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Investment strategy

January 30, 2022

2 mins

High quality portfolios are the best medicine now

January 30, 2022

2 mins

David Bailin

Chief Investment Officer & Head of Citi Global Wealth Investments

Steven Wieting

Chief Investment Strategist & Chief Economist

SUMMARY

The US Federal Reserve’s current inflation-fighting mode makes it more likely that a new policy error will occur. But the economic recovery that began in 2020 can endure and outlast present threats. Hence, investors need to opt for long-term dividend growth stocks as a potential source of regular returns.

We knew the Fed was ready to start a new rate-hiking cycle in March. But the Fed Chairman Jerome Powell surprised us by broadening the range of the Fed’s policy tightening options to essentially anything. It's most unusual for the Fed to be considering immediate rate hikes - and elect to communicate the need for a tightening of financial conditions - while simultaneously expanding its balance sheet to the end of Q1 with Quantitative Easing.

Powell confirmed what investors had been assuming for months: with US inflation at 40-year highs, the Federal Reserve is ready to lift US interest rates – now at near-zero – beginning in March. But he surprised investors by broadening the range of policy tightening options to essentially anything.

When asked about the prospect of a 50-basis-point rate hike, or rate hikes at every Fed meeting, Powell did not rule them out. Investors understood this to mean that the Fed intended to act aggressively in the face of a historically tight labor market and too-high inflation.

In our view, Powell’s current inflation-fighting mode makes it more likely that a new policy error will occur. That said, however, the balance of new economic information being printed has not changed our view that the economic recovery that began in 2020 can endure and outlast present threats.

Normalization after a global event as traumatic and elongated as a pandemic is without precedent. That there is atypical inflation is to have been expected. Yet, the Fed’s response is itself both aggressive and unconventional. That argues for diversified portfolios. It is not a cause for market timing.

We have therefore shifted our emphasis from investing in a cyclical rebound to finding potential sustainable sources of return. Our quality global dividend grower position reflects our theme of investing in Long-Term Leaders.

Our investments in healthcare equities seek to benefit from the secular growth of the world’s older population and its quest for Longevity. The new positions in cyber-security, payments and fintech are key potential opportunities within Digitization which we believe is an unstoppable long-term trend shaping the world economy. In short, given the change in Fed policy, it is even more important to focus on the assets with the potential for long-term growth, even in the face of higher rates.

CIO Strategy Bulletin (PDF 554.07 KB)

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High quality portfolios are the best medicine now

SUMMARY

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