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Equities

Staying the Course in Global Equities

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  • Positive vaccine developments, robust fiscal stimulus and ultra-low central bank policy rates have led to a steepening US yield curve, with long-dated US Treasury yields rising ahead of the short-end. In the past two weeks (as of 24 February 2021), inflation-adjusted (real) 10-year US Treasury yields have risen from -1.1% to -0.8%. Nominal interest rates face continued upward pressure as inflation expectations are gradually rising. This is largely due to mounting expectations of a historically large new US fiscal stimulus, even as effective vaccines are deployed.

 

  • However, the world economy remains heavily distorted by COVID-19’s impact – current bottlenecks in manufacturing are likely to clear, while excess services capacity could keep inflation restrained in many sectors, while both demand and supply recover. Thus, Citi analysts caution against expectations for runaway consumer price inflation anytime soon. 

 

Potential consolidation in equities in the near-term

  • The rise in Treasury yields have helped catalyze a rotation away from highly valued growth equities that had benefited from COVID-19 related shifts in the economy. With the Federal Reserve pledging to remain highly accommodative until a full labor market recovery is achieved, the slight rise in yields from record low levels would ordinarily not rile equity markets. However, this “catch-up” in bond yields has followed a period of very sharp upward earnings revisions across the world, during which bond market pressures were absent. The distinct timing of these events now points to some likely consolidation in world equities, particularly in rate-sensitive growth shares that proved defensive during the worst of the COVID-19 shock.

 

 

 

Remain overweight global equities in asset allocation

  • Even as equity returns likely moderate in the near-term, Citi analysts believe the outlook for sustained expansion beyond 2021 – along with poor valuations in cash and fixed income – remain key reasons for retaining an overweight in global equities and Real Estate Investment Trusts (REITs). Consensus expect a 27% rise in global earnings per share (EPS) in 2021, while Citi analysts expect a further 12-15% gain in 2022. Easy macro policies are also likely to support a multi-year period of above-trend growth.

 

  • As the COVID-19 shock is not expected to be permanent, Citi analysts believe there remain substantial opportunities to allocate to laggard regions and sectors, while still being allocated for sustained growth in particular industries. Within global equities, Citi analysts continue to prefer regions such as Europe, Southeast Asia and Latin America, and non-US small and mid-caps.

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