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Economic Recovery Intact but Risks Remain

The US economy and employment may continue to improve slowly. Looking further out, Citi analysts are increasingly optimistic on the state of business cycle and growth prospects for 2021 and 2022. Overall end-consumer inventories are falling sharply and may continue to drop through Q3 at current production rates. While it may restrain US GDP through year-end, it may drive a future recovery in industrial activity and trade and this is unlikely to be a US-only phenomenon.  


Earnings and sector implications

Earnings have also shown a greater disconnect between large/small company profits than initially expected. S&P 500 EPS fell by 33% in Q2, but US small- and mid-cap firms saw EPS crushed by -70%.


Citi analysts expect a potentially sharp market rotation within equity sectors once it becomes apparent that widely available treatments are likely to mitigate the worst effects of COVID-19. In particular, cyclical industrials and most small- and mid- cap stocks do not appear to be priced for the ensuing economic rebound and could be poised to recover as the world moves beyond immediate COVID-19 related concerns.


With governments around the world spending more than US$9bn to date sponsoring company research and trials for the development and testing of candidate vaccines, Citi analysts expect that an effective vaccine and/or monoclonal antibody remedy could be announced by 1H 2021.




Political risks remain

US-China tensions continue to rise with China announcing sanctions on 11 Americans in response to similar measures by the US against 11 individuals in Hong Kong related to the implementation of the National Security Law. US election season is also upon us and related news flow is likely to increase. The potential for market volatility in the short-run remains, especially if a Democratic sweep grows louder with an increased risk of US corporate tax rates being raised to fund more progressive policy priorities.


From an asset allocation standpoint, Citi’s Global Investment Committee is allocating their equity overweight more broadly across sectors and global opportunities to increase diversification. This includes emerging markets (Asia and Latin America), small- and mid-caps in the US that have lagged large caps in performance, and global REITs.

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