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Potential Headwinds for US Equities

With just 4% of the world population, new cases in the US are near 30% globally. With COVID-19’s “first wave” resuming before a potential winter second wave, “socially close” economic activities such as travel and hospitality could be held back.

 

Fiscal stimulus negotiations commence in the US

This argues for a more sustained, if costly, fiscal response. On July 27, Senate Republicans unveiled a second stimulus package (the “HEALS” Act) worth $1trn to combat the pandemic.

 

A first step towards negotiating a compromise plan with House Democrats, the content of the bill is largely in line with the expectations, which would extend the unemployment benefits at a lower rate, hand out direct payment of US$1,200 to Americans, and provide fiscal support to schools, businesses and infrastructure. Despite the tight time frame for Congress to act, Citi analysts expect a bi-partisan compromise could be reached, as they have 36 times before in the past.

 

Investors are also starting to focus on the US Presidential elections in November

Biden is currently ahead in national polls and in most key swing states, but the elections remain 3.5 months away and circumstances can change. Historically, the US stock market has risen in 15 of the 17 election years since 1952.

 

While sector performance are likely to be influenced by fundamentals, valuations and monetary policy, fiscal or regulatory policy measures may also affect different areas. Some market sectors may prefer a Republican (e.g. Consumer Discretionary and Defense) while others (e.g. Renewable Energy) may prefer a Democrat with Senate control as well.

 

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Implications for portfolio allocations

US equities ended July with the S&P rising 5.5% (1.2% YTD). The Technology sector broke out to new records high with the Nasdaq composite up 6.8% for July (19.8% YTD). While “digitization” remains one of Citi Private Bank’s unstoppable trends, a narrow focus on performance could accumulate overweights in the most over-valued assets over time and lead to potential concentration risk.

 

With this, Citi’s Global Investment Committee (GIC) is neutral on US large cap equities, and allocate their overall global equities overweight to increase diversification. Within the US, small and-mid caps are preferred, having lagged large-caps in the recovery. Another area the GIC is overweight is Emerging Asia – Chinese shares have rallied in July with Shanghai Composite Index up 10.9% (8.5% YTD). Though near-term consolidation could be likely, Citi analysts are long-term optimistic on Asian consumption, technology and healthcare themes

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