The latest edition suggests that the strongest phase of the economic and market recovery from the pandemic is likely behind us. More normal conditions lie ahead following the “great rebound,” with more moderate returns as the equity bull market matures. But rather than leaving portfolios as they are, Citi believes this normalization calls for investors to make important asset allocation changes.
Going into 2021, Citi recommended positioning for a snapback in many assets that had been hit hardest by the pandemic. These included emerging markets, small-cap equities and beaten-down cyclicals. For 2022 and beyond, by contrast, Citi emphasizes exposure to “long-term leaders,” equities in high-quality companies in expanding industries that may deliver earnings growth in the long run. Historical analysis shows that long-term leaders have delivered strong returns with lower volatility over time. Examples include “dividend growers,” equities in companies with long records of increasing their dividends.
With inflation up but bond yields remaining low, Citi is reiterating the threat that negative real interest rates pose to wealth. “As we warned in last year’s report, the owners of cash and many bonds have suffered a loss of purchasing power in 2021,” said David Bailin, Chief Investment Officer and Head of Citi Global Wealth Investments. “We compare the effect of negative real rates to the activities of a cash thief, who we expect to remain at large in 2022. But we see various investments that may help clients preserve and grow purchasing power in the face of this threat.”
Citi has also identified “unstoppable trends” that are reshaping business and everyday life, as well as portfolios. These include multiple aspects of digitization such as cybersecurity, 5G and related technologies and fintech, as well as the ongoing shift of economic power towards Asia. In each of these areas, the pandemic has accelerated change. New working patterns, for example, are transforming the demand for offices, while the growth of online retail is intensifying the need for warehouse and delivery facilities.
“While we reiterate the importance of keeping portfolios positively positioned and fully invested, we also acknowledge a range of risks,” said Steven Wieting, Chief Investment Strategist and Chief Economist at Citi Global Wealth Investments. “The potential for vaccine-resistant COVID mutations, deteriorating U.S.-China relations, large-scale cyberattacks and evolving consumer spending habits based on inflation expectations all require close monitoring.”
With the economic expansion set to endure, we see the potential for further upside in financial markets. After a 45% rise in 2021, global earnings per share may increase by a more normal 8% in 2022. Global equities might deliver a mid-to-high single-digit return in this environment, with global fixed income returning 0% to 1% before inflation.
The full report, a summary version, short videos and other materials can be accessed here.
Announced in January 2021, Citi Global Wealth (“CGW”) is comprised of the wealth management businesses of Citi Private Bank and Citi’s Global Consumer Bank. Through these businesses, CGW delivers Citi’s wealth solutions, products and services globally. The unified management and delivery of CGW’s wealth strategy represents a further commitment by Citi to become a leading global wealth business. Citi Global Wealth Investments (“CGWI”) is comprised of the Investments and Capital Markets capabilities of Citi Private Bank, Citi Personal Wealth Management and International Personal Bank U.S.
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