Global markets – especially equities and commodities – have started 2021 with a bang, shrugging off COVID-19 and last week’s riot and attempted insurrection in Washington by Donald Trump supporters.
The US 4th quarter earnings season kicks off this week – Friday really with three major banks reporting on the same day, led by the biggest in JPMorgan Chase.
Citi’s global strategy team said on Friday that global stocks will be flat over the year – but they reckon Australia will be one of two global markets that could do better this year – the other is the UK.
The best returns are expected in the UK post-Brexit, where Citi forecasts 7% growth for the FTSE 100 and Australia, where they expect the ASX 200 to rise 6%.
Emerging markets, notably China, Korea, and Russia, are singled out by the Citi strategists for growth.
The “mildly optimistic” forecast from the Citi team says their view on global equities hinges on the success of COVID-19 vaccines in restarting the world economy (That’s a given for all forecasts this year).
Citi’s economics team sees a 5% increase in global gross domestic product in 2021, after 2020’s estimated 3.9% contraction.
Both of these factors should boost the recovery in corporate profits, with earnings per share in the most battered sectors (such as energy) rebounding the most.
The investment bank’s strategists predict just a 2% increase in the benchmark MSCI All Countries World Index over 2021, and have moved to a neutral footing for the view for growth sectors in favour of a rotation into value stocks.
Cutting their long-held bias toward growth stocks, which has seen the team historically kept their rating on the US market overweight, is part of the rationale behind downgrading the market to neutral.
They also viewed the growing US fiscal deficit as a threat to the dollar, which they expected to weaken this year, boosting emerging markets and commodity stocks (and the Australian dollar).
But bond yields could be lifted, helped by a recovery in the global economy, with Citi projecting that the 10-year US Treasury yield (currently at 1%) will hit 1.25% in coming months and 1.45% by the end of the year (even though there is no need for rates to be so high with little chance of higher inflation).
The Citi team says this should help financial and energy companies. Analysts expect these sectors to do better this year on a comparative basis with oil and gas prices higher than a year ago for the first 9 months of this year.
The Citi strategists warn that much of their forecast on recovery may already be priced into the market, because the MSCI All Countries World Index is trading at 20 times consensus earnings per share which is far higher than the long-term median of 15 times.
By that measure, the Citi’s analysts warn that the US is the most expensive of the major markets, and the UK the cheapest.
COVID is making both judgements look sound at the moment.