Despite the renewed prospect of a US-China trade war, the bank remains optimistic on the China A-share market.
“We are overweight A-shares,” Bacon told FSA. “It’s our biggest call globally. A-shares now have more sell side coverage, valuations are compelling and growth rates are relatively high and fairly stable.”
In China, Citi’s core themes are around technology and the consumer, for example in the healthcare and insurance industries, Bacon said.
He said the bank’s wealth management clients have been looking at ways to increase A-share exposure, and the recent MSCI index inclusion of A-shares only supported existing strong interest.
“[With A-shares] the risk is to the upside and benchmark increases will continue to provide support in the medium term.
“Short term growth concerns will pass, and the ultimate economic impact of any possible trade war is being overstated in some quarters.”
More broadly in equities, the bank is positive on emerging markets with a bias toward Asia. Japan is also favoured. ”We’ve dialled back on India due to the potential impact from the broad reforms. But India remains a good long-term play.”
In developed markets, with high US valuations and Europe’s growth slowing, the bank is selective on its choices. Bacon said, as a general view, technology infrastructure and the healthcare sector are attractive.
Spotlight on fixed income
In June 2017, Bacon noted investor optimism was not fleeting but “fundamental” and he forecast a generally strong year for investments, which turned out to be true. Key indices in the US, Europe and Hong Kong, as well as the MSCI World, were up more than 20% with little volatility.
This year, however, won’t be like 2017, he said.
“ won’t be a bad year, but will be a year of adviser-client discussion, continued diversification and consolidation of assets.”
Fixed income is the hot topic this year. Clients have heightened concerns about duration risk and want to diversify their portfolios given rising interest rates, he said, adding that money is coming out of high yield globally.
“We are questioning the idea that all fixed income does poorly in a rising rate environment. We are educating clients on the facts behind fixed income sensitivity to rising rates.”
The bank is looking at floating rate securities and other strategies sensitive to interest rates. Senior loans, for example, “are less sensitive to interest rate movements and provide higher returns with lower volatility given their seniority in the capital structure”, Bacon said.
“But if clients emphasise returns, then it’s still emerging market debt. For those that want defense, we look at global diversified government bond funds.”
Bacon said the big caution this year is the direction of the US dollar.
“If it continues to strengthen it will have an impact on emerging markets. We maintain the view of medium-term dollar weakness.
“We also encourage clients to stay more fully invested,” he said. “Cash remains a drag on long-term portfolio returns.
“There is an enormous amount of noise in the market at present, and we are encouraging clients to look through the noise and focus on fundamentals and data, which suggest a more benign backdrop.”