Staying Disciplined with Portfolio Rebalancing and Asset Allocation

As investors drove a relief rally in financial markets post the G20 summit, this serves as a reminder that market timing could be detrimental to the long-term health of portfolios. Citi analysts believe that asset allocation across high/low risk investments remains the best strategy to cope with uncertainty.

Within equities, Citi analysts are underweight US in our multi-asset class portfolios. Strong investor confidence in US markets may actually limit future returns and investors who have become highly concentrated in US markets should consider rebalancing and diversifying.

In contrast, Citi analysts continue to believe that long-term investors and those under-allocated to Emerging Markets (EM) should look to gradually build exposure to the asset class.

Not only do valuations support this, but following trade risks, worries over growth and Fed tightening, EM equities have become the most under-owned in 16 years.

Why valuations matter: The charts show the 10-year return prospects for US equities based on the cyclically-adjusted price earnings ratio (CAPE) and valuations are forecasting diminishing future returns. In contrast, future returns in EM exceed those expected to be found in the US.

Global investors currently have the lowest weightings for EM since 2002: Since 2014, relative weights in EM have continued to fall and are now 600 bps below the MSCI neutral weight, the lowest level since 2002.