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Citi Personal Wealth Management

Fright and Flight in February

Monthly Market Snapshot: February 2020

Highlights

Investors sought out “safe-havens” towards the end of February as the coronavirus spread beyond the borders of China. In the United States, the S&P 500 plunged 8.4% while the Dow Jones tumbled 10.1%. The 10-year U.S. Treasury yield plummeted from 1.51% at the end of January to 1.15% at the end of February.

The coronavirus continues to cloud the economic outlook. Prior to the virus, the global economy was starting to stabilize after a manufacturing-led slowdown, but a “supply-side” shock from disruptions to supply chains and a “demand-side” shock from self-quarantines now pose a risk to growth that is hard to quantify. Past viruses suggest that this will likely take a quarter or two to play out.

On February 24th, Citi Private Bank’s Global Investment Committee (GIC) decided to reduce its exposure to global equities by moving from an +3.0% overweight position to a neutral position. Those reductions in equity exposures are being offset by a reduced underweight in global fixed income (from -4.0% to -2.0%; essentially adding to the overweight position in U.S. Treasuries) and an increase in the gold position (from +1.5% to 2.5%). While the GIC reduced its equity rating, Citi’s year-end target for the S&P 500 remains 3,375.

Shawn Snyder
Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Outline of the United States

Economy (Slowing)

The U.S. economy grew by an annualized rate of 2.1% in the fourth quarter of 2019. However, growth in the first quarter of 2020 is likely to be weak with a series of factors like the coronavirus and stalled aircraft production likely to weigh on growth. We suspect that growth will rebound in subsequent quarters as these factors start to fade. Citi’s economists are still looking for year-on-year growth of around 2.0% in 2020, but risks remain tilted towards the downside.

Stocks (Neutral)

Citi Private Bank’s Global Investment Committee decided to move from an overweight on U.S. stocks to a neutral position. The move is in response to the potential earnings hit that companies will likely take in response to the coronavirus. Assuming the outbreak of the virus eventually comes under control, we should see a noticeable rebound in equities with the S&P 500 averaging a return of 15.9% in the six months following previous virus-related market bottoms.

Bonds (Overweight)

The Federal Reserve issued an emergency rate cut of 50 basis points in response to the coronavirus. Safe-haven assets like U.S. Treasuries have been serving as a ballast in portfolios with yields down sharply. While already overweight U.S. Treasuries, the GIC increased its overweight by 2.0% across all sub-asset classes (short-, intermediate-, and long-duration) in U.S. Treasuries.

Europe and Japan

Outline of Europe

Economy (Europe: Slowing / Japan: Slowing)

An economic contraction in the Euro Zone in the first half of the year seems highly likely, but not necessarily the start of a recession. Movements on the monetary policy front may be forthcoming and direct fiscal policy assistance could help to support a rebound in the second half of 2020. In terms of Japan, growth estimates have been revised down from 0.2% year-on-year to 0.0% in 2020. The economy appears to be experiencing a technical recession.

Stocks (Europe: Neutral / Japan: Neutral)

The GIC has moved to a neutral position on both European (ex-UK) and Japanese stocks. While we do not feel that the fall in European equities marks the beginning of a lasting bear market, we would recommend a “wait and see” approach. Signs of a stabilization in the virus will likely mark a turning point. In Japan, exposure to slowing trade with China and a potential recession is keeping us at bay for now.

Bonds (Underweight)

The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.

Emerging Markets

Outline of China, indicating Emerging Markets

Economy (Slowing)

Emerging Asia economies are uniquely exposed to the abrupt slowdown in China. Citi’s economists have revised down their annual growth forecasts for the region by 0.4% from 5.2% to 4.8%. We now expect China’s economy to downshift from 6.0% year-on-year growth in the fourth quarter to 3.6% in the first quarter. Other regional forecasts remain broadly unchanged, but downside risk remains should the virus continue to spread. Growth should eventually rebound once the virus is contained.

Stocks (Neutral)

The GIC reduced its weighting on emerging markets from overweight to neutral. However, we did add a tactical overweight to Greater China markets. Equity markets in the region were impacted quickly and appear to be on the mend with large amounts of monetary and fiscal policy being implemented to help offset the expected slowing. We believe this provides an opportunity.

