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Equities

Slower Growth Isn’t the New “Down”

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Roughly 18 months after the low point for global economic activity, COVID-19 is sharply weakening as a driver of economic activity. So too is the “snapback” from depressed conditions.

 

Not every shock beginning in China is created equal. Unwinding Evergrande is unlikely to pose systemic risk in China, much less the world. Global markets face a shift in macro policy away from easing, consistent with slower growth. A property-led slowdown in China’s economy could be felt globally. However, the Evergrande headlines came at an unfortunate time, exaggerating its particular importance.

 

Economic growth and development are the norm. The US economy has expanded in 86% of all months since World War II, but not at the 6.5% pace of 1H’21. Tracking data for the current quarter suggest a 3.5% pace, close to Citi’s full-year 2022 US growth outlook. Signs point to a peak in “cyclical momentum” in the US and wider world economy.

 

Defensive industry sectors and large cap equities have routinely outperformed during growth slowdowns, while global bond yields averaging 1.3% across the risk spectrum remain uncompelling. Global corporate profits rose to a record high in 1H’21 and may likely gain 45% for the year.

 

In the second full year of economic recovery, S&P 500 EPS gained more than 10% in all but one case since 1960. A slower pace of EPS growth and very gradual tightening steps by central banks suggest potential high single-digit equity returns on average in the next two years (albeit far below the 30% gain of the past 12 months). Citi analysts generally see reduced vulnerability in non-US equities, currencies and commodities compared to the “taper-tantrum” period beginning in 2013.

 

China now faces contraction in its property sector that risks economic growth falling below policymakers’ minimum target. Citi analysts expect China macro policy to swerve toward stabilization and stimulus, but not necessarily in areas targeted for restraint.

 

Chinese equity valuations have retreated in one sector after another, which has historically pointed to enhanced returns. Nonetheless, Citi analysts see the outlook for Chinese macro and macro policy as less predictable than in the past 10 years and would prefer global diversification to concentrated overweights in Chinese shares, even as macro policies could likely restore economic growth within 2022. China’s move toward greater command and control may likely diminish its global economic influence little over coming years. The view is largely independent of how local markets perform.

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