Equity and credit markets have moved significantly in anticipation of recovery last year. However, Citi analysts disagree with views that this has been overdone, given the likelihood of double-digit earnings-per-share gains in 2022 after a snapback of at least 20% in 2021. Nevertheless, increased speculative activity of late suggests a short-term consolidation. This should not be confused with a new trajectory for the economy. In contrast, if a COVID-19 mutation takes hold that proves resistant to vaccines developed in the past year, it could represent a much larger, fundamental risk.
In this case, greater policy easing and interest rate declines could boost defensive assets while hurting cyclicals. Citi’s Global Investment Committee’s (GIC) base-case view anticipates continued upward long-term interest rate pressures, gains in commodity prices and equities, as the world economy recovers from the COVID-19 shock.
A lasting economic expansion with a likely overweight in equities for a lengthy period
With mass distribution of effective COVID-19 vaccines this year, Citi analysts expect a lasting global economic expansion. In the early stages of the post-pandemic period, a sharp, temporary bounce-back is expected as COVID-19 distorted the world economy. Services activity could recover rapidly by late 2021 but following that phase, some fading of the strength of goods-producing sectors (e.g. home electronics) is likely. While presently boosting North Asia’s exports, this may restrain them when looking a year or more ahead.
Present interest rate levels and early-cycle growth conditions still favor equities more than bonds with global equities attractively priced even at present valuations. Barring a massive bout of exuberance in equities and a sharp rise in yields, the GIC is likely to overweight equities for a lengthy period.
Asset allocation changes – small decrease in Global Equities overweight, and small reduction in Global Fixed Income underweight.
A thematic overweight was added to global healthcare equities by eliminating an overweight to US small and mid-cap (SMID) shares (which have gained nearly 30% prior to the start of the COVID-19 shock). Opportunity is seen in global healthcare – despite having the most stable growth fundamentals, the sector underperformed global equities by nearly 8% last year.
The GIC remains overweight equities in the broader Asia region, but have pared back equity allocations in China and North Asia, which have sharply outperformed the global rally, and resumed an overweight in Asian EM debt. The GIC is also switching their US high yield bond (HY) allocation to variable rate loans, to reflect the sharp rebound in HY credit.