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Equities | Asset Allocation

The Search for Yield... in Equities

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Although Citi’s Global Investment Committee maintains a modest underweight in global equities, Citi analysts believe that a modest correction of 10-15% in global equities from their peak could be seen as an opportunity to increase allocations, particularly in dividend yielding equities. As of 23 Aug, the MSCI World Index is down around ~5.7% from its July peak (Source: Bloomberg).

 

Relative value of equity dividends has increased, with the substantial rally in global fixed income. Although equity markets remain somewhat vulnerable to evolving policy and economic developments, it may not take a large sell-off to create attractive equity opportunities, amid mounting economic fears that may become overstated.

 

The US would need to avoid recession in the coming 6-12 months to support a potential reallocation to equities. Citi analysts see a number of supportive factors: 1) central banks are easing globally. As central banks seek to boost inflation, the absence of an inflation spike has cushioned consumer incomes – a major difference from the onset of past contractions; 2) high personal savings levels, low debt burdens and absence of booms in cyclically activity such as housing makes it likely that household demand can be stabilizing force in the year ahead.

 

With half of non-US investment grade debt now negative yielding, equities are an alternative income producing asset class. Globally, dividends have grown by a compound annual growth rate of around 6% over time. When reinvested, growing dividend payments account for more than half of the total return of US equities over a 30 year period.

 

Global dividend growers can work together with bonds in a balanced asset allocation. On its own, selecting equities with dividends cannot completely cushion the asset class from volatility. However, the risk-reward ratio becomes more attractive once dividend stocks are combined with fixed income.

 

As bond income becomes ever scarcer, Citi analysts think that firms that can pay dividends and sustainably grow dividends may generally outperform broader equity markets over time.

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