The bank points out the apparent discrepancy between a dramatic forecast drop in second-quarter GDP and how stock markets have recovered quite considerably from their lows.

Citi Private Bank has moved into parts of the equity market, choosing sectors most likely to fare well in an economy hit by COVID-19,   predicting that the next 10 years should favor equities over cash and government debt.

The US banking house, like some other asset allocators, is trying to work out how global developed equity markets are down by about 15 per cent this year while gross domestic product is expected to drop by as much as 40 per cent in the second quarter on an annualized basis. For the whole of this year, the International Monetary Fund has predicted that GDP growth worldwide will drop by 3 per cent. 

“The timing of the market rebound [from its 2020 lows] should not be a mystery. Equity markets typically lead earnings per share by six months. COVID-19’s global spread shocked markets in late February, forcing a harsh reassessment of the outlook. Dramatic fiscal and monetary easing steps and the eventual prospect of the reopening of economies suggests higher economic activity and profits in coming quarters than in the present one,” the private bank said in one of its regular Quadrant report. 

“However, that still doesn’t explain why the S&P 500 had only fallen 35 per cent at its March low, given that we expect EPS to fall more than 60 per cent in 2Q. US large-cap equities contain the highest weighting of technology services (across multiple sectors) and near the highest share of healthcare of any global index. Along with consumer staples, these sectors remain in high demand in the present crisis. US small- and mid-cap (SMID) equities and most non-US markets have lagged 12 per cent-15 per cent behind,” it said. 

Where to put money
Citi Private Bank said it has advised clients that excess cash should first be allocated to the firms least impacted by the COVID-driven economic crisis and to those with the strongest balance sheets. 

“With this in mind, we reallocated between equity markets and reduced some of the hedges we had augmented in February. This allowed us to sell some assets that have appreciated 30-40 per cent over the last 12 months and reallocate to others that have fallen 10 per cent-50 per cent.  With market volatility at a record high - losing or gaining as much as two years of return in a single month – investors should show patience. This means holding a balanced asset allocation rather than chasing sell-offs and rallies,” it continued. 

The MSCI World Index of developed countries’ equities is down by 15.24 per cent since the start of this year (as measured in dollars). 

Asset decisions
In global equities, the bank shifted to a 2 per cent overweight in US small and mid-capitalization shares funded by underweights in eurozone shares across all market caps. In emerging markets, we boosted holdings in Asia and Latin America (Brazil in particular within Latin America) to overweight, while reducing allocations in Central Europe, the Middle East and Africa to underweight. (The overall global equity allocation remains neutral.)

In fixed income, the bank stays “significantly overweight” US Treasuries, but has shifted duration lower to a neutral allocation at the long end of the yield curve. It added further money to US investment grade credit, and returned cash to a neutral allocation of 2.0 per cent from 1.5. The overall global fixed income allocation is now 1.5 per cent underweight (versus -2.0 per cent), with deep underweights remaining in European and Japanese bonds.

On the traditional safe haven of gold, Citi Private Bank added: “We remain overweight gold and see further gains over time. However, following a 35 per cent rise over the past year, we reduced the allocation by 1 percentage point to +1.5 per cent, unwinding our increase from February.”