Global equities rebounded sharply in January. In the United States, the S&P 500 jumped 7.9% and the NASDAQ powered ahead with a 9.2% gain. Outside of the U.S., performance was also strong with European, Japanese, and Emerging Market...
Global equities rebounded sharply in January. In the United States, the S&P 500 jumped 7.9% and the NASDAQ powered ahead with a 9.2% gain. Outside of the U.S., performance was also strong with European, Japanese, and Emerging Market shares rallying 5.7%, 6.1%, and 8.7%, respectively.
A more cautious Federal Reserve, a more optimistic view on U.S. – China trade relations, and strong employment reports helped markets to rebound. Moving forward, equity market performance will likely depend on the depth of the global economic slowdown. We remain in the camp that expects a slowdown, not a recession. As such, we believe that equity markets still have some room to run before peaking.
Citi’s Private Bank’s Global Investment Committee (GIC) decided to raise its overweight to global equities from +1.0% to +2.0%. Increased allocations were made to U.S. large-cap and emerging Asia stocks while reductions were made to continental Europe. A reduction in the cash position was used to fund an increase in global fixed income exposure – bringing the global fixed income weighting to neutral. Increases were made to government guaranteed and short- and intermediate-term U.S. investment grade credit.
The U.S. economy is showing some signs of weakness. A dismal equity market performance in the fourth quarter of 2018 and the longest federal government shutdown in U.S. history weighed on both consumer and business confidence. As a result of the shutdown, Citi’s economists have lowered their 1Q19 forecast from 2.7% to 2.1%. Growth may decelerate to a pace of about 1.8% by year-end as we move past peak stimulus from the tax cuts.
Citi Private Bank’s Global Investment Committee raised its allocation to U.S. large-cap stocks. While the pace of gains seen year-to-date is likely to slow; a less aggressive Fed, progress on trade negotiations, and a moderating, but growing U.S. economy should support stocks. We acknowledge that risks to growth are probably to the downside, but do not foresee a U.S. recession in 2019.
The Federal Reserve has shifted course and is now “on hold” regarding future rate increases. The GIC added further to its overweight position in short- and intermediate-term investment grade debt. This is now the largest overweight in the portfolio. The Committee also likes short-duration U.S. Treasuries and municipal bonds for U.S. tax-payers.
Europe and Japan
Citi’s economists do not see compelling evidence that the euro area is at risk of recession in the first half of 2019, but evidence does point to a clear deceleration. As a result, they have revised down their 2019 growth forecast from 1.5% to 1.2%. In Japan, growth has been revised downward for 2019 – from 1.1% to 1.0%. The region remains exposed to trade tensions, but our economists believe that the U.S. is unlikely to impose high tariffs on Japanese autos.
Stocks (Slightly Overweight)
The GIC reduced its overweight to continental Europe – taking down exposures to France and small- and mid-cap shares. We see the sluggish European recovery as persisting, but external risks related to China’s slowing leaves us less optimistic. As far as Japan, we see opportunities in robotics and automation, but are maintaining a neutral weighting.
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 as a whole are expected to grow by 4.4% in 2019 – slightly slower than in 2018. China’s economy will likely slow, but still expand by 6.2% year-on-year. The broader emerging Asia region may grow by 5.7% year-on-year. While trade tensions pose a notable risk, they could also serve as a positive surprise if tariffs are reduced. China may also see policy-driven “green shoots.”
The GIC is overweight emerging market equities – recently increasing its exposure to emerging Asian equities. Emerging markets should benefit from a more cautious Federal Reserve and the potential for a weaker U.S. dollar. The recent decline in valuations also adds to the appeal.
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||14.43x|
|S&P 500 EPS Growth||11.7%||22.2%||6.2%|
Citi Research and Citi Personal Wealth Management as of January 31, 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||2.08||7.9||0.9||3.3||2.1||0.5||1.0||1.0||1.0||10-Yr. U.S. Treasury||2.63|
|U.S.||3.31||5.9||0.5||2.7||3.6||0.0||1.0||1.0||1.0||30-Yr. U.S. Treasury||3.00|
|Europe||0.67||11.2||1.1||3.3||0.5||0.5||0.9||0.9||0.9||1-Yr. CD Rate||1.41|
|EM Sovereign||5.69||7.1||0.6||9.6||9.8||-4.1||3.7||3.7||3.7||30-Yr. Fixed Mortgage||4.37|
|U.S. High Yield||7.35||1.8||-5.6||17.8||7.0||-2.1||4.7||4.7||4.7||Prime Rate||5.50|
Asset Class Returns (Sorted by Performance)