your investments with or made through Citibank. For an accurate record of your accounts and transactions, please consult your official statement. Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making an investment decision. Each investor should carefully consider the risks associated with the investment and make a determination based upon the investor’s own particular circumstances, that the investment is consistent with the investor’s investment objectives.
At any time, Citigroup companies may compensate affiliates and their representatives for providing products and services to clients.

United Kingdom: This document is distributed in the U.K. by Citibank UK Limited and in Jersey by Citibank N.A., Jersey Branch.

Citibank UK Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Our firm’s Financial Services Register number is 805574. Citibank UK Limited
is a company limited by shares registered in England and Wales with registered address at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, Companies House Registration No. 11283101.

Citibank N.A., Jersey Branch is regulated by the Jersey Financial Services Commission. Citi International Personal Bank is registered in Jersey as a business name of Citibank N.A. The address of Citibank N.A., Jersey Branch is P.O. Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank N.A. is incorporated with limited liability in the USA. Head office: 399 Park Avenue, New York, NY 10043, USA.

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