Alert iconWarning: Unsupported web browser

In View no longer supports your current web browser version, which means some functionality may be limited. Please update your browser for the best experience before you log in.

close icon
Citi Private Bank logo

Unsupported browser

Our website no longer supports your current web browser version, which means you are no longer able to access this website. Please update your browser to continue.

Continue
Investment strategy
November 17, 2021
3 mins

Less cyclical sectors may drive sustainable long-term returns

November 17, 2021
3 mins
Steven Wieting
Chief Investment Strategist & Chief Economist
SUMMARY

As the post-COVID macroeconomic climate begins to emerge, our portfolio allocations have evolved to moderate risks and gravitate toward lasting sources of income and growth via less cyclical sectors.


Our Global Investment Committee (GIC) kept its asset allocation unchanged on November 17, 2021 with Global Equities 6% overweight. Fixed Income and cash remain 6% underweight. Over the course of 2021, we’ve reduced risk assets from a peak overweight of 11% as we see equity returns in the coming year moderating toward high-single digits. This follows a 26% gain over the past 12 months.

With even larger equity market gains in COVID-impacted sectors, we’ve migrated holdings toward consistent dividend growers and less cyclical areas (such as healthcare) to drive sustainable long-term returns. We continue to overweight some assets that have benefited from the unusual circumstances of the pandemic. Our overweight in US Treasury Inflation Protected Securities has appreciated to a record high valuation on anticipated inflation.

While we continue to value inflation hedges, we see actual inflation moderating in the coming 12 months as fiscal stimulus abates and supply disruptions ease. We also continue to overweight some real estate assets after the dislocations of 2020. However, forward-looking yields have moderated. As such, we continue to look at opportunities for optimizing our holdings within fixed income and equities given changing valuation and growth opportunities.

Our GIC discussions this week focused heavily on parallels to the Federal Reserve’s last period exiting Quantitative Easing and moving to the early stages of a policy tightening cycle. The sharp rise in long-term yields of the so-called “taper tantrum” period of 2013 has been absent in recent months. However, the 100 basis point rise in US long-term yields in the past year appears to have already anticipated a gradual US monetary policy normalization.

Fed’s prospective action has helped the dollar more than bond yields

Key to the Fed being able to exit policy accommodation at a gradual pace will be the rate and persistence of inflation. While there is some underlying acceleration, inflation does appear to have significant temporary components which have been the larger part of the past year’s rise. The early period of Fed policy normalization in 2014-2016 catalyzed some global vulnerabilities which represent risks today. However, these risks appear lower in scale now. For one reason, the real value of the US dollar is significantly higher than in the taper tantrum period.

Important to understanding 2014-2016, global petroleum prices collapsed as US oil supplies surged. This catalyzed negative economic effects in petrol states and many commodity-oriented economies. Similar vulnerabilities appear lower today. China’s equity markets and currency fell sharply in 2015 and we see China’s economy decelerating under a severe property sector retrenchment. However, unlike 2015, we believe Chinese equity and credit markets have already corrected significantly.

While we continue to overweight US equities somewhat more than others, non-US equities never recovered fully in valuation from the impact of Fed tightening and US dollar appreciation during 2013-2017. This setting leaves us somewhat less concerned about well-telegraphed Fed policy intentions now. At some point, the high valuation of US growth stocks relative to both US value shares and non-US shares generally will need to be reconciled.

Very low real interest rates globally and strong IT-sector growth fundamentals at present provide no immediate catalysts for mean reversion between these classes of equities. As noted, our portfolio allocations have evolved to moderate risks and gravitate toward lasting sources of income and growth. Many of the highest returns of the past 18 months have been in COVID-ravaged industries.

For example, the US Hotels, Resorts and Cruise-lines group has returned 185% since April 2020. While further recovery seems likely, the long-term growth profile of these firms simply does not permit a repeat performance in the coming 18 months. By focusing on rising dividends among higher quality firms in growing industries, we see a higher probability of meeting or exceeding the absolute returns of broad markets in the coming year.

Insights

See our insights and the issues that matter for your wealth.

View all insights

Insights

See our insights and the issues that matter for your wealth.

View all insights
Close Modal

You're about to leave the Citi Private Bank website

By clicking continue, you will visit a third-party website that is not owned or managed by us.

We have no control of the content, privacy or security beyond this point.

Continue

Stay on this page