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Citi expects volatile second half

Don’t be misled by the lazy summer, risk management now has high importance, according to Roger Bacon, Citi Private Bank’s Asia-Pacific head of managed investments.

“It’s a tough year,” Bacon told FSA. “We’ve been very balanced in our outlook. Constructive on equities selectively and at the same time concerned about world growth.

The shorthand for the bank’s current portfolio allocation is “slightly overweight equities globally, slightly underweight fixed income”, Bacon said.

The minimal overweight in equities comes from European exposure.

Broadly speaking, given a balanced portfolio, he is selective on Europe and US equities. China, India and Japan equities get a neutral weighting, with Japan and India taken down from overweight last year.

“Flows are relatively low globally, with the exception of tech and healthcare. Interest is primarily in US equities. Investors are waiting for next macro-catalyst.”

One catalyst could be better data from China because the mainland markets are looked at in terms of momentum, not valuation, he said. “But sentiment is not positive and there is zero momentum. It’s hard to find a catalyst to get interest going.”

He welcomed the possible inclusion of China’s A-shares on key MSCI indices, the mutual recognition of funds initiative and the stock connect program, which he said is an important stage in the evolution of China’s financial industry.

“But collectively, they are not enough to change sentiment. People are far more focused on retail leverage than access and they need to become more constructive on China equity risk.”

In fixed income, the bank has been overweight US investment grade credit, but now due to negative rates in Europe and Japan, other bonds are not trading well. He said 30% of investment grade government bonds globally have a negative yield.

“That’s a staggering statistic. Eventually the Fed will raise rates, so we continue to shorten duration in the portfolio. We have a focus on short duration type products — fixed income with a flexible duration mandate allowing the manager to shorten duration. We’ve been working with clients to be selective and shorten duration, irrespective of rates rising in the US.”

Allocation tweaks have been minimal. Citibank has made “a slight move into emerging markets fixed income for geographic diversification”, he said.

Trump card

Global markets are like to become more volatile in the second half.

“We are entering into typically quiet summer months with no obvious macro-catalyst, plus Brexit risk. Risk management is now the most important thing,” Bacon said.

But Brexit aside (personally he would like the UK to stay in the EU), the single biggest macro risk to a balanced portfolio in the next 6-12 months is the US election, he said.

“Brexit is potentially a risk, but the extent of the risk from that won’t change the fundamentals of the world for years to come. The US election outcome could be a real game changer. If Hillary Clinton wins, the likelihood of momentous change is reduced. If Donald Trump wins, all bets are off.”

Bacon said Trump is gradually becoming a more credible candidate compared to six months ago. If he chooses people around him to help round off the “sharp edges”, the election will be close.

“No doubt if he gets in it will cause a lot of uncertainty and will impact geopolitical tension for years.  Expect volatility in the second half.” 

Part of the Mark Allen Group.