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Citi

Post-Pandemic Portfolio Positioning

 

  • Overall, global equities are 25% higher (as of 22 April) than they were at the end of 2019, even though economic output, employment and corporate investment are below their pre-pandemic peak. Equity gains of 30% in the US and China, reflect the enormous fire power of their fiscal, monetary, policy and health care actions. After such returns, investors may be fixated on the drop to come and assume markets have “gone too far”. Citi analysts think the world is likely to see a multi-stage recovery as COVID-19 is eradicated more slowly in some regions than others. It is therefore important to assess relative valuations.

 

  • Citi analysts are confident the level of vaccinations is likely to increase globally, and variants of COVID-19, while expected, are unlikely to cause a second pandemic. Momentum in the world economy could grow through 2022 with gains thereafter. If certain markets have priced in most of the good news, steps must be taken to identify and invest in areas of opportunity for further gains. A stepped up pace of US infrastructure spending is likely to be stimulative and a “net positive” for the economy. However, the performance of US shares in 2020 and 2021-to-date (as of 22 April) suggests potentially more limited returns for the region and high levels of speculative trading adds to near-term risks.

 

  • Citi analysts do not advocate market timing which is extremely difficult and can harm investor returns. If 1) the final year of economic expansions, 2) recession periods, and 3) the first year of economic recovery, are eliminated, US and non-US equity returns in “mid-cycle” tend to achieve the long-term average. Aside from short-term pull-backs that are common to almost every year, this mid-cycle (post COVID-19) could behave similarly.

 

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  • UK and European equities offer good exposure to areas favored by Citi analysts. COVID-19 cyclicals make up 55-60% of European and UK market capitalization respectively and there could be more to go in their rebound from 2020’s underperformance. The region also has a long-term growth driver in “green energy”; one of Citi’s “Unstoppable Trends” which is supported by increasingly ambitious government initiatives. Europe and UK also offer dividend yields of almost 3-4% respectively, which are high by relative standards globally.

 

  • Separately, while liquidity and credit conditions could remain difficult in China in Q2 and weigh on bond and equity markets, the recovery may continue beyond Q2 and the long-term prospects of Chinese equities remain strong after policy and credit conditions normalize. Southeast (S.E.) Asia could benefit more from stronger US import demand and are more compatible with rising US yields. China’s tightening credit also tends to impact North Asian markets more than S.E. Asia and supports Citi’s preference for the latter.

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