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No signs of major sell-off: Citi expert

No signs of major sell-off: Citi expert

There are no signs of a major impending correction in global markets that are running at all-time highs, according to a Citibank specialist.

The S&P 500 fell 1.5% overnight as concerns about infighting in the US administration and its ability to implement President Donald Trump’s economic agenda deepened with speculation of the possible departure of Gary Cohn, director of the National Economic Council.

Asia stocks extended the slide this morning, with the Nikkei 225, Hang Seng index, Shanghai Composite and ASX 200 in the red.

‘From price to book value, we are running at higher than historic average by about 20% and that’s obviously not a good sign. Hence we believe that valuations are rich,’ Shrikant Bhat, managing director and regional head of investments for Citi Asia Pacific told Citywire Asia on Wednesday. ‘But that does not mean that we are at the cusp of a sell-off.’

The S&P 500, Dow Jones and Nasdaq hit record highs this year, buoyed by the rush into technology stocks and improved growth prospects for the US and global economy. Asia Pacific equities have been close to two-year highs.

‘We saw the North Korea flare-up, which is something that markets were concerned about, but the sell-off was shallow and the moment concerns were laid to rest, markets have resumed their rally. That seems to be the state of play at this point of time,’ said Bhat.

However, Citi has been wary of geopolitical risks potentially leading to a sell-off in markets and is recommending a balanced risk approach to clients through the use of multi-asset strategies. ‘Most of the equity exposures of our customers have been taken through multi asset strategies versus risk-on direct equities investment mode,’ Bhat said.

According to Bhat, the strategies have returned in double digits year-to-date at 70% of the volatility associated with equities. Clients can currently access equities through funds, structured notes or direct investments. The fund penetration rate is as high as 40% for some clients, he said.

In the bond space, clients have been shifting out of higher risk trades to investment grade names. ‘They have been moving recently into the emerging market bond space but again linking only to the investment grade within that rather than going down the credit curve into the more riskier grade, which is susceptible to sell-off,’ he said. He has also asked clients to shorten duration as the US Federal Reserve is poised to further hike rates.

He advises clients to put no more than 10% of their net worth in illiquid investments because of high premiums. ‘We have also found that customers like to keep some liquidity. When there are market shocks, they like to do opportunistic investing,’ he said.

Bhat oversees investments sold to Citigold Private Clients, investors that have at least SGD 1.5 million ($1.1 million) invested with the bank, as well as Citigold, its mass affluent consumer banking division. They are not offered discretionary portfolio management or managed account services.

‘Clients have been sleeping well this year given that markets have been returning positively and concerns have been allayed,’ he said. ‘But they have concerns that have markets run too high, is there a correction round the corner and are there geopolitical risks that might heavily fructify?’

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