Citi overweight Europe equities, US investment grade bonds

Citi Private Bank has affirmed overweight ratings on US corporate investment grade bonds and core Europe equities.

According to Citi’s November Report, apart from UK government bonds, the firm’s Global Investment Committee (GIC) is pessimistic on core sovereign bonds as a result of uncertainties about Greece and the periphery market contagion combined with declining growth.

“Spreads are likely to widen further, thanks to a continuing inability of the EU policymakers to tackle the crisis. We stay completely out of everything from Italy down and have done since April last year,” said Citi, which owns none of the EU periphery bonds at the moment.

The group has also recommended shorter maturities for core government bond portfolios in the range of one to three years as it believes interest-rate risk is better taken in corporate credit. Together with attractive spreads and strong fundamentals offer by the non-financial corporations, Citi is sticking with their heavy overweight in long-dated US investment grade corporate bonds.

On the equity side, Citi believes US equities will underperform as strong valuations, overly bullish sentiment and high growth expectations are adding downside risks to the market. On the contrary, cheap multiples of the Europe equities may mean that they are likely to fall less than markets with high PE ratios.

Meanwhile, core Europe equity is one of the Citi’s top three overweights (see chart below) and contributes 7% of the group’s total allocation in developed market equity, after US’ 16%.

In addition, concerns over the quality of China’s growth story and a disinflationary shock from the developed world may place pressure on emerging markets, whose equities are likely to underperform in the coming six to 12 months.

However, Citi is reducing the underweight to emerging Asia because potential soothing policies by the Chinese government may provide some near-term support as equities prices have fallen off the cliff, despite its long term instability. The group favours defensive stocks versus cyclical stocks and markets with cheaper valuations and better liquidity.

Besides, Citi is also pessimistic on the performances of commodities as China’s economy is likely to slow further with a very unstable economic model.


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Source: Citi Private Bank

 

This article was first published on Professional Adviser Hong Kong

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