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One Large US Bank Isn't As Bullish As Its Peers Over 2013 Economic Outlook

Chrissy Coleman

24 January 2013

This past month has seen many industry players present a positive outlook for 2013 but Citi Private Bank is not as sanguine as some of its rivals, the banking group says.

The bank’s chief investment officer for Asia, John Woods, told a media briefing yesterday that he predicts this coming year will pan out very similarly to 2012 in terms of “low growth, policy risk and opportunity through occasional bouts of volatility.”

Under the heading of “Transforming Uncertainty into Opportunity,” Woods presented three themes, based on which the bank is forming its investment strategies.

Sustainable yield

Firstly, on the theme of “identifying sustainable yield,” Woods said that while current markets are priced closed to perfection, the question investors need to ask themselves is whether the fundamentals match this positive view.

The key macro drivers of the global economy remain weak and there are few catalysts for growth, the bank said. Woods named some macro risks as: the US and its lack of employment growth; the continuing eurozone recession, which he believes is likely to worsen in the first half of this year, and zero growth levels in Japan. He added that while he is hopeful that the Japanese government will soon implement growth-positive measures, “it’s hard to get too excited about the growth profile in that part of the world."

Additionally, policy risks are still high according to Woods. He cited examples of uncertainty around debt ceiling discussions in the US, upcoming elections in Europe, the new government in Japan and structural changes in China.


The second theme which guides Citi is the need to “build enduring portfolios,” in other words: diversification.

As appetite for risk is high (especially in Asia), investors may be tempted to invest in small-cap value stocks, also known as the riskiest stocks you can get, which Citi believes is “probably a mistake in this environment.”

“It’s our experience that investors in North Asia tend to have a much higher weighting to equities than investors in Southeast Asia, who conversely have a much greater weighting towards fixed income – we're recommending some diversification to both geographies as part of a balanced portfolio,” Woods said.

Citi believes that within Asia, there will be some rotation out of the Southeast into the North. “Last year Southeast Asia was by far the out-performer within the regions and we think that it’s likely, on the basis of valuation and liquidity flows, focus will be back on the North,” he said. As an example, Woods said the bank saw a boost to performance in defensive sectors, such as consumer staples, but thinks that will change and there will be a shift to materials and industrials sectors, which is in fact already occurring.

Regarding fixed income, Woods said the market has been very strong, particularly for high yield, and predicted local currency denominated bonds, for example Korean won and offshore Chinese yuan, will be more attractive than US dollar denominated bonds.

Global change

“Harnessing global change” was the third theme discussed by Woods. “There are some very profound, long-run structural changes impacting the global economy and it’s these themes that clients will be looking to exploit," he said.

As an example, he spoke of the “re-shoring” of firms in Asia back to developed countries, such as the US, as a consequence of experiencing a change in the productivity and profitability of Asia. For many years, Asia attracted offshoring business as costs were low, but that has started to change. 

The US has 8 per cent unemployment and as a result can extract greater profitability, while in Asia unemployment is extremely low, so we are seeing greater growth in wages. This gives rise to “a structural shift, away from exporting to consumption – everyone is now identifying that domestic demand is the future for Asia,” Woods said.

“I think this will be a structural shift that our clients will want to be aware of and will want to exploit,” he added.

Woods also spoke of another structural shift in the form of increased opportunities in direct lending. He said that as the cost of lending increases for banks, especially in Europe with regards to the Basel III bank capital accords, for example, European banks are to some extent pulling back from Asia.

“This is leading to a lot more investment opportunities in direct lending - banks like ours will be going to clients and offering a lot more private equity or real estate opportunities, when once the corporate would go through the banks to secure a financial loan,” said Woods.

He added: “Now we have a lot more direct lending and this is extremely popular amongst our clients and I think it will continue.”

Continuing under the theme of “harnessing global change,” Woods said urbanization in China is a highly relevant story in terms of structural shift.

“We’ll be looking at railways, construction and energy as themes within China and it’s only going to intensify in the coming years. We have been tracking these portfolios of rolling sector rotation, which are linked to urbanization, and clients involved in those baskets of equities have done extremely well and comfortably outperformed the market, and we think that will continue,” he said.