Global stocks climbed 11.6% in the first quarter of 2019 – the strongest quarterly return since 2010. In the U.S., the S&P 500 returned 13.1% for the quarter while the Dow Jones gained 11.2%. Outside of the U.S., both Europe and Emerging Markets returned about 9.6%. Though we should...
Global stocks climbed 11.6% in the first quarter of 2019 – the strongest quarterly return since 2010. In the U.S., the S&P 500 returned 13.1% for the quarter while the Dow Jones gained 11.2%. Outside of the U.S., both Europe and Emerging Markets returned about 9.6%. Though we should acknowledge that the gains are coming on the back of rising global growth concerns and a 13.1% drawdown in global equities in the fourth quarter of 2018.
The recent rally can largely be attributed to two factors: 1) easing U.S. – China trade tensions and 2) a dramatic shift from the Federal Reserve. As recent as last September, the Fed was projecting three additional rate hikes in 2019. Now, the Fed is projecting zero. This dramatic shift has increased the odds that the U.S. business cycle may be extended.
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 intermediate-duration U.S. investment grade and emerging market debt.
The U.S. economy has experienced a persistent slowing in growth since the second quarter of 2018 – falling from an annualized rate of 4.2% in 2Q18 to 3.4% in 3Q18 and 2.2% in 4Q18. For the first quarter, growth appears to be on track for about 1.7%. However, Citi’s economists are expecting growth to rebound in the second quarter of this year as the impact of the federal government shutdown fades and delayed tax returns boost consumer spending. On a year-on-year basis, growth may slow from a rate of about 2.9% in 2018 to about 2.5% in 2019.
Citi Private Bank’s Global Investment Committee maintains an overweight on U.S. large-cap shares. A patient Fed should help to underpin equities. In addition, we think that downward revisions to earnings estimates have been too severe. However, we are expecting that pace of gains to moderate after the powerful first quarter rally. Citi believes that the S&P 500 will likely finished the year somewhere between 2,850 and 2,950.
The Federal Reserve is now forecasting zero rate hikes in 2019 and just one rate hike in 2020. It has also announced that it will end its balance sheet reductions in September. Against this backdrop, the GIC has decided to shift some of its short-term investment grade debt overweight into intermediate-term investment grade debt.
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||2,507||2,850||N/A|
|S&P 500 P/E Ratio||15.43x||17.33x||16.32x|
|S&P 500 EPS Growth||22.20%||6.20%||11.30%|
Citi Research and Citi Personal Wealth Management as of March 28, 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||3.4||3.6||3.9||3.1||3.1||3.2||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||1.82||7.9||0.9||3.3||2.1||0.5||1.8||2.7||2.7||10-Yr. U.S. Treasury||2.41|
|U.S.||2.95||5.9||0.5||2.7||3.6||0.0||2.0||2.9||2.9||30-Yr. U.S. Treasury||2.81|
|Europe||0.48||11.2||1.1||3.3||0.5||0.5||1.7||2.5||2.5||1-Yr. CD Rate||1.46|
|EM Sovereign||5.47||7.1||0.6||9.6||9.8||-4.1||1.1||6.1||6.1||30-Yr. Fixed Mortgage||4.08|
|U.S. High Yield||6.81||1.8||-5.6||17.8||7.0||-2.1||1.0||7.4||7.4||Prime Rate||5.50|
Asset Class Returns (Sorted by Performance)