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Equities could expect more inflationary pains. This global portfolio strategy can help you minimize damage.

Stocks are poised for another drop ahead of more inflation data after a nasty CPI surprise re-swept markets. The technology sector was hit hardest, with Apple AAPL,
-5.18%
loses 5% and hands over the crown of his world’s largest company to Saudi Aramco.

Big techs “need to bounce back to lead the market,” said Neil Wilson, principal analyst at Markets.com, who sees the bulls putting up a fight when the S&P 500 SPX,
-1.65%
falls to 3,800. That’s “when things start to look very oversold… Risk is the bear market’s slow slide down, exactly the same momentum we’ve seen in the bull market, but in reverse.”

Our call of the day comes from Citigroup strategists who have offered a global equity portfolio as a hedge against a further decline.

“It’s long value and short growth. The UK and emerging markets are favored over the US and continental Europe. It favors cheap financial and commodity stocks over more expensive tech-related businesses,” said a team led by global equity strategist Robet Buckland.

The macro equity portfolio “minimizes the risk of another real yield-driven downgrade in global equity markets, short trades where valuations are most sensitive to US 10-year TIPS yields and long trades that are most sensitive to US 10-year TIPS yields least sensitive,” the team said. The portfolio is cautious on growth sectors, particularly in the US

As the team explained, the global stock market is still not that cheap compared to history.

You consider the MSCI AC World Benchmark ACWI,
-1.25%
is down 17% year-to-date and is trading at its long-term median of 15 times 12-month forward price/earnings — below 20 times its peak last year. A drop to the 10-fold seen during the 2011-12 eurozone crisis would imply a further ~33% pullback, they said.

The MSCI AC World Growth Index, meanwhile, is down 25%, while energy and UK healthcare are the only sectors resisting a “developing bear market”, the strategists said.

The relationship to real yields and stock valuations is key to pinpointing further stock weakness, Citi reminded us.

“Monetary easing in 2019-2020 has helped push real yields down and reprice equities. Monetary tightening in 2022 is driving real yields higher and leading to a stock downgrade,” they wrote, adding that valuations for more interest rate-sensitive growth stocks would likely need to fall further.

How much? The MSCI AC World Growth Index reached a P/E ratio of 29 towards the end of 2021 and is now trading 22 times for the current real return of +0.3%.

If that real yield dips back to -0.5%, growth stocks’ downgrade should reverse, but Citi’s global strategist Matt King saw the risk of real yield heading towards 1%, which is bearish for stocks and believes stocks themselves could Stay Vulnerable 10-Year TIPS Stop Climbing.

Their hawkish outcome on real yields would see the MSCI AC World benchmark trading at forward P/E from 15 to 14x currently and the MSCI US at 16x from 18. We’re almost there, they said, but the world growth index will fall to 17 times from the current 22.

How this downgrade strategy has played out so far in 2022, here’s a chart:

Citigroup

“The long-only strategy is down this year, but a lot less than the broader market,” Buckland and the team said.

Read: While Ark’s flagship fund has tumbled 76% from its peak, Cathie Wood still considers her stocks “low-value territory.”

The Buzz

disney shares DIS,
-2.29%
is down after the entertainment giant said it added more streaming subscribers than expected on Netflix’s NFLX,
-6.35%
routers, but warned against weakness.

AppLovin APP,
-5.90%
rebounds after executives at the app monetization group said their software business is picking up speed and they may put the app unit up for sale.

EV manufacturer Rivian Automotive RIVN,
-9.61%
is up after sticking to its 2022 production outlook. And Lordstown Motors RIDE,
-9.58%
rose more than 30% after announcing it had closed the deal to sell its factory to Foxconn.

Beyond Meats BYND,
-13.83%
The stock trades below its IPO price for the first time after disappointing results. Grocery delivery group Instacart has filed for a long-awaited IPO.

More revenue to come from WeWork WE,
-9.57%,
US Food USFD,
-5.30%
and Squarespace SQSP,
-12.43%.

Producer prices rose 0.5% in April, in line with some economists’ forecasts, with annual inflation easing somewhat. Weekly jobless claims rose 1,000 to 203,000.

The crypto bloodbath continues. Following the collapse of algorithmic stablecoin TerraUSD, mega-stablecoin Tether USDTUSD,
-0.23%,
announced a $1 billion swap when it bottomed at 95 cents. bitcoin BTCUSD,
-0.44%
has fallen by about 5%.

President Joe Biden urged Americans “not to go deaf to such grief” as he announced 1 million COVID deaths in the country.

Finnish leaders support NATO membership in response to Russia’s war in Ukraine. Former Russian President Dmitry Medvedev warned that the West’s steady arms supply and support to Ukraine risks a “full-blown nuclear war”.

The markets
blank

Uncredited

stock futures ES00,
-0.73%

YM00,
-0.39%

NQ00,
-1.37%
along with Treasury yields TMUBMUSD10Y under pressure,
2.838%

TMUBMUSD02Y,
2.573%,
as the dollar climbs the DXY,
+0.58%.
Commodities are widely under pressure, with oil CL00,
-1.46%

BRN00,
-1.70%
dropped over 2%.

The graphic

Here’s a look at how Apple’s market cap eventually ceded to Saudi Aramco’s.

The tickers

These were the most searched tickers on MarketWatch as of 6 a.m. Eastern Time:

Random Reading

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passenger without training a small plane lands in Florida.

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https://www.marketwatch.com/story/this-global-portfolio-from-citi-has-been-built-to-withstand-another-big-rout-in-equities-11652353500?rss=1&siteid=rss Equities could expect more inflationary pains. This global portfolio strategy can help you minimize damage.

Brian Lowry

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