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Positioning for Opportunities Amidst Volatility

As markets have rallied in April (S&P 500 Index rose 12.8% for its greatest monthly gain since 1987), evidence is building that investors could view the COVID-19 collapse as a “short, sharp, shock”. Q2 is most likely the lowest point of a fast-moving recession, with a resumption of growth just beyond.


Nevertheless, the road to recovery for equities is unlikely to move in a straight line. Citi analysts expect more volatility and new opportunities, even as some sectors and regions look attractive today.


Avoid Being a Market Timer

Citi analysts advocate 3 critical steps to avoid timing the market: 1) Maintain a core portfolio (~80% of investment assets) that can benefit from rebalancing and asset allocation changes over time and is reflective of risk tolerance; 2) an opportunistic portfolio can be established to invest in shorter-term, dislocated opportunities;  and 3) maintain a cash buffer.


Citi Private Bank identifies 3 rising risks on the horizon that may cause markets to move lower over coming months:

1) Greater-than-expected virus impact from COVID-19 as economies start to re-open, leading to uneven economic recovery in the US and elsewhere; 2) Potential political issues, including greater trade frictions between US and China that may impede a full economic recovery; and 3) any change in the focus of policymakers to do “whatever it takes” to support the economy in the face of the COVID-19 crisis.




Investment Strategy

Small and Mid-Cap US Equities: Strongest outperformance of small and medium-sized companies typically occurs early in an economic recovery cycle.


Asian and Latin American Emerging Market Equities: Asia is Citi Private Bank’s “unstoppable trend”, a region that represents a durable, long-term growth opportunity, with relatively stronger companies and national balance sheets. On the other hand, Latin American valuations are deeply depressed, with shares valued near 2008 crisis lows while currencies (inflation-adjusted) have fallen to mid-1990s levels.


Structures that take advantage of high levels of volatility: While market volatility has retreated from its highs, the volatility index (VIX) remains around 65% higher than its 2019 average. In a low interest rate environment, investors may also consider structured notes for some portion of their combined fixed income and equity allocation.

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