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Higher Rates vs Global Recovery - Navigating the Volatility

Key takeaways

  • With effective vaccinations surging and infection rates falling, Citi analysts expect global GDP growth to rebound to 5.5% in 2021 and 4.0% in 2022. Despite risk of inflation and higher yields, Citi’s views are that rising yields are unlikely to signal the end of the equity bull market, as earnings growth in 2021 and 2022 are expected to offset higher and more normal levels of interest rates rising from ultra-low levels.
  • Citi’s Global Investment Committee (GIC) thus increased its Overweight in Equities, reduced its Underweight in Bonds and reduced Gold from Overweight to Neutral. Real Estate Investment Trusts (REITs) remain Overweight while Cash remains Underweight.
  • Citi analysts favor selected cyclical sectors, global ex-US small/mid caps and regions such as Europe/UK and ASEAN while having a thematic preference for Global Healthcare. Over the longer term, Citi maintains a commitment in Unstoppable trends -  Rise of Asia, Increasing Longevity, Digital Disruption, and New Energy.


Worldwide vaccine roll out in early days


Since vaccinations began in December 2020 in the US, more than 150 million doses have been administered (as of 30 Mar). About one-third of the total US population has at least a first vaccine dose. At the present pace, 70% of the UK population may be vaccinated with both doses by September 2021 which is expected to be sufficient to achieve herd immunity. In Europe, the slow speed of vaccine delivery has prompted a set of further lockdowns and travel restrictions.

Pace of vaccinations in Asia is relatively slow compared to Western countries. This is because of the large population and lower rates of infection. However, some acceleration in vaccination is likely in coming months.


Keeping an eye on inflation and interest rates

With nearly 10 million US jobs lost during the pandemic, income and output can potentially be much higher during several years of recovery before the economy is overly stretched. US inflation may potentially rise above 3% over the remainder of 2021. The inflation outlook for the longer-term depends on how gradually central banks move away from monetary policies suited for economic collapse and the global health emergency.

In March, the Federal Reserve (Fed) maintained its dovish stance, keeping rates unchanged at 0% and the bond-buying program at its current size. Citi analysts do not expect any rate hike in 2021.


Wealth Themes

Renew your Portfolio in the New Economic Cycle

2021-22 is likely to be a period of recovery and strong economic growth driven by vaccines, a rebound in trade and industrial production, pent up demand for services and global stimulus.


Short-term recovery plays

As markets recover, Citi analysts favor

  • Global ex US small/mid caps (US SMID)
  • Cyclicals (Industrials, Financials)
  • Southeast Asia and sectors (Consumer Discretionary, Financials and Industrials)
  • Global Healthcare, given its relative valuation near historic record lows. The sector underperformed global equities by nearly 8% last year, despite having the most stable growth fundamentals.


Long-term Unstoppable trends

Citi maintains a commitment in Unstoppable trends which are likely to last for two decades or more:

  • Rise of Asia – Companies exposed to Emerging Market (EM) consumerism;
  • Increasing Longevity – Focusing on healthcare technology;
  • Digital Disruption – 5G, Cyber Security, Fintech, Artificial Intelligence, Data Storage (Big Data), Internet of Things;
  • New Energy – Smart Grids, Solar, Wind, Hydro, Energy Storage and Energy Efficiency.


Avoiding the Inflation Drag

Citi analysts continue to look for opportunities to pick up yield, while staying diversified in portfolio risks.



  • US HY – Citi analysts prefer higher yielding variable-rate bank loans. Moving up in the capital structure, not only provides lower volatility, but its floating rate component provides protection if short-term rates rise.
  • EMD – Citi analysts prefer Asian HY credit, where spreads are double their US counterparts.



  • REITs may benefit from recovery in property fundamentals, low interest rates and credit easing.


Dividend plays

  • As the global economy recovers, Citi analysts expect “dividend grower” equities to resume their long-term, lower-volatility outperformance.
  • Citi analysts advocate global dividend exposure, as well as a mix of cyclical and defensive sector exposure.


Recycle: The Power of Investing with Purpose

  • A recent 2020 study estimates that investment in ESG funds is now over US$40 trillion, increasing by approximately US$10 trillion every two years with a growth trajectory that shows no sign of abating.
  • The European Union’s €750 billion recovery fund will have a green emphasis, both in terms of focus as well as fundraising. The EU has promised to raise 30% of the required debt by issuing green bonds. In addition, it has pledged that all of the spending must contribute to its emission-cutting goals. In addition, a number of EU-wide green taxes are under consideration to support the eventual repayment of the fund.
  • As part of its COVID-19 recovery plan, China announced an extension of electric car subsidies and tax breaks through 2022. Previously, these were set to expire in 2020. Furthermore, China has started spending $1.5 billion to grow its electric car-charging network by 50% in 2020. President Xi also announced China’s goal of reaching carbon neutrality by 2060, planning investments of more than $5 trillion in renewable power generation, while shuttering coal-fired plants or retrofitting them with carbon capture technology.




Position for a bottoming USD, financial repression in EUR & JPY and a commodities (ex Gold) reflation narrative

Position for a bottoming in USD amidst expectations for higher real yields in US versus financial repression in Europe and Japan.

  • Position for a bottoming in USD versus financial repression in EUR and JPY. Prefer USD over EUR, JPY, CHF and Gold.


Position for commodities reflation narrative

  • Position for a risk asset and commodities reflation narrative that favors inflows into oil, copper, iron ore to support commodity FX.


Position for risk asset recovery reflected in higher real yields

  • Position for Gold cycle likely peaking due to risk of Fed tapering asset purchases by end-2021 and more aggressive US rates pricing for lift-off.



Increased Overweight in Equities, reduced Underweight in Bonds and reduced Gold to Neutral. REITs remain Overweight while Cash remains Underweight.


  • US SMID reduced from Overweight to Neutral. Since adding an overweight to US SMID in April 20, this asset class has gained nearly 80%. In place of this, the GIC added to global healthcare, given its relative valuation near historic lows. The sector underperformed global equities by nearly 8% last year, despite having the most stable growth fundamentals.
  • Within Asia, the GIC reduced overweights in China, Taiwan and Korea to neutral, while adding to ASEAN. This takes into account Chinese monetary policy becoming more hawkish, which could limit gains. ASEAN may have more exposure to the recovery.
  • The GIC added weights to UK equities. At 4.0% average dividend yield, UK equities trade at 14.2 x 2021 EPS, a 40% discount to US equities, with a EPS rebound likely.


Fixed Income

  • The GIC switched out of US High Yield and added into US Bank Loans after rallies in credit assets. Within Sovereigns, the GIC reduced weights in US Short-term treasuries. Citi’s base case anticipates continued upward long-term interest rate pressures, as the economies recover from COVID-19. The GIC added weights to Treasury Inflation-Protected Security (TIPS), which may benefit from the Fed’s higher inflation target.



  • Gold is a performance risk when market interest rates rise. Since 1985, gold has risen more than 20% during six periods, and fell more than 20% in four cases. The gains for gold through 2020 reflected a peak pace of US monetary easing. This leaves gold vulnerable




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