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Citi

Preparing Portfolios for Near-Term Challenges

  • World markets face greater uncertainty with the looming US election in early November and no clarity as to its outcome. US political developments have also slowed progress toward additional fiscal support for the economy.

 

  • Separately, markets may brace for the risk of rising COVID-19 infection rates as winter approaches and populations in the Northern Hemisphere increasingly move indoors. It is unclear if an overlap with the traditional influenza season may mean greater COVID-19 infections. However, social distancing indoors may hinder recovery in certain economic activities.

 

  • Despite the two major near-term uncertainties, a dramatically different macroeconomic policy backdrop and better-prepared health sector suggest challenges may not be as severe as the initial global shock from COVID-19. After November’s election, the US President, Congress and Federal Reserve are likely to continue focus on economic stimulus and COVID-19 mitigation efforts. COVID-19’s effects are varying widely across the world, but are not driving large performance differences in the pace of economic recovery. While possible, renewed indiscriminate shutdowns to fight COVID-19 seem unlikely and Citi analysts expect more targeted measures instead.

 

  • Thus, the US election and potential winter COVID-19 surge are unlikely to dominate global returns in the next 12-18 months. Instead, it may be more likely for the eventual departure of COVID-19 to have a profound, mostly positive impact (though negative for certain “COVID-19 defensive” assets).
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  • Concerns about US taxation amplify the existing diversification argument for global equities, which have lagged behind US markets in both performance and valuation. The US market itself has been led by technology shares, which has played a critical role in allowing the world economy to adapt to social distancing disruptions. Citi analysts remain fundamentally optimistic on the technology sector, but even after a 10% correction in the past month (as of 24 September), potential long-run returns appear less attractive at the start of 2020.

 

  • In comparison, Citi analysts find cyclical, income-generating global equities are reasonably valued and poised for recovery after the pandemic. In particular, firms that are able to sustain dividend payments under present challenging circumstances could hold special appeal, particularly, in the low interest rate environment. While the global easing cycle has already boosted gold’s value sharply, Citi analysts still see diversification and hedging value for the yellow metal, and it should stay supported by a sustained period of easy monetary policy.

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