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Positioning in a New Economic Cycle

News that US President Trump and the First Lady tested positive for COVID-19 rocked world financial markets on Friday. The S&P 500 finished 1% lower on Friday, but still managed to post weekly gains of 1.5%. Citi analysts believe that news of the President’s infection may now highlight the increased health risks for the country and may encourage delays in reopening efforts which already face winter challenges to social distancing. At the margin, the news may move Republicans toward greater stimulus efforts. It is unlikely to mean a delayed US election, which would require consent of the Democrat controlled House.


The New Economic Cycle is likely to begin in 2021

After the US election ends, Citi analysts believe that the economy could grow. When COVID-19 recedes, Citi analysts are confident expansion could accelerate based on the following:

  • Vaccines - There no fewer than 14 major vaccine trials and three companies have late stage, Phase 3 testing underway.
  • Reopening of the global economy - This may mean increased domestic hiring and global trade to fill consumer demand. Particularly when COVID-19 has passed, deeply lagging industries such as travel and tourism may see a sharp normalization.
  • Tailwind of fiscal spending - The US election in just over a month has been the primary roadblock to enhanced fiscal support for the economy. A divided government is likely to yield support for an increased safety net. This could be as “little” as $1.5 trillion, but that’s a sizeable 8% of US 2021 GDP. A unified government is likely to spend even more, but over a multi-year period. This might include a long-term infrastructure spending plan, perhaps with a focus on de-carbonization, if led by Democrats.





New Economic Cycle optimism suggests portfolio action

Neither recessions nor pandemics last forever. Rather than speculate on what may happen up to and after Election Day, investors should prepare their portfolios for positive economic events that are more likely than not to materialize in 2021. Therefore, Citi analysts prefer to:

  • Retain or expand exposures to the best-valued income-generating investments and long-term growth opportunities while gradually adding exposure to depressed assets that may be deemed undervalued a year or more from now.
  • Hold US large cap growth stocks at neutral, but overweight US and global small and mid-caps, including emerging markets. Overweight global REIT assets at current valuations given their recovery prospects.
  • Identify firms that are able to sustain dividends under today’s challenging circumstances as their return in a New Economic Cycle may be above average for many years to come.
  • Underweight global Fixed Income, in particular negative or negligible-yield bonds. Within that space, prefer US high yield bonds and Emerging Market Debt.


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