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Citi

A Focus on Reconstruction and Growth

  • Consensus forecasts a 26% rebound in global earnings per share in 2021. The slow starting point for vaccinations in early 2021 means it may take a bit longer than a year to reach their expected level. Yet the gains they expect are reasonable, as is further growth beyond. Adding to Citi analysts’ confidence is strong and clear evidence that a rebound in industrial production and global trade is already underway. This makes particular sense given the impact that COVID-19 has had on supply chains and inventories. A broader recovery beyond the goods producing sectors awaits following large scale vaccinations. 

 

  • Fear that markets have already risen too much. Investors who stay paralyzed by the possibility of a loss give up powerful long-term return possibilities. After the global financial crisis ended, equities surged in 2009, running ahead of the broad economic recovery that was to come. Many investors saw 2009’s 27% annual return in the S&P 500 and 42% return for non-US stocks as the end of the recovery. US (S&P 500) and global equities (MSCI All Country World) then went on to provide positive returns in 9 of the following 11 years. In the near-term, speculative activity in equities markets points to a routine market setback. Volatility may be poised to rise, but equity market valuations still appear more attractive than global fixed income thus leaving Citi analysts to overweight the asset class.

 

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  • Looking forward, Citi analysts are more optimistic about non-US equities that, based on prices, have not eclipsed their old record highs. The US dollar’s large net gain and rising US equity valuations over the past decade have left the rest of the world with a “minority stake” of global equity market capitalization. This is likely to shift back meaningfully, given the markedly different valuations for the majority of the world’s businesses.

 

  • The UK for example is likely to face its last substantial macro crisis with the immediate challenges of COVID-19. As this ends, it could emerge from Brexit with a more certain future. UK equities trade at just over 14x expected EPS this year with a 3.5% dividend yield.

 

  • In emerging markets, Brazil’s equity markets is off 24% in USD terms since the end of 2019, with COVID-19’s impact the likely key driver. Southeast Asian markets dropped 10% in 2020, despite favorable long-term development prospects. Regional Asian markets are likely to snap back with a health solution to COVID-19 during the coming year and Citi analysts see them providing long-term growth opportunities beyond.

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