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March 7, 2022, 4:30 p.m. EST

Russia-Ukraine war prompts Citi CIO to make these changes to stock-market allocations

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By Christine Idzelis

The war in Ukraine is sparking a “painful jump” in crude-oil and natural-gas prices and overall inflationary pressures that has Citigroup’s wealth-management division making significant portfolio shifts, according its chief investment officer. 

“We are not reducing our equity allocation; we are changing it,” said David Bailin, chief investment officer of Citi Global Wealth, in a phone interview Monday. “We’re adding to positions that give exposure to global natural resources, both as an inflation hedge and to give clients exposure to changes in both the price and volume of commodities” including energy, minerals and agriculture, he said.

Citi Global Wealth is also creating a position in gold, an addition that will bring the precious metal to around 2% of the portfolio, according to Bailin. The portfolio changes are “in process,” he said, with the shifts into stocks tied to energy, minerals and agriculture meaning reduced exposure to some consumer-sensitive equities and small and medium-size stocks, he told MarketWatch.

Russia’s invasion of Ukraine could cause crude-oil prices to spike to $125 or $150 a barrel,  which could send U.S. gasoline prices 20% higher by early spring, according to Bailin’s CIO strategy note dated March 6. Higher prices of oil, gas, and agricultural commodities should motivate production gains that help slow inflation later this year, “but not before U.S. consumer prices surge further,” Bailin warned in his note.

“A consumer-harming spike to 8.5% U.S. inflation in the next 3 months is most likely,” he wrote, referring to the consumer-price index. CPI rose to 7.5% in January on a 12-month basis, the highest pace since February 1982

“We believe this bearish view on inflation will be exacerbated once higher prices for food commodities is factored in,” Bailin wrote. “The yield curve has been flattening on rising recession risk with real interest rates still likely to decline further as prices spike.” 

Read: Wall Street is beginning to cut S&P 500 forecasts as oil prices surg e  

Citi Research analysts said in a note after markets closed Friday that they had lowered their 2022 forecast for the S&P 500 index /zigman2/quotes/210599714/realtime SPX -1.72% to 4,700, from their previous target of 5,100 for the end of this year. “No doubt, the duration and extent of Russia-Ukraine conflict impacts on longer-term growth drivers remain in flux,” the Citi analysts wrote.

Major U.S. stock benchmarks closed sharply lower Monday , with the S&P 500 falling about 3% to end around 4,201. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.62% slumped about 797 points, or 2.4%, to close in correction territory, while the Nasdaq Composite’s /zigman2/quotes/210598365/realtime COMP -1.80% 3.6% slide landed the technology-laden index in a bear market, according to Dow Jones Market Data.

Nine of the S&P 500’s 11 sectors closed lower Monday, while energy /zigman2/quotes/210600058/delayed XX:SP500EW.10 -7.45% rose around 1.6% and utilities /zigman2/quotes/210600480/delayed XX:SP500EW.55 -1.27% gained about 1.3%, FactSet data show.

As part of its portfolio shifts, Citi Global Wealth was also contemplating greater investments in defense equipment, according to the CIO strategy note.

“Even if the conflict in Ukraine comes to a conclusion, it is unlikely that western sanctions on Russia will be rolled back,” Bailin wrote. “The future price of oil and other commodities has shifted higher not only in the near term, but in the longer term as well.”

Western producers will need to “fill Russia’s energy export gap as well as agricultural export losses from Ukraine,” an adjustment that could take as long as two years, according to his note. 

Meanwhile, “an unfolding, painful jump in crude oil and natural gas costs will incentivize investments in alternatives,” Bailin wrote. “Their gains will replace fossil fuels over a long period,” he said in the note, “but to avoid recessionary supply shocks, one cannot wait and live without energy.”

Read: Why Russia’s invasion of Ukraine adds to inflation pressures and should be ‘unsettling’ to stock market, says this strategist

In oil futures, West Texas Intermediate crude for April delivery rose 3.2% Monday to settle at $119.40 a barrel. That’s the highest front-month the highest front-month contract finish since September 2008, according to Dow Jones Market Data.

Read: Oil prices briefly top $130 a barrel on talk of Russia oil ban

Wheat futures, meanwhile, continued to surge as Russia’s invasion of Ukraine shut down exports. Soft red winter wheat for May delivery was up 7% Monday afternoon at $12.94 a bushel.

See:  The Russia-Ukraine war is fueling the ‘biggest supply shock to global grain markets’ in living memory

“In our view, the ongoing invasion of Ukraine by Russia and the economic sanctions that have been used by the West to isolate Russia have redrawn the political and economic map of the world,” according to Citi’s CIO strategy note. “It appears more likely than not that President Putin will cause Russia to bear the long-term scars of his decision to go to war and use all tactics necessary to control part or all of Ukraine.”

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