The warm and fuzzy feeling towards global equities continued in February. In the U.S., the S&P 500 climbed by 3.3% and the Dow Jones powered ahead with a 3.7% gain. Outside of the U.S., performance in Europe was solid with a 3.6% gain while Japanese shares...
The warm and fuzzy feeling towards global equities continued in February. In the U.S., the S&P 500 climbed by 3.3% and the Dow Jones powered ahead with a 3.7% gain. Outside of the U.S., performance in Europe was solid with a 3.6% gain while Japanese shares lagged. Emerging market stocks added 1.1%.
Even though U.S. economic data are signaling a moderation in growth, a more cautious Federal Reserve and improved U.S. – China trade relations have helped to boost equities. With the S&P 500 up over 11.0% year-to-date, the pace of gains may moderate, but we believe that stocks still have some room to run in this business cycle.
Citi’s Private Bank’s Global Investment Committee (GIC) is maintaining its overweight to global equities (+2.0%). Key overweights include allocations to both U.S. large-cap and emerging market stocks (particularly emerging Asia). The Committee remains neutral on global fixed income, but sees opportunities in both short-duration U.S. investment grade and emerging markets debt. The Committee remains deeply underweight on most European and Japanese sovereign bonds.
U.S. economic data have been weaker-than-expected lately with retail sales, existing home sales, and durable goods orders each disappointing. That said, the data are still pointing towards moderation, not recession. It is also possible that the data are reflecting temporary factors like the government shutdown and the fourth quarter equity market sell-off. After growing at an annualized rate of 2.6% in the fourth quarter, Citi’s economists expect growth to moderate to 2.1% in the first quarter of 2019. Fortunately, growth should rebound in the second quarter.
Citi Private Bank’s Global Investment Committee maintains an overweight on U.S. large-cap shares. Corporate earnings are expected to moderate, but we believe that downgrades to earnings estimates have been too severe. In addition, 20% equity market declines (as witnessed in the back half of 2018) have traditionally been followed by strong returns in the next 12 months.
The Federal Reserve is “on hold” regarding future rate increases and may end its balance sheet reductions as early as this June. Against this backdrop, the GIC maintains an overweight position in short- and intermediate-term investment grade debt. The Committee also likes short-duration U.S. Treasuries and municipal bonds for U.S. tax-payers.
Europe and Japan
Growth forecasts for the euro area continue to come down. Citi’s economists have been steadily reducing their 2019 year-on-year forecast – bringing it down from 1.5% in December to just 1.0% currently. A technical recession does not appear imminent, but the next four- to five- months of data will be critical in making that assessment. In Japan, several industries remain exposed to the slowdown in China. As a result, growth estimates for 2019 have been downgraded – falling from 1.0% to 0.9%. Growth in 2020 looks even more challenging with Citi’s economists calling for just 0.1% growth in Japan.
The GIC is neutral on both European and Japanese large-cap shares. Relatively anemic economic growth and greater exposure to the slowdown in China still leave us cautious. In Japan, there does appear to be opportunities in select sectors like robotics and automation, but selectivity is key.
Even though monetary policy remains accommodative in both the European Union and Japan, we still see the yields on most European and Japanese sovereign bonds as unacceptable.
Emerging market economies are expected to grow by 4.4% in 2019 – slightly slower than in 2018. China’s economy will likely slow from a year-on-year growth rate of 6.6% in 2018 to 6.2% in 2019. However, we think that growth may start to stabilize later this year as stimulus measures take hold. The broader emerging Asia region may grow by 5.7% year-on-year.
The GIC is overweight emerging market equities. Emerging markets seem to be in a sweet spot due to a more dovish Fed and easing U.S. – China trade tensions. In addition, price-to-earnings (P/E) ratios in the emerging world are noticeably lower than in the developed world and corporate earnings are set to outstrip U.S. earnings in 2019 (5.9% year-on-year earnings-per-share growth versus 4.5%).
Bonds (Slightly Overweight)
We are overweight emerging market fixed income – in line with our equity position.
U.S. Stock Market and Economic Forecasts
|S&P 500 Target||2,674||2,507||2,850|
|S&P 500 P/E Ratio||20.11x||15.43x||16.09x|
|S&P 500 EPS Growth||11.7%||22.2%||6.2%|
Citi Research and Citi Personal Wealth Management as of February 20, 2019. Note: The S&P 500 P/E ratio is based on trailing four-quarter S&P 500 operating earnings-per-share. 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
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Based on PPP Weights||3.8||3.5||3.6||3.2||3.1||3.1||N/A||N/A||N/A||N/A||N/A||N/A|
|Equity Returns (%)||Valuations||Div. Yld. (%)|
|Fixed Income Returns (%)||Other Key Rates|
|Fixed Income||YTM||2014||2015||2016||2017||2018||MTD||QTD||YTD||Instrument||Current (%)|
|Global||2.00||7.9||0.9||3.3||2.1||0.5||0.0||1.0||1.0||10-Yr. U.S. Treasury||2.72|
|U.S.||3.18||5.9||0.5||2.7||3.6||0.0||0.0||1.1||1.1||30-Yr. U.S. Treasury||3.08|
|Europe||0.65||11.2||1.1||3.3||0.5||0.5||-0.1||0.9||0.9||1-Yr. CD Rate||1.36|
|EM Sovereign||5.56||7.1||0.6||9.6||9.8||-4.1||1.1||4.9||4.9||30-Yr. Fixed Mortgage||4.33|
|U.S. High Yield||6.97||1.8||-5.6||17.8||7.0||-2.1||1.6||6.3||6.3||Prime Rate||5.50|
Asset Class Returns (Sorted by Performance)