Stocks, bonds, commodities or cash? Citi and others reveal how to allocate right now
As the S & P 500 ‘s year-to-date rally nears 20%, some investors have questioned whether stocks could be nearing a tipping point. Other potential risks on the horizon include the yield curve inversion — believed by many to be a signal of recession — this week’s U.S. Federal Reserve rate decision, and inflation numbers due next month. So how should investors allocate their portfolios in this environment? Here’s what Citi, TS Lombard and the Wells Fargo Investment Institute advise. More gains to come for U.S. stocks: Citi Citi in a July 23 note said that while in the early months of 2023, the bull market was “very narrow,” it believes markets could recover more broadly soon. “In our view, a broader market improvement lies ahead, but with less robust gains for both the ‘magnificent seven’ and the S & P 500, which has benefited from its AI leaders,” it said, using ” magnificent seven ” to refer to U.S. mega-cap tech stocks. “If staying invested in equities requires short-term loss avoidance strategies, by all means, hedge. The S & P 500 VIX has fallen back toward the zone of record lows. Risk-mitigation steps can offer either immediate yield or unusually cheap costs for hedge buyers.” The bank added that real yields could reach 4% above inflation over the next five years, “therefore, buying bonds in lieu of cash is advisable.” Real yield is the nominal bond yield minus inflation. Buying bonds would allow investors to lock in today’s bond yields, but real yields would rise if inflation falls. Citi Research said in a July 21 note that it continues to be more positive on equities, but has an underweight position on U.S. credit as its main hedge should a recession in the country “happen faster than we think.” It added it has a bias toward emerging markets, and also favors precious metals. Here’s how Citi Research said it would allocate in the medium term in the note: Favor long and short-term bonds: Wells Fargo Wells Fargo Investment Institute in a July 17 note said it continues to favor both long and short maturities in bonds as the yield curve inversion “remains persistent.” “We would remind investors that the economy can continue to expand after yield curve inversion and that, likewise, risk assets can continue to perform well,” the firm said. “However, given the powerful message, an inverted yield curve has historically delivered, we believe investors should continue to be watchful, informed and vigilant.” Here’s what the firm is most positive, unfavorable, or neutral on: Emerging market debt over equities: TS Lombard For those looking outside of the U.S., research firm TS Lombard said that emerging market debt is set to outperform stocks for now. Local debt markets in Brazil and Mexico have been among the best-performing emerging markets, it said. TS Lombard added in a Monday note that the prevailing conditions in most EM economies — high interest rates and falling inflation — tend to favor debt over equities. “Over the past month, a soft dollar and moderate U.S. equity gains have helped support EM equities, but local debt has started to outperform on a risk adjusted basis,” said the firm. “The bottom line is that debt is outperforming equity for the country indices in almost all EM, except for India in which material inflation risks remain.”
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