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Citi

Sifting Through Divided World Markets

Powerful fiscal stimulus in the US and COVID-19 vaccines have vaulted both confidence in the recovery and actual growth sharply higher. As such, the US economy looks poised to outperform in 2021, while other regions look set to follow later in 2021 and 2022. Strong returns in global equity returns are expected in the year ahead. However, this could be lessened compared to the powerful rebound from the crisis a year ago in anticipation of economic recovery and could also be less evident at the broad index level. With global equities gaining 25% since the end of 2019 and 10% year-to-date (as of 22 April), Citi’s Global Investment Committee (GIC) has moderated down their global equity overweight and reduced their global fixed income underweight by allocating more to variable rate bank loans.

 

The GIC has added to their thematic overweight in Healthcare, shifting global small- and mid-caps to a slight underweight. US and China equities are at neutral allocation after outperforming other regions.  

 

Potential volatility in US markets – Overweight Healthcare and Real Estate

High levels of speculative activity and short-term trading in US markets suggest more than the usual risk of a setback, which occurs virtually every year. However, Citi analysts see this as highly unlikely to interrupt the global economic recovery.

 

Within the US, the GIC is overweight Healthcare and Real Estate sectors. Despite consistent revenue and earnings gains, healthcare shares have risen only 15% since end-2019, including a 5% rise YTD (as of 22 April), sharply lagging other US shares. This is despite an unusually large 25% valuation discount versus the S&P 500. The sector’s revenues and profits continue to rise faster than other industries given demographic-driven demand strength. The healthcare sector has historically fallen the least among sectors during corrections, and its present valuation suggests better returns ahead, as it does for Real Estate, where asset prices remain 3% below the pre COVID-19 period.

 

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Catch up” regions and sectors in equities

The multi-speed global economic boom led by the US in 2021 may broaden to the world in 2022, with fiscal easing likely to boost US imports and foreign economic growth. Away from China and the US, the remainder of the world has seen equity market gains half as large as the US since end-2019, with Latin America down 16% (as of 22 April) in USD terms.

 

The sharp acceleration in vaccinations in the US, UK and eventually the Eurozone, coupled with no slowing in vaccine production, is likely to mean a sharp improvement in vaccine availability for the emerging world. Much lower valuations and lower expectations for recovery from COVID-19 favors “catch up” returns for regions including the UK, Eurozone, Latin America and Southeast Asia, when looking out over the next 12-18 months.

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