Major broker Citi believes the Federal Reserve, the European Central Bank (ECB), and the Bank of England (BoE) are each on track to start cutting rates by the middle of the year – “financial conditions be damned”. As rates start to come down, says the broker, an “inflating tech bubble will add fuel to the fire”.
Rate cuts into bubbles? Rather than run for the risk-aversion hills, Citi loves the smell of irrational exuberance in the morning! They intend to “remain significantly long equities” until one of two things occur:
They see “some of the signs that typically appear at a bubble top”; or
Their indicators “warn of an imminent recession”
Encouragingly for investors, Citi believes “neither is the case yet”. They’re going to “focus on where the fire is burning brightest”, which means buying tech stocks in the USA, Taiwan, Korea and Japan. It also means buying copper.
Here’s a summary of the key findings of Citi’s March Global Asset Allocation House Views.
Citi acknowledges US economic data is trending weaker, “However, we do not think that this weakness is enough to re-activate the US recession fears, at least not yet”, they note. The data so far suggests the soft landing scenario is edging out the hard landing scenario. This is the basis of the broker’s overweight view on US equities.
Don’t get too caught up with the timing of Fed cuts, says Citi. It’s “less important when the Fed starts, more important that the Fed cuts at all”, they say. Market pricing for 2024 has swung from as many as seven cate cuts to now just three. But the balance is probably on the way – just likely pushed further out into the future. At the end of the day, the Fed “cutting into a frothy equity market is one of the ingredients for a growing bubble”, notes Citi.
As the “B” word is concerned, Citi notes their US equity market “bubble indicator” has been triggered, but also that “we are far from a classical bubble top”. Even better for investors, Citi notes bubbles can typically last “for quite some time” after their bubble indicator is triggered, “often for one or two years”.
Citi feels the following classical signs of a bubble top are still absent. These include valuation and sentiment indicators which aren’t yet “clearly in peak bubble territory”, and the fact that IPO exuberance and leverage by retail investors is “still very benign”.
AI fans will be encouraged to know that the current bubble “is still in its early innings” according to Citi who says, “we are a strong proponent of the AI bubble and are invested that way via OW in US, Korea and Taiwan.” OW stands for “overweight”.
Citi likes copper for a few reasons:
The global manufacturing PMI is turning up and copper “performs well” when this happens
Copper tends to rise in line with equity market bubbles, like the one we’re in now, as the wealth effect from stocks tends to lift copper consumption
The long term energy transition is creating structural shift towards increased copper consumption
As a result of the above, Citi’s commodity strategists believe that “everything below 9k is cheap for copper”. FYI, copper is currently trading around US$8,700/t.
Citi are “still bullish precious”, mainly referring to their views on gold. The recent rally has triggered an upgrade of the broker’s 0-3 month forecast to US$2,200/oz and 0-6 month forecast of US$2,300. FYI, gold is currently trading around US$2,165/oz.
Increases in central bank reserves is helping drive the stronger gold price as a portion is trickling into holdings of gold. Purchases by emerging markets are also robust as they are “undergoing strategic reserve diversification”. Citi’s commodities team believes both factors are likely to remain “strong in 2024”. Lower real rates and a softer USD in the wake of Fed interest rate cuts are also likely to provide further support for gold.
However, Citi isn’t jumping into long gold positions just yet. They prefer to wait for a “better entry point”, noting “it is hard to justify a new overweight at these levels, especially considering the negative carry of the position.” For now, Citi is officially “neutral” on gold, but is looking to buy into “dips” in the gold price.
On energy, Citi says that they have a “negative bias on oil” in the second half of 2024 and into 2025 due to stronger than expected supply growth from non-OPEC producers. Spare capacity at major OPEC producers Saudi Arabia and Russia is also likely to provide a buffer against any “severe supply disruptions”. There’s also likely to be “weaker than expected demand” later this year.
In conclusion, Citi’s latest report on Global Asset Allocation makes interesting reading for investors as the bull market progresses into its second year. It’s a reassuring view which suggests that when the party is in full swing, and as long as the liquidity keg is getting replenished by central banks, party on!
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