BUY. THE. DIP.
That’s the unanimous view of Citibank’s Global Equity Strategy team who think the recent correction in stocks offers an opportune time for investors to buy at better levels.
“The overall impact of this selloff is that Citi’s end-2018 market targets, which were starting to look unappetising following strong markets in January, now imply healthy returns for the rest of the year,” it says, pointing to the table below revealing its year-end forecasts.
“Citi’s regional strategists are not especially surprised by this latest selloff. We collectively see this as another buying opportunity rather than the beginning of something more sinister.”
The reason Citi is not concerned yet is simple: the signals are simply not there to suggest this correction will become a bear market.
Pointing to its “Bear Market Checklist”, an indicator that uses metrics that were flashing warning signals before bear markets in the past, only 3.5 of the 18 indicators sat in “dangerous” territory in January.
“Sure valuations are starting to look stretched, Panic/Euphoria is flagging caution and company balance sheets are beginning to look extended, but other factors remain subdued,” it says.
“Companies are still fairly cautious — investment, merger and acquisitions and IPOs are subdued. At the top of a bull market, companies get sucked in as well.
“Equity fund inflows are picking up but still low compared to previous market peaks. Signals from the bond market are not yet especially bearish for equities. The US yield curve has flattened, which can be a sign of oncoming problems for the world economy and global stock markets, but it is not yet inverted. And credit spreads have risen but they are still a long way from dangerous territory”
The latest checklist is shown below, comparing how things currently sit compared to 2000 and 2007 just before bear markets hit.
Given the current set of circumstances, Citi says the indicator is “telling us to buy the next dip.”
It also thinks that new highs are on the wat, although it admits it’s likely to be a hard slog compared to the trend in previous years.
“Welcome To Phase 3,” Citi says.
“In Phase 2, equity and credit both do well. Stock market volatility is relatively low, which seems logical given the close relationship with credit spreads.
“But in Phase 3 credit spreads and equity volatility move higher.”
Citi describes Phase 3 as a “high volatility bull market” where gains for stocks are “still decent” compared to those in credit markets.
“Phase 3 is when equities become the only game in town,” Citi says.
“Credit spreads rise as fixed income investors worry about high corporate leverage. Government bond yields rise as central banks hike rates. Capital flows from fixed income to equity markets.”
As a result of large-scale asset purchases from major central banks such as the US Federal Reserve, European Central Bank and Bank of Japan, among others, Citi says Phase 2 has been temporarily extended “keeping credit spreads and equity volatility lower than they would otherwise have been”.
“As policymakers step away, so markets will move into Phase 3,” it says.
“We suspect that this Phase 3 will be longer than in the last cycle, but we will continue to use the bear market checklist, and especially signals from the fixed income markets, to gauge when the dreaded Phase 4 is imminent.”
Citi describes Phase 4 as a “full-on bear market, when investors start to price in a recession”.
“Risk assets, including equities, plummet,” it says.
Business Insider Emails & Alerts
Site highlights each day to your inbox.