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Citi Private Bank Retains Bullish Equity Stance, Frowns On Fixed Income

Tom Burroughes

28 May 2015

is continuing with its bearish positon on fixed income markets, arguing that low eurozone bond yields contribute towards making this asset class an unattractive investment, while it remains bullish about global equities.
In April, the private bank had trimmed the scale of its bearish position on German government bonds, aka bunds.

The US firm has a +5.5 per cent overweight position on equities and a -5.5 per cent underweight stance on fixed income, it said in a monthly note from its global investment committee.

“Large scale bond purchases by the European Central Bank and Bank of Japan are resulting in a supply shortage of some high grade fixed income products, but we view the impact of global easing as reflationary at the margin. Movements in risk premiums suggest upward pressures on government bond yields with central bank bond purchases tugging in the other direction. Sharp summer supply distortions could result in lower yields again. Irrespective of the near-term price direction, very low Eurozone government bond yields make for an unattractive investment,” Citi Private Bank said in a note.

The bank said a wave of central bank money printing this year and unanimity among investors towards most asset classes raises the risk of a big reversal this year, but the longer-term outlook that drives markets remains in place. “While we remain largely constructive on risk assets with a 12-18-month tactical horizon, we see high correlations across asset classes as a significant market risk in the near term,” the bank said.

“As highlighted last month, near-term risks to our favoured markets in Europe remain significant, owing to the Greek sovereign struggles,” the bank said. “However, our tactical investment horizon of 12-18 months suggests holding firm through any potential market dislocations, as the broader eurozone recovery is most likely to endure and prove rewarding,” it said.

On the subject of emerging markets, the bank said that while looser Chinese monetary policy has boosted Asian equities and bond markets, a rise in petroleum and other commodity prices has shifted the source of returns. “While we reduced underweights in commodity-sensitive EM equity and credit markets last month, potential new declines in petroleum, partly for seasonal reasons, might resume earlier pressures in some EM assets. This could result in support for Asian importers in coming months,” it said.

Citi Private Bank added that the broader view for financial markets is positive because of support from central banks.