Global Markets: Citigroup optimistic in medium term
The summer months are generally quiet for equity markets. As the old saying goes: "Sell in May and go away." But what is the medium- to long-term prognosis for equities? Much better than one would expect in view of the uncertain backdrop, according to the latest Citigroup equity outlook.
Notwithstanding economic challenges, Citigroup is confident that there is still plenty of upside potential in global equities. "We believe provisions by authorities should be enough to contain liquidity concerns. Fiscal consolidation will be enough to slow economic momentum, but not enough for a global double dip.
"Offsetting these concerns is the good news on corporate earnings. Our long-held view has been a sharp recovery in profits in 2010, driven mainly by margin expansion. We thought at the start of the year there was scope for earnings upgrades and since then, analysts have raised their corporate earnings growth forecast from 29% to 36%."
The Citigroup equity strategy team is not factoring in a double-dip recession. "Even if it does happen, we are not convinced that the impact on corporate earnings will be as bad as many fear. Even in a scenario of a moderate economic downturn, we believe there is scope for corporate profits to rise. Companies approach a second potential downturn 10% leaner and with management in the mindset of cutting expenses. This will help protect profits. To get global earnings back down to previous lows, we need to forecast the disastrous combination of a brutal economic downturn and cost inflation. This combination seems unlikely."
Japan is Citigroup's preferred recovery play on the basis that they will be exposed to domestic growth and higher exports throughout Asia. Citigroup analysts pencil in a 15% uptick in emerging market equities by the end of 2010, although there is a bias towards emerging Asia. They are negative on Central Europe, the Middle East and Africa on the basis that Europe's problems will weigh on growth in these regions. They are neutral on Latin America.
The team is underweight on US equities on the basis that they are among the most overvalued of all markets. It is overweight with UK equities because most of the companies that make up the FTSE are export oriented rather than focused on the UK domestic economy.
Citigroup is overweight in the cyclical sector with a bias towards consumer discretionary, materials and IT. It argues that defensive stocks remain unattractive.
The Irish stock market [Iseq] soared for a decade on the "Irish economic miracle". That story is now gone, but coming up with a replacement is not going to be easy.
From now on, it will be about sectoral picks with the best in class Irish firms coming on the radar of international investors: CRH in the construction sector; Ryanair in aviation and the Kerry Group and Glanbia in the food sector. Smaller Irish companies listed on the Iseq are likely to face a challenging time until there is a sustained recovery in global markets.
