The US private bank is concerned that some of the inflationary pressures prompting central banks to tighten policy aren't fixable by interest rates but are caused by supply disruptions caused by COVID-19. It is also shifting some investments outside the US.

Citi Private Bank has reshuffled its portfolios after falls in technology stocks in January this year, and as non-US equities start to look more attractive given the different likely paths of monetary policy.

More hawkish comments on monetary policy and interest rates from the US Federal Reserve raise “downside risks for the [US] economy and financial markets,” the US private bank said in its latest “Quadrant” report. 

The US equity market is, overall, expensive and there’s a case for spreading investments around, the private bank said. 

“The MSCI measure of US equities has risen to 63 per cent of the world’s total liquid equity market capitalisation. Valuation is on the side of non-US markets. Foreign exchange risks may be lower than many assume after the dollar’s surge of the past decade,” it said.

“After a near 30 per cent drop in cybersecurity and fintech shares, the Global Investment Committee added a thematic overweight to focus our growth investments within high conviction areas,” it said. The bank said it is making more cuts to volatile, leveraged assets such as US SMID [US mid- and small-cap] shares and US Mortgage REITS. Further, Citi Private Bank has added to its 10 per cent-plus allocation of the most well capitalised, global dividend growth shares, which it said was its largest off-index position.

The bank believes that the global economic recovery will continue, but it warns that the US Fed appears to be taking risks with such expansion. 

The Citi Private Bank report came out a few days before the UK’s Bank of England raised rates and when the European Central Bank’s president, Christine Lagarde, said inflation risks in the eurozone were on the upside.

“The stance of monetary policy is indeed unsustainably easy. Supply and demand will have to grow at similar rates in the future for the economic expansion to be sustained. However, COVID has left massive (and we believe temporary) distortions to product demand and labour markets. In fighting inflation, policymakers should see that inducing a collapse in demand would do nothing to solve present challenges,” Citi Private Bank said. 

The private bank said that government and central bank policy is already contributing less to inflationary pressures in the US. “This is well evident in slowing US retail sales data. `Excess demand’ for certain goods at the expense of services is not addressable with monetary policy. Even more clearly, Omicron’s impact on global and local supply chains can’t be fixed with tightening macroeconomic policies. Contrary to Fed Chairman Powell’s [inflation] comments, much evidence is accumulating that a supply recovery is unfolding. US imports surged 20 per cent over the past year. Inventories spiked in late 2021,” it said. 

The bank said it was reassured by the valuation of 13 times 2022 estimates for most non-US equities’ price-earnings ratios, and it has increased exposure to several non-US equities.