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Asset Allocation

Shifting Allocation on Trade War Escalation

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Citi analysts reduced the overweight in Global Equities and reduced the underweight in Fixed Income. Citi’s allocation shift is driven by US trade policy, which now appears less predictable. The outcomes of political negotiations are increasingly material to the economic outlook and have become a more influential driver of returns.

 

Reduce Overweight in Global Equities: Citi analysts reduced allocations to both Developed and Emerging Equities based on two criteria:

1) Markets where there have been relatively little valuation impact from trade fears, but where the economic impact of a trade war could be substantially greater. This led to reductions in Canadian and Mexican equities.

2) Markets where there is low or reduced conviction in fundamentals. This led to reductions in EMEA, as well as moderately paring back overweight positions in Developed Europe. Citi analysts reduced overweights in Germany, Hong Kong and other trade-dependent Asian and European markets.

 

Reduce Underweight in Global Fixed Income: Citi analysts added to overweight positions in short-term US Treasuries, short-term US corporate debt and municipal bonds for US tax-payers. Citi analysts also added a new overweight position in US Treasury inflation-linked debt. The position helps add an asset that is negatively correlated to risk assets while also earning a return above the US inflation rate.

 

Amid currently reduced policy visibility, Citi analysts see the reallocation as a transitional step. Allocations may be raised or lowered based on pending trade and other policy developments. Nevertheless, Citi analysts believe that a highly diversified multi-asset class portfolio approach remains essential in today’s environment.

 

Global expansion remains intact: To be clear, new trade agreements that lower or preserve current tariffs could still result in a significant relief rally for many beaten down equity markets across the world. Present US economic growth is strong and EPS gains may likely exceed 20% for a second straight quarter, and possibly for the full year. Citi analysts believe the global expansion remains intact, with GDP growth of 3.4% forecasted in 2018.

 

Importantly, Citi analysts continue to reiterate their high conviction on Emerging Markets (EM) and Emerging Asian equities in particular over the coming decade. While Citi analysts may make shorter-term tactical allocation shifts in the asset class as a result of US trade and monetary policy developments, any such changes would very unlikely change Citi’s longer-term strategic views.

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