Equities will outperform bonds for the sixth year in a row during 2008, according to Jeff Applegate, chief investment officer, at Citi Global Wealth Management, although he admits that this has not been the case so far this year.
Mr Applegate revealed that the US bank’s private clients have a very mixed view of the investment year ahead. “Some of them are ultra bullish and others are taking a more passive view. Interestingly, we’re seeing clients wanting to take strategic equity stakes at the moment. There’s a lot of good value to be found in the market at the moment,” he said whilst talking to a group of journalists.
Citi is looking for a global growth rate of 3 per cent and sees that a slowdown is only likely in the developed world.
Earnings figures, though, will disappoint said Mr Applegate though P/E ratios will rise around the world.
Citi's view is that inflation, at least in the developed world, will remain range bound or fall and that the US dollar will show further weakness this year against the currencies of the developing world.
Mr Applegate pointed to the recent breaking of the link between energy inflation and core inflation and unit labour costs which have become much more important. He pointed out that with the globalisation and massive expansion of the labour supply, long-term inflationary pressures are now much less worrisome.
“We expect to see only one quarter of negative growth in the US so we will narrowly avoid a recession,” said Mr Applegate.
“We see inflationary pressures in the developing world which will lead to a tightening of monetary policy, for example in China.”
Volatility in the equity markets will continue to rise, says Citi and large caps will continue to outperform.
“We’re overweight Europe and emerging markets, neutral on Asia ex-Japan and underweight Japan and the US. Sectors we favour include financials, industrial gasses and healthcare.
“We’re also keen on agricultural stocks as soft commodities exhibit lagging performance along with de-correlation.”
In the fixed income world, yield curves will steepen across the developed world, according to Citi.
Global developed country sovereign debt is not attractive says Citi, but emerging market bonds are more so as they benefit from positive fundamentals and probable currency appreciation against the US dollar.
“The world’s population is growing at a phenomenal rate. By 2050 it is predicted that it will reach nine billion with much of the growth coming from Asia and Africa. We also expect a huge rise in urbanisation and in rising living standards in the emerging markets,” said Philip Watson, head of Investment Analysis and Advice Group at Citi Private Bank.
“For instance in Brazil there’s a very young population and the housing deficit is currently seven million and growing at 900,000 a year. We would therefore advise investing in the Brazilian housing sector, especially as mortgages are becoming more attractive and there is more liquidity in the financial system,” said Mr Watson.
“India too looks like a good investment, especially when looking at infrastructure opportunities. Rapid urbanisation is coming from a very low base in the sub-continent,” he said.