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Citi

Market Update on Coronavirus

  • There remains a lot of uncertainty but several turning points observed in recent days. Human trials of anti-viral drugs have started and the number of recovery cases have surpassed the number of deaths. A key global risk is the possibility of uncontrolled contagion out of China, however thus far reported contractions out of China have remained around 1% of the total.

 

  • Going forward, markets may have to face shortfall of near-term economic data, while the negative impact may be less severe than many thought as policy makers start to respond more actively to combat the economic situation.

 

  • Citi’s Global Investment Committee (GIC): Remain overweight equities in a globally diversified portfolio. The GIC has trimmed allocation in US to a smaller overweight, which has outperformed global equities by 10% in the last twelve months. Nonetheless, the US equity market continues to benefit from strong sector diversification within a single geography and US economic growth remains constructive. They have also increased allocation to Greater China, with markets likely to stabilize in coming months and a potential rebound in their economies when quarantines and travel bans conclude. The following are some key themes for positioning in equities, while keeping risk hedges like gold and selective fixed income on to help cushion volatility:

 

  • Healthcare, which is among the most consistently strong sectors in previous health episodes. The most direct beneficiary may be those engaged in innovative technology and advanced sciences, such as healthcare technology, equipment supplies, biotech and life.

 

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  • Dividend growers. Firms that are able to grow current income for investors instead of relying on credit. With an expectation of positive but more subdued equity gains this year relative to 2019, slower but stronger income producing equities are preferred and also represent a higher quality strategy, particularly in volatile environments.

 

  • Asian technology. Headwinds such as trade and inventory overhang, which have challenged the sector in recent years appear to now be turning. Despite outpacing the US technology sector in terms of earnings growth, the Asian technology sector has significantly underperformed and looks poised to catch-up.

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