Head - Equity Strategy
To best view Citi Private Bank's site and for a better overall experience, please update your browser to a newer version using the links below.
With a confluence of favorable macroeconomic factors, we are going overweight cyclical equities versus defensives.
Cyclical equities are rebounding. After a difficult 2018, equities with greater sensitivity to the economy have outperformed their defensive counterparts by 2.5% globally in 2019. Such cyclical sectors include technology, industrials, materials, and consumer discretionary, while defensive sectors embrace utilities, consumer staples, and healthcare. But can this recent upturn in cyclicals endure for a while longer or is it merely a snap-back from a severe sell-off?
We believe that cyclicals can indeed continue to outperform in 2019. The Chinese authorities are stimulating their economy via both monetary and fiscal measures. The US Federal Reserve has pulled back from its more aggressive monetary tightening path. And, the US dollar remains range-bound for now. History suggests that this confluence of factors could help global cyclical names with heavy exposure to commodities and consumer spending.
Importantly, we don’t see a serious global economic downturn as imminent. We note the positive fourth-quarterly earnings surprises in the US industrials sector. In particular, various aerospace and defense firms as well as select airlines have beaten expectations. We think that such results point to underlying economic strength in the world’s largest economy and beyond. If so, investors reacted too bearishly to the late-2019 sell-off, both in relation to cyclicals and to equities overall.
Given our constructive short- to medium-term outlook, Citi Private Bank has gone overweight cyclical equities versus defensives on a short- to medium view. This partly reflects our bullish view of equities as a whole. If global equities are to continue to advance in 2019 – as we believe they can – history suggests cyclicals are the likeliest candidates to lead the way higher. At the same time, however, we stress our ongoing commitment to both defensive and cyclical equities that have long-term growth potential throughout economic cycles. You can read more on some of our related thinking in our Unstoppable trends theme.
Clients can read Equity Market Monthly: From Despair to Repair by logging in.