Bonds (Overweight)

We are overweight emerging market fixed income – specifically in emerging Asia and Latin America.

U.S. Stock Market and Economic Forecasts

Figure 1: U.S. Stock Market and Economic Forecasts
Indicator 2018A 2019A 2020F
S&P 500 Target 2,507 3,050 3,375
S&P 500 P/E Ratio 15.43x 18.97x 17.09x
S&P 500 EPS Growth 22.5% 1.0% -0.2%
GDP 2.9% 2.3% 2.0%
Inflation 2.0% 1.4% 1.6%
Unemployment Rate 3.9% 3.7% 3.5%
This table shows Citi's U.S. stock market and economic forecasts. Indicators include year-end targets for the S&P 500, Price-to-Earnings ratios, Earnings-Per-Share growth rates, gross domestic product, inflation, and the unemployment rate.
Sources: Citi Research and Citi Personal Wealth Management as of February 28, 2020. Note 1: The S&P 500 P/E ratio is based on trailing four-quarter S&P 500 operating earnings-per-share. Note 2: “A” means actual; “F” means forecast. There can be no assurance that these projections will be met. Actual results may differ materially from the forecasts/estimates. The above table reflects the views of Citi Investment Research and Analysis (CIRA). CIRA forecasts take into consideration underlying economic, demographic, political, and psychological forces that drive market behavior. CIRA looks for trends and markets that offer potential as long-term investment ideas. You should carefully consider investment objectives, risks, charges, and expenses before investing.

Global Economic Forecasts

Figure 2: Global Economic Forecasts
Region GDP Growth CPI Inflation 10-Year Yields Exchange Rate vs. USD
2019F 2020F 2021F 2019F 2020F 2021F 2019F 2020F 2021F 2019F 2020F 2021F
Global 2.6 2.5 2.8 2.5 2.6 2.4 N/A N/A N/A N/A N/A N/A
Based on PPP Weights 3.1 3.1 3.6 3.2 3.3 3.1 N/A N/A N/A N/A N/A N/A
Industrial Countries 1.7 1.4 1.6 1.3 1.4 1.6 N/A N/A N/A N/A N/A N/A
United States 2.3 2.0 1.9 1.4 1.6 1.8 1.25 1.25 1.25 N/A N/A N/A
Euro Area 1.2 1.0 1.4 1.2 1.1 1.5 -0.30 -0.19 -0.13 1.12 1.14 1.18
Japan 1.0 0.0 1.2 0.5 0.7 0.6 0.00 0.15 0.15 109 106 97
Emerging Markets 3.9 3.9 4.3 4.0 4.1 3.4 N/A N/A N/A N/A N/A N/A
China 6.1 5.3 5.7 2.9 3.4 1.9 2.87 2.79 2.79 6.91 6.98 6.67
❮ Swipe left for more
This table shows Citi's forecasts for gross domestic product, consumer prices, 10-year sovereign bond yields, and exchange rates versus the U.S. dollar across various regions.

