Chief Investment Strategist and Chief Economist
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We expect markets continue to rebound over 2019 as a whole, albeit not as strongly as they did in January. With the economic backdrop remaining positive, we see selective investment opportunities in equities and fixed income.
Financial markets have bounced back strongly in 2019 so far. We’ve been arguing for some time that this was the likeliest scenario based on the experience of corrections over the last six decades. Sharp US equity sell-offs outside of economic crises have typically given way to strong returns over the subsequent one- and two- year periods. However, history also suggests that the pace of the resurgence in asset prices will moderate. That said, we do expect better returns for 2019 as a whole, continuing the reversal of the correction of 2018, which was driven by overdone investor fears. To us, investor sentiment and positioning still look unduly bearish given the economic outlook.
Global growth remains intact as of early 2019. We don’t expect it to accelerate significantly, we do think it can endure for a while longer. Of course, there are various risks to this, not least of all around international trade. However, our base case is that trade disputes will probably ease. In the meantime, the US Federal Reserve seems set to proceed more cautiously with monetary tightening. So, how to position portfolios in this environment?
Citi Private Bank’s Global Investment Committee – which determines our tactical asset allocation – has just increased our holdings of both global equities and fixed income – figure 1. We did so by reducing our cash position. Within equities, we added to our holdings emerging Asia, with the region still down some 19% on year-ago levels. We also switched from underweight to neutral – or fully invested – in US equities, where we continue to prefer larger-cap securities with stronger balance sheets. While we stayed overweight Swiss and German equities, we also pared back overweights in some other European markets that we feel are less likely to rebound if trade tensions ease.
A preference for higher-quality, income-generating assets also guides our fixed income positioning at this stage. We’ve added further to our overweight position in short- and intermediate-term investment grade US fixed income, which was already our largest overweight across any asset class. We also shifted somewhat away from US high yield and into emerging market fixed income. You can read more about some of the opportunities we see in Make your cash work much harder and in Outlook 2019 more generally.