A disruptive United States and growing political risks in Europe were among the most important of fears that the global markets started 2017 fearing. But Citi Private Bank said in its mid-year review that neither of those has turned out to be damaging thus far.
The bank’s global chief investment strategist Steven Wieting said compared to the first half of 2017, generating double digit returns will not be “quite as easy” in the coming months, despite the current situation.
“You haven’t seen hyper stimulus in the United States from the U.S. Congress and I think we could find that they can act at some point, (but) it’s going to be scaled back and the disruptive effects around the world will not occur … And that is a pretty optimistic view,” he said.
The bank has decreased its holdings in certain fixed income assets such as U.S. high yields and diversifying more into emerging markets and has raised its allocations to global equities, even though it has kept its view that the global economy will prove more resilient than previously anticipated.
Largely cautious on emerging markets in the last four years has been Citi Private Bank. That was because external debt burdens for most emerging market borrowers had been raised due to the strengthening of the greenback.
The bank said in its mid-year outlook report that many emerging markets are now in better fiscal positions to withstand a tightening cycle in the U.S. despite of the risks emerging from the rising U.S. dollar and interest rates which could still harm those borrowers. Citi said that they are less exposed to a sudden outflow of funds because they are also less reliance on foreign funding.
“In fact, we think the U.S. dollar is in a peaking process so you have to think of the effect in this region and other emerging markets that this whole combination is one that looks a lot like 2016. A lot of the things that worked through real growth industries will continue to work as investments,” Wieting said.
“We feel comfortable now allocating to emerging markets, which are at near record discount valuations to the United States and (we are) in fact broadening out to international assets generally,” he added.
The bank said in its review that not far from the record during the technology boom in late-1990s, equities are valued at a 45 percent discount to U.S. equities based on their 10-year cyclically-adjusted price-earnings ratio across emerging markets. Also yielding six times more than euro zone firms of all credit ratings are local currency government bonds in emerging markets.
On both emerging market equities and fixed income, Citi Private Bank is overweight. Hong Kong, China, India and Indonesia are the picks for the bank with respect to the Asian equities. And also favored are the local debt markets in India and Indonesia.
(Adapted from CNBC)