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Investment strategy
February 20, 2022
2 mins

Asset allocation for rapidly evolving markets

February 20, 2022
2 mins
David Bailin
Chief Investment Officer and Head of Citi Global Wealth Investments
Steven Wieting
Chief Investment Strategist and Chief Economist
SUMMARY

We have always opined that it is virtually impossible to predict the worst and best days of markets. But as market conditions change, it is important to adjust what is in portfolios to reflect a variety of possible outcomes.


  • Fiscal stimulus, unusual consumer spending patterns, disrupted production and labor displacement together, created the atypically large inflation we are experiencing just now. When we look at spending through the end of 2021, however, we see that inflation-adjusted consumer goods expenditures have fallen 5% after reaching a peak last April. With fiscal stimulus in the rear-view mirror, we believe inflation will peak over the next couple of months as supply begins to catch up to demand.
  •  In line with this thinking, we have increased our portfolio exposure to intermediate US Bonds by 4%. At a 2% or even 2.5% yield, the real return is likely to be marginally negative for the coming decade. This would not make such bonds an especially attractive investment. But these days the attractiveness of US Treasuries as a portfolio risk hedge is increasing, not decreasing.
  • We left intact specific equity overweights in global healthcare, cybersecurity/fintech and payments, strong dividend growers in large caps globally, and China. These moves reflect our views on where relative value can be found in equity markets and where we expect stronger and more secure returns to come from in this transitional market environment.
  • In addition to our thematic positions in equities at 4% of portfolios (pharmaceuticals, cybersecurity, payments and fintech), we are also about 4% overweight benchmarks in large capitalization dividend growth shares – counting both US and non-US holdings. We believe these well-capitalized firms, with profit levels high enough to allow the most consistent increases in dividend payments, have outperformed in the defensive market of recent months.
  • As the inflationary boom ends, and the Fed possibly over-reacts, a peak in long-term yields may also define the trough for higher quality US growth stocks. When rates do peak, and we think that may be sooner than many expect, the pressure on growth stocks is likely to abate. While timing is never clear with foresight, this could plausibly be after the Fed’s first interest rate increase, particularly if it takes bold action with a 50-basis point increase.

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