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Asset Allocation

Moving Equities Up to Neutral

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US monetary and trade policy are key recession risks, and both appear to be moving in a less troubling direction. While highly difficult to predict, Citi analysts believe the US is pursuing its trade aims somewhat more cautiously, while more mindful of the domestic economy. Thus, Citi’s Global Investment Committee has moved from underweight to neutral global equities. 

 

Why neutral? Previous “growth panics” in 2016 and 2018 led to deeper market slumps. This time, the Fed’s turn from tightening to easing has cushioned markets. On the flip side, that leaves less room for a substantial “snap back” recovery, even if trade uncertainty clears.

 

Not without risks but discounted. While a modest near-term correction in manufacturing activity may negatively impact earnings, a recovery is seen within the coming year. In addition, global equity underperformance over the past 12 months (equities up 2% compared to 11% for global bonds) meaningfully discounts this.

 

Equity dividend yields to drive a greater-than-usual share of total returns. Hits could be significantly concentrated in trade-sensitive industries, and Citi analysts expect overall corporate profits to rise little in 2019 and just 4% in 2020. Global equity returns are assumed to center around +6%-7%. Thus, sustainable dividends and dividend growth will matter for total returns in the slower return environment that is expected.

 

Citi analysts upgrade cyclical stocks to neutral (from underweight), after a period of outperformance for interest-sensitive defensive industries. This favors firms that can grow dividends rather than those with highest absolute yields. Dividend growth rates look particularly attractive in US and Japan.

 

 

 

Reducing global fixed income allocation to underweight (from neutral): Global bond yields, including emerging markets and high yield debt, have fallen to a record low 1.6% (0.6% ex-US). Citi analysts deepen their underweight in mostly negative-yielding European government bonds, and reduce the size of their overweight in short-term US Treasuries and some short- and intermediate-duration investment grade corporate bonds. Within global fixed income, developed corporate investment grade bonds and emerging market debt (Asia and Latin America) are preferred.

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