Market Indicators

Figure 3: Equity Markets
  Equity Returns (%) Valuations Div. Yld. (%)
Equities Level 2014 2015 2016 2017 2018 MTD QTD YTD P/E 12-Month
Forward P/E		 Current
Global 513 2.1 -4.3 5.6 21.6 -11.2 -8.2 -9.3 -9.3 18.6 15.9 2.5
S&P 500 2954 11.4 -0.7 9.5 19.4 -6.2 -8.4 -8.6 -8.6 20.1 17.7 2.0
DJIA 25409 7.5 -2.2 13.4 25.1 -5.6 -10.1 -11.0 -11.0 18.8 16.9 2.4
NASDAQ 8567 13.4 5.7 7.5 28.2 -3.9 -6.4 -4.5 -4.5 34.3 24.3 1.1
Europe 2731 1.2 3.9 0.7 21.2 -18.5 -9.4 -13.0 -13.0 18.1 13.3 3.6
Japan 3079 7.1 9.1 0.4 21.8 -14.5 -9.2 -10.4 -10.4 14.5 13.7 2.6
Emerging Markets 1006 -4.6 -17.0 8.6 34.3 -16.6 -5.3 -9.8 -9.8 14.3 12.5 2.8
❮ Swipe left for more
This table shows returns for various equity markets, including returns from the previous 5 years and current year period-to-date returns. It also shows current valuations for these markets.
Note: Global = MSCI All Country World Index (USD); Europe = Euro Stoxx 50 Price Index (USD); Japan = MSCI Japan (USD); Emerging Markets = MSCI Emerging Markets (USD). Most equity index returns shown here are based on a U.S. dollar basis. International returns for a U.S.-based investor can differ significantly depending on the effects of foreign currency exchange.
Figure 4: Fixed Income Markets
  Fixed Income Returns (%) Other Key Rates
Fixed Income YTM 2014 2015 2016 2017 2018 MTD QTD YTD Instrument Current (%)
Global 1.37 7.9 0.9 3.3 2.1 0.5 1.9 1.9 1.9 10-Yr. U.S. Treasury 1.51
U.S. 2.32 5.9 0.5 2.7 3.6 0.0 2.0 2.0 2.0 30-Yr. U.S. Treasury 2.00
Europe 0.12 11.2 1.1 3.3 0.5 0.5 2.1 2.1 2.1 1-Yr. CD Rate 1.08
EM Sovereign 5.24 7.1 0.6 9.6 9.8 -4.1 1.7 1.7 1.7 30-Yr. Fixed Mortgage 3.63
U.S. High Yield 6.36 1.8 -5.6 17.8 7.0 -2.1 0.0 0.0 0.0 Prime Rate 4.75
❮ Swipe left for more
This table shows returns for various fixed income markets. It also includes other key rates like the 10-year U.S. Treasury, 30-year U.S. Treasury, 1-year CD rate, and 30-year fixed mortgage rate.
Note: Global = Citi World BIG Index (LCL); U.S. = Citi U.S. Broad Investment Grade Bond Index (USD); Europe = Citi Euro Broad Investment Grade Index (EUR); EM Sovereign = Citi Emerging Markets Government Bond Index (USD); and U.S. High Yield = Citi High-Yield Market Index (USD).

Asset Class Returns (Sorted by Performance)

Figure 5: Global Asset Class Returns (Year-to-Date)
Figure 5: ...
This chart shows global asset class returns (year-to-date). Data shown indicates U.S. Broad Investment Grade at 3.7%, Euro Broad Investment Grade at 2.4%, EM Government Bond at 0.5%, U.S. High Yield at -1.7%, United States (S&P 500) at -8.6%, Emerging Markets (MSCI EM) at -9.8%, Japan (MSCI Japan) at -10.4%, and Euro (Euro STOXX 50) at -13.0%.
Sources: Citi Research and Citi Personal Wealth Management as of February 28, 2020.There can be no assurance that these projections will be met. Actual results may be differ materially from the forecasts/estimates. The above table reflects the views of Citi Investment Research and Analysis (CIRA). CIRA forecasts take into consideration underlying economic, demographic, political, and psychological forces that drive market behavior. CIRA looks for trends and markets that offer potential as long-term investment ideas. You should carefully consider investment objectives, risks, charges, and expenses before investing.
Figure 6: S&P 500 Sector Total Returns (Year-to-Date)
Figure 6: ...
This chart shows the total return for the various S&P 500 sectors (year-to-date). Data shown indicates Information Technology at -3.6%, Utilities at -3.9%, Real Estate at -5.0%, Communication Services at -5.5%, Consumer Discretionary at -7.0%, Consumer Staples at -7.8%, S&P 500 at -8.3%, Healthcare at -9.2%, Industrials at -9.7%, Financials at -13.5%, Materials at -14.0%, and Energy at -24.0%.
Sources: Citi Research and Citi Personal Wealth Management as of February 28, 2020.There can be no assurance that these projections will be met. Actual results may be differ materially from the forecasts/estimates. The above table reflects the views of Citi Investment Research and Analysis (CIRA). CIRA forecasts take into consideration underlying economic, demographic, political, and psychological forces that drive market behavior. CIRA looks for trends and markets that offer potential as long-term investment ideas. You should carefully consider investment objectives, risks, charges, and expenses before investing.

Shawn Snyder
Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

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The MSCI ACWI (All Country World Index) captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries. With 2,483 constituents, the index covers approximately 85% of the global investable equity opportunity set.

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