Head of Global Equities - Citi Investment Management
Archie Foster, Director of Equity Research, Citi Investment Management
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Long-term secular growth themes could deliver benefits to portfolios over time.
Many investors hold high hopes that the US economy will get a significant boost before long. That is the clear message from the valuation of US equities, and particularly of industrials. Their optimism is based on the Trump administration’s promises of large tax cuts and widespread deregulation. We, too, are hopeful that economic growth will indeed pick up in the second half of 2017. But we also think that investors may be disappointed by the extent and duration of any boost, especially given that the US economic expansion is already long in the tooth at almost nine years old.
We believe that longer-term – or ‘secular’ – economic trends may currently offer more promising investment opportunities than any shorter-term cyclical upturn. Three themes in particular – technological progress, globalization and demographic change – appear capable of contributing to long-term growth and to significant changes in how we live and work.
For example, an increasing amount of labour is set to be performed by intelligent machines, enhancing corporate productivity and raising profitability. Advances in green energy technology are steadily changing the way we power the world. The ongoing integration of emerging economies into the global economy, meanwhile, should lead to increasing wealth in those countries, alongside higher consumption, better healthcare and education, and enhanced infrastructure. Finally, the aging of populations across the developed world could have a major impact on the healthcare industry and many others.
None of these longer-term themes are completely insulated from upturns and downturns in the economy. However, we do believe that they could provide enduring growth opportunities for companies and industries that can position themselves to take advantage. In turn, this could create opportunities for investors who are willing to take a long-term view. These secular growth opportunities are not confined to companies in developed markets. Indeed, many stem from developments in the emerging markets (EM).
Citi Private Bank is already bullish on emerging market equities, both short-term and long-term. Our own strategic asset allocation model suggests that EM equities might achieve an annualized return of 10.6% over the coming decade. And our Global Investment Committee has recently increased its tactical weighting to both EM equities and fixed income. But within these broad asset classes, we believe that even more attractive opportunities may exist, thanks to secular growth themes.
The challenge for investors is therefore to find efficient ways to get exposure to these themes. Our preferred approach would be to build portfolios of equities that straddle a variety of themes and sub-themes, rather than focusing upon just one of them. We would also seek exposure across both developed and emerging markets. Above all, we would emphasize the importance of taking a multi-year view, rather than chasing near-term returns. For patient investors, secular growth could deliver portfolio benefits over time.