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Citi

Investment Opportunities and Challenges in a Post COVID-19 Recovery

Key Takeaways

  • Citi’s Global Investment Committee (GIC) has moved Global Equities from Neutral to Overweight, increased its Underweight in Bonds, and trimmed its Overweight in Gold. It also added a thematic allocation to REITs.
  • Citi analysts expect global real GDP to contract by 3.5% in 2020, followed by a rebound of 5.5% in 2021. As a result, global Earnings-Per-Share (EPS) could contract by 50% in 2020, followed by a 40% rebound in 2021.
  • Navigating global markets in 2020 requires investors to focus on a more targeted investment approach. Citi’s strategy is to maintain a long-term commitment to our Unstoppable trends in healthcare, digital disruption, and Asia, while also favoring selected cyclical sectors, such as US small-cap equities, and regions like Latin America (LatAm), where values have collapsed similar to 2008.

 

Negative global growth expected

Citi analysts expect global real GDP to contract by 3.5% in 2020, followed by a rebound of 5.5% in 2021. The US is forecast to shrink by 3.3% this year, followed by 4.2% expansion next year. The Eurozone is expected to contract by 6.7% in 2020 and rebound 6.5% in 2021. Within Asia, China is expected to be most resilient this year, up 2.4%. Japan is set to contract by 5.2% in 2020 and rebound 2.5% next year.

As a result, global Earnings-Per-Share (EPS) could contract by 50% in 2020, followed by a 40% rebound in 2021. Consensus on the other hand is more optimistic and expects a 19% contraction in 2020, followed by a 28% rebound.

 

Unprecedented monetary and fiscal stimulus

Central banks reacted by announcing an aggressive expansion in Quantitative Easing (QE) policies. Notably, the US Federal Reserve (Fed) said that it would buy both investment-grade and high yield corporate bonds/ETFs, something not even done back in the 2008 financial crisis. Recent changes in unconventional monetary policies of major central banks mean that central bank asset purchases are expected be over US$6 trillion, nearly 2.5 times previous peaks. This measure is expected to peak in February 2021.

From a global fiscal stimulus perspective, governments around the world have committed roughly US$9 trillion to support their economies.

 

Equities

Emerging Markets - Asia is favored

Fed easing in March has alleviated the USD liquidity shortage that had hit the region. As China continues to gradually climb out of the economic declines seen in February, equities in Asia are likely to rebound as well. Citi analysts remain long-term optimistic on Asian consumption, technology and healthcare themes.

In LatAm, valuations have improved sharply after a deep selloff. Given the severe underperformance relative to other markets, Citi analysts believe the region may have room to perform. The correction has adjusted real exchange rates to levels not seen since the 1990s and may provide a cushion to economies.

In EMEA, a brighter cyclical outlook for oil, and a likely prolonged period of easing by the European Central Bank (ECB) and Fed could provide support. Nevertheless, Citi’s still small underweight in EMEA is driven by a higher conviction in both Asia and LatAm.

 

US - Preference for US Small and Mid Caps

Rapid and continued policy steps by the Fed and US Congress have helped stabilize markets after a significant drop in March. Broad market valuations are no longer cheap after having recovered sharply from crisis levels.

Citi’s thematic preference remains for secular growth shares in healthcare and the “digital economy” over the longer term. This favors US large cap equities. However, their strong outperformance YTD suggests more limited gains ahead. In the near term, Citi analysts expect US Small and Mid Caps to catch up.

 

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Europe and UK - More stimulus may be on the way

The European Union appears increasingly likely to unify around a stronger fiscal expansion in the coming year. The European Central Bank (ECB) may thus have a source of credit demand growth to stimulate economic activity. As such, Citi analysts are neutral on European equities.

With close to 70% of overseas revenue exposure, UK equities have been hit hard by a combination of the global slowdown and a delayed virus containment strategy. UK-Eurozone trade negotiations are unlikely to have progressed amid COVID-19 fears, clarity on this or a delay in the trade deadline (currently year-end) could likely boost sentiment and lift a weak sterling.

 

Japan - A softer Yen may help boost equities

Japanese large cap stocks sold off along with global markets but have rebounded more sharply, likely as a result of seemingly lower levels of virus spreading and less extreme economic shutdown measures as well as ample stimulus. Furthermore, JPY weakened sharply as the Fed provided monumental measures to restore liquidity, removing a key headwind.  

 

Fixed Income

US Sovereign bonds Overweight

Large scale fiscal packages have temporarily put a floor in long-dated yields, while the Fed has cut short rates to the zero lower bound. Renewed asset purchases may limit how far long-dated yields can ultimately rise, though Citi analysts expect some rebound in rates in a cyclical recovery.

 

Investment Grade (IG) bonds  Overweight US

Citi analysts prefer areas that have not bounced back as far. This include cyclical-oriented sectors impacted by COVID-19.

 

High Yield (HY) bonds – Neutral US

With Fed supporting credit markets, Citi analysts believe there is scope for additional spread tightening in HY bonds. However, further improvements in valuations may not be linear. Default rates are rising and may continue.

 

Emerging Market bonds – Overweight

For USD debt, fundamentals have deteriorated, but a lot has been priced in. Citi analysts find Asia (low beta) and LatAm (high beta) attractive. In local currency bonds, yields have fallen to lowest levels on record, though EM FX remains volatile. Unhedged returns may eventually benefit from a prolonged period of Fed easing and USD weakness.

 

Real Estate Investment Trusts (REITs)  Overweight

Against a backdrop of sharply lower interest rates, central bank credit easing steps and a likely rebound in social engagement, Citi analysts think many real estate assets may be pricing in fairly extreme pessimism and this could present opportunities.

 

Commodities

Gold  Overweight

Citi analysts reduced weights in Gold after large price gains. But given dramatic declines in global bond yields, Citi analysts continue to see gold as a hedge during volatile markets.

 

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Overweight Global Equities, Underweight Bonds and Overweight Gold. Added a thematic allocation to Real Estate Investment Trusts (REITs).

Citi’s Global Investment Committee (GIC) has moved Global Equities from Neutral to Overweight, increased its Underweight in Bonds, and trimmed its Overweight in Gold. They also added a special thematic allocation to Real Estate Investment Trusts (REITs).

Given the unevenness of the economic rebound both by geography and by sector,  navigating global markets in 2020 is likely to require investors to focus on a more targeted investment approach.

 

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