Stocks and commodities should do well, but corporate and sovereign bonds should be avoided, especially in Europe and Japan.
That’s the concise view from Citibank’s Global Asset Allocation team as to what lies ahead in 2018. The bank is confident that strong economic growth and muted inflationary pressures, described as a Goldilocks scenario by Citi, will continue to support riskier assets despite a continued slowdown in central bank asset purchases.
Here’s Citi’s medium-term asset allocation recommendation over the next 12 months. A reading of -4 is regarded by Citi as a recommendation to go “maximum underweight”. At the other end of the spectrum, a +4 reading is a signal to go maximum overweight on a particular asset.
Citi currently holds a moderate overweight position in stocks and commodities, but is underweight bonds and corporate credit.
“Equities remain slightly overweight, with emerging markets and Japan our preferred markets,” Citi says.
“After raising commodities to overweight [late last year], we remain so this month, as they offer diversification benefits for supply shocks to global growth and do well in both reflation and growth plateau phases typically.”
And while Citi likes assets at the risker end of the asset spectrum, it retains the view that bonds — both sovereign and corporate — should not be chased aggressively by investors.
“In government bond space, we are underweight European, German, UK and Japanese bonds,” it says. “US Government bonds remain slightly overweight and emerging market local debt remains at neutral.”
It’s a similar story for corporate credit where Citi, as a whole, retains an underweight rating.
“Within the asset class, we are neutral emerging market external debt and underweight US investment grade (IG) and high-yield (HY), but with a preference for IG,” it says.
“We are underweight both IG and HY in European credit.”
Given the price action since late last year, Citi says it’s pleased with how its asset allocation mix has been performing.
“Since our year ahead version of the Global Asset Allocation, global equities and commodities are both up almost 8%, whilst credit and bond total returns are slightly negative,” it says.
“As we had hoped, in a strong cyclical backdrop, with earnings coming in strong, markets can focus on underlying fundamentals rather than the reduction in central bank [monetary] accommodation.”