Citi Private Bank knows its clients, like others, have endured a nerve-wracking time in recent years since the 2008 financial crash, but it wants customers to go beyond their comfort zone to gain lucrative returns.

Like a number of other firms issuing mid-year forecasts and investment stances, Citi Private Bank used the start of July to argue for what it sees as the biggest opportunities – and counsel against the largest risks – into the second half of the year.

This year so far has seen rising investor nervousness that the era of seemingly endless quantitative easing – or central bank money-printing – will come to an end in the US (Japan, meanwhile, has picked up the QE baton). There is a serious chance that the 30-year-plus bond market rally may finally peter out. And emerging market economies have lost some of their spark, having been a motor of growth for several years. There is a lot of change in the air.

“We are asking clients to do the uncomfortable things, such as to be overweight in equities in a time of greater volatility,” David Bailin, head of global managed investments at Citi Private Bank, told this publication in a recent interview. (His area of business at the private bank oversees about $55 billion of client assets.)

“We think there is less uncertainty today than there was [at the start of the year] in the global economy,” he said, citing the greater clarity of central bank policy and government actions. “The Fed’s wiliness to end, or at least decelerate, QE indicates confidence that the US economy is on a more solid footing,” he continued.

Bailin noted a split, or “bifurcation” in market performance in recent months: strong gains in developed equity markets and weakness in emerging equity markets.

“Developed markets have arguably done too well, achieving a full year’s performance in less than six months” he continued.

Weightings
Compared with the firm’s normal strategic allocation, Citi is more that 5 per cent overweight equities, and by contrast, is more than 5 per cent underweight fixed income.

“We are very cautious about fixed income and are rebalancing client portfolios toward shorter duration and better credit quality. Even in the junk bond market, we prefer better credits. We are raising exposure to some corporate bonds and some mortgage backed securities that might do well in a rising interest rate environment. We are telling clients to own individual bonds and not bond funds,” he said.

“In equities, Citi Private Bank strongly prefers the US; we still like Japan and believe the Abe policies will work. We have tilted our weightings upward for China on equities and we are waiting for a better entry point into other emerging markets,” he said.

Forecasts

Citi Private Bank forecasts global gross domestic product to expand by 2.6 per cent this year and by 3.2 per cent in 2014; for the US, it expects a 1.9 per cent growth rate in 2013, and 2.9 per cent in 2014. For China, it sees GDP growth of 7.6 per cent and 7.3 per cent in 2013 and 2014 respectively; in the eurozone, the rates are a contraction of 0.8 per cent and flat in 2014. As for emerging markets, the forecasts on GDP are a gain of 4.8 per cent and 5.2 per cent.

In its research note, Citi Private Bank noted that developed market equity indices outperformed expectations during the first half of 2013, rising by 10.2 per cent, while performance of emerging market equities was disappointing, falling by 10.3 per cent in US dollar terms. Fuelled by Japanese central bank monetary policy, the Japanese stock market has surged by 30 per cent in yen terms in the year to date. US stocks have rallied by almost 14 per cent and European equities by 4 per cent.

The bank said its main overweight, or bullish, stance remains in developed market equities, especially for the US and Japan.

“We would expect solid returns over the next two years, likely in the high single digits annually as economic recovery continues and gains traction. We are on careful watch for a chance to raise our weightings in key EM equities, which have cheapened significantly this year. However, the powerful DM stock rally during the first half of the year, amid very low volatility, could make it somewhat difficult to beat cash between now and year end,” the bank said.

“Our major underweight is sovereign fixed income, where rates are picking up, and returns are falling. Here, we are likely to remain underweight until yields are meaningfully higher, befitting the end of a crisis period,” it added.