Money & Banking

Citigroup says switch from European stocks to emerging markets

Bloomberg September 25 | Updated on September 25, 2020 Published on September 25, 2020

Attractive equity valuations, weaker dollar are positives for EMs

Investors should rotate out of European equities into their emerging market counterparts thanks to a divergence in the economic trends underlying the two asset classes, according to Citigroup Inc.

The firm’s gauge of economic surprises is indicating a pattern disappointment in Europe, while remaining robust in emerging markets, wrote strategists including Jeremy Hale in an asset allocation note on Thursday. Meantime, expectations for European earnings growth are the highest among developed markets and may be at risk of declining, they said.

“We think it makes sense to trim some developed-market-specific risk at a time where near-term probabilities are skewed to some regional economic surprise indexes turning negative again, led by Europe,” they wrote. “In equities, we remain slightly overweight overall, but recommend rotating out of European stocks and into EM given relative data trends.”

A gauge of the European economy fell unexpectedly in September amid a resurgence in coronavirus cases that has dampened investor ardour toward the region’s shares. The Stoxx Europe 600 Index has fallen more than 3 per cent over the last two months, while the MSCI Emerging Markets Index is little changed.

Also read: Dollar off 2-month peak, yuan gains on bond benchmark inclusion

EM equity relative valuations are attractive and there is evidence of inflows returning, the strategists wrote. One further plus-point for developing-nation stocks was the potential for a weaker dollar, they added.

Fundamentals for the dollar will remain unsupportive medium term, the Citi team wrote. This a positive for EM risk assets.

Elsewhere, the strategists moved underweight high-yield US corporate bonds, maintaining a preference for investment-grade securities. They increased their weighting in gold.

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on September 25, 2020
This article is closed for comments.
Please Email the Editor