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Citi

Encouraging Vaccine News Boost Case for Equities

Following Pfizer’s news on their 90% effective vaccine, Moderna also announced its COVID-19 vaccine was 94.5% effective in a preliminary analysis. With large-scale production and additional vaccines likely, an end to the global pandemic is expected to be around mid-year, with a sharp broadening out of the world economic recovery in the second half of 2021. Pent-up demand, ultra-easy monetary policy and stimulus could mean a strong, synchronous global recovery through 2022.

 

The vaccine news has boosted confidence in Citi’s base-case views. Owing to massive dispersion between the performance of many “COVID-19 cyclicals” and “COVID-19 defensives” this year, there could be room for a substantial further performance rotation in the coming year, even if it is only to partially reverse 2020’s impact.

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The Citi Private Bank Global Investment Committee (GIC) further increased overweights to global equities, adding to developed markets (ex US) and emerging markets (ex China).

  • The added allocations to Asia, Japan, Europe and Latin American equities reflect a sharp rebound already underway in global trade.
  • International trade discord seems far less likely with a Biden-led US administration and markets may benefit from the end of trade restraints that preceded COVID-19.
  • Emerging markets (EM) equities could also benefit from sharply compressed US interest rates and trend declines in the US dollar, given that the Federal Reserve has adopted a higher inflation target.
  • While Chinese equities gained sharply in 2020, EM equity valuations overall are near a record 35% discount to US equities on prospective 2021 earnings per share.
  • Finally on Technology, Citi analysts do not expect a fundamental sector collapse. However, the very strong performance of large cap IT shares – with the Nasdaq 100 Index up 38% in 2020 (as of 16 November)– suggests modest near-term return. Software, applications, and digital content continue to gain share of the world economy over time. Certain tech firms saw demand for their services boom as a solution to social-distancing requirements. However, a normalization of demand for these services with the likely end of the pandemic next year could be a performance restraint.

 

 

To fund the change, the GIC reduced overweights in EM fixed income and US high yield debt. They also reduced short-term US Treasury holdings with near zero yields.

  • While EM and US high yield debt could be further supported by recovery from the COVID-19 shock, declines in yields are now pronounced.
  • With very low volatility and a mere 20 basis point annual yield, US Treasuries simply represent cash-equivalent assets on the sidelines.

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