Despite plunging markets and global business disruption, Citi Private Bank is sticking with its fundamental house view.
Published in December, the bank’s 2020 outlook predicted that “a pick-up in economic activity will feed through into solid corporate revenue growth and modest earnings growth”, boosting equity markets.
This forecast does not need to be adjusted materially, just delayed 3-4 months, Julie Koo, managing director and head of Citi’s private bank investment management sales, told FSA.
“With other major global events, including pandemics and the spread of viruses, there was an immediate and deep negative reaction and within three months in most cases markets rebound and recover if not overshoot previous levels.
“Nothing says this situation will be different. As the virus spreads globally it will be a U-shaped recovery rather than a V-shape and will likely extend into the second quarter.
Although the bank is closely watching credit markets and liquidity, “we do not view the world economy as highly vulnerable to contraction apart from the coronavirus”, she said.
Calming investors
“We’ve had investors who were spooked and we are advising wealth clients to take several actions,” she said.
One is to revisit portfolios and review the original investment thesis. “Ask whether your view has deteriorated or conviction in the management changed,” Koo explained.
“If so, take the exposure down. If the answer is no, then riding through this temporary market environment is a good idea,” she said, though admitted that embracing wild market swings is not easy.
Koo emphasised that Citi retains strong confidence in “unstoppable trends”, or long-term investment themes that are likely to experience growth despite macro risks because “the train has already left the station”, she said.
“We’re not going back to burning coal, for example. Clean energy, cybersecurity, fintech may have some setbacks but they will continue to develop. The same with the growth of Asia’s middle class.”
Second, clients should position for a U-shaped recovery by dollar cost averaging – buying at regular intervals regardless of market conditions to smooth volatility – not by trying to time the market.
“The other thing we keep messaging to clients is on diversification, building well-diversified core portfolios.”
Testing fund managers
In reviewing portfolios, the bank is explaining to clients how a fund is “doing what it should be doing” when the market plunges.
“One hedge fund in particular on the platform had a tough February. We told investors this is a great manager who has been through cycles in the past and we have high conviction on the portfolio. The first week in March, the fund turned the performance around.”
She sees the period of extreme volatility as a litmus test for fund managers.
“Communication is key. We can clearly see the managers who have proactively reached out saying they know our clients are scared, here’s what we’re thinking and here’s how we may come out of it.
“If you’re not close to that information, then all clients have to go on is the numbers.”
Fixed income re-assessed
Citi is currently looking to add to its platform “well-managed diversified fixed income funds”, she said.
On the equity side, given the low yields in fixed income, Koo is looking at equity income strategies.
“The dividend story in equities has proven to be a driver of returns and is underrepresented in most client portfolios. This is an area where investors can turn to for income and also position for some capital gains.”
Fixed income markets, coming off a strong 2019, won’t be as strong this year, she said. Recent interest rate cuts and ballooning negative yielding bonds – which the bank is advising to avoid — make yield even more difficult to find.
She said Asian credits, particularly investment grade, continue to be a safe haven, but she is advising clients to look at alternatives such as private debt, private equity and hedge funds.
“Fixed income opportunities will look different this year. We think clients should look to diversify investments into areas uncorrelated with public fixed markets and where there is return upside.”
Koo said Asia clients have been underinvested in alts, which should be 20% of a portfolio – perhaps 10% in private markets and 10-12% in hedge funds.
In the midst of the global investor reaction to the spread of the coronavirus, Citi Private Bank remains “cautiously optimistic”, she added.
“Markets are driven by emotion in environments like this, not by fundamentals.
“Looking at patterns of history, everything points to the fact that when we come out of this cycle, we’ll pick up or even accelerate production to meet demand. This should allow for economic growth, albeit delayed.”
