By Joseph Adinolfi
Another group of Wall Street market strategists have signaled to their clients that it’s time to buy back into stocks — especially stocks that aren’t trading in the US.
While global equity funds saw their first net inflows over the past week since April, a group of analysts at Citigroup recommended to clients who are concerned about the durability of the rebound that they might be better off buying Europe or emerging-market equities, which have more attractive valuations than the US.
The S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.16% and Stoxx Europe 600 /zigman2/quotes/210599654/delayed XX:SXXP +2.07% have both retreated by roughly 16% since the start of the year, while the MSCI emerging-market index /zigman2/quotes/201454250/composite EEM -0.78% has retreated by 17% in U.S. dollar terms and has fallen nearly 25% over the past 12 months.
“For those investors concerned it is too early to take the plunge in the US market, maybe buying dips in Europe and EM is a safer call,” a team of strategists led by Citi’s Robert Buckland wrote in a note.
As analysts evaluate whether the latest rebound in equities will have staying power, or whether it will fizzle in the coming days and weeks, the Citi team pointed to their “red flag” checklist, which assesses stocks based on a range of characteristics, including valuations, credit spreads, profitability, number of recent initial public offerings and overall analyst bullishness.
The fewer “red flags”, the higher the likelihood that stocks will trade higher 12 months out — at least, that’s been the general trend in the past, the Citi team said.
U.S. stocks triggered more red flags on Citi’s checklist when markets peaked last year compared with European and emerging markets, which is one reason why the team was more bullish on emerging-markets.
When it comes to the outlook for a global recession, another team of Citi analysts decided to cut their U.S. equity allocation back to neutral, while remaining invested in Chinese equities and in the U.K. compared with Europe. They were also underweight U.S. and European credit, which they noted often trades poorly while heading into a recession, even though a recession isn’t the base case for Citi’s economists.
They therefore cut their U.S. equity allocation back to neutral, while keeping underweight ratings across the U.S. and European credit stack.
However, there was one notable exception to this: the team moved its recommendation for U.S. Treasurys back to neutral from underweight, a decision that comes as Treasury yields have moved off their peaks in recent days.
Finally, the team was careful to differentiate between desirable and undesirable sectors, going long healthcare and consumer staples stocks, while advising clients to cut their allocations to technology and financial stocks.