MID-YEAR OUTLOOK | 2020
A new cycle in the global economy and markets is beginning. But many clients do not own the right equities for this new recovery, and almost all have too much cash. Earning more safely does not mean staying out of markets or holding cash while waiting for the “right time” to invest.
To help you understand how your portfolio currently measures up, we can provide you with your very own Outlook Watchlist report. Your relationship team can then recommend strategies for getting properly invested for the new cycle.
So why not make a start by requesting your Outlook Watchlist report from your relationship team?
Discover Mid-Year Outlook 2020
1 Letter from the CIO 2 Overview 2.1 Investing in a new economic cycle 2.1.1 Our favored markets 2.2 Truly Unstoppable trends perform well even during a pandemic 2.3 Cash is not king 2.4 Seek sustainable dividends 2.5 The best results for alternative investments often follow economic crises 2.6 What smart families are doing in capital markets 2.7 The power of Investing with Purpose 3 Asset allocation 3.1 Towards a new asset allocation 3.2 The wisdom of lump-sum investing 3.3 Major changes to our Strategic Return Estimates
DAVID BAILIN CHIEF INVESTMENT OFFICER
To Our Clients,
I am very mindful that all of us have been impacted personally and professionally by the pandemic. Across the Citi Private Bank community, some have lost loved ones to COVID-19, all of us are worried about our families, and there are more than a few of our clients serving on the front lines, as doctors, researchers, and vaccine innovators. It is also a time of strife due to major social issues and unemployment. We are a resilient bunch, sharing our experiences, adapting to new realities, and developing fortitude as we seek to restore elements of normality to our lives and respect in our political discourse.
This is a rare and remarkable time.
The events of the last few months have brought an end to the longest economic expansion in history. That expansion – from July 2009 to February 2020 – was of sufficient magnitude to allow the world to enter this crisis from a position of relative economic strength. The US personal savings rate was a healthy 8% when COVID-19 struck. Globally, inflation was low, and there were no major booms to unwind. But the global virus also hit at a time of de-globalization, when traditional political alliances are fraying, the balance of power between the US and China is shifting, and when populism is becoming more prevalent.
The varied, disjointed, and uncoordinated health and economic responses to the global spread of the virus reflect these less stable times.
So, it is with a great sense of responsibility and gratitude that I pen this guide and introduction to our Mid-Year Outlook entitled, From Fear to Prosperity: Investing in a New Economic Cycle.
Normally, our mid-year report is an update to the outlook we publish at the beginning of the year.
This is not the case for 2020. Our global team of researchers, economists, and portfolio managers has revisited every assumption in our models.
We have updated our Strategic Return Estimates, the foundational ten-year return projections that drive our core asset allocation. We have looked at the political, economic, governmental, and market reactions to the pandemic to devise and assess scenarios that reflect a range of possible outcomes. We have considered which trends will accelerate as a result of the pandemic, and which industries and activities will be less relevant afterwards. And, we have taken your questions into account. Our Global Investments team has had more frequent contact with our clients than at any time in the past decade. We have a great deal to tell you about what we know and what we do not know. When a crisis of such magnitude occurs, knowledge is in short supply. As the British philosopher Bertrand Russell said, “some things are more nearly certain than others.” Where we have facts and data, we can craft stronger recommendations. Our highest conviction views are grounded, in part, on historical relationships between the economy and markets, but are also based on observations of atypical market behavior, new portfolio realities, and the acceleration of important trends in business and politics.
Mid-Year Outlook 2020 reflects the complexities and new realities of our time. Let me share them in summary form for you, with references to the articles that follow:
The most material issue for investors over the next five years will be low rates. With the yield on US Treasuries falling closer to zero, asset allocations will have to change materially. Historically, fixed income zigged when equities zagged. Their negative correlation served as a natural hedge. That is no longer true. Then there is the associated issue of longterm returns. If fixed income cannot provide reasonable returns and as much diversification, portfolios should reflect such realities. We have, therefore, re-run our Strategic Return Estimates to reflect the pandemic, low rates, and how markets have performed thus far – see Major changes to our Strategic Return Estimates. The results suggest that clients make major changes to their core, long-term portfolios. Increased exposures will include small- and medium-sized companies, emerging market debt and equity. For suitable investors, they will include certain capital markets strategies – see What smart families are doing in capital markets – as well as private equity, real estate, and late-stage venture capital – see The best results for alternative investments often follow economic crises. We also continue to emphasize the value of select companies with a track record of growing dividends – see Seek sustainable dividends. We then set out why we believe investors are likely to focus even more upon companies with the highest environmental, social, and governance standards, both during the pandemic and for the long term – The power of Investing with Purpose. Finally, there is the issue of cash itself. Clients hold way too much of it, and failure to manage cash wisely is a major negative for portfolios – see Cash is not king.
The major “fear” is the virus itself. And that is because the pandemic is not at its end. Looking at US data, for example, we see that that there may be as many as 190,000 fatalities just three months from now - figure 1. But we can also see that 50 million people at most will have been infected by then. Only when infection rates (Ro) fall sustainably to 0.5 or less, may the end of the pandemic be in sight. This means that COVID-19 will remain prevalent globally for a year or two or longer, unless a vaccine is found and broadly distributed. The economic friction associated with living and working through a pandemic across a modern economy has never been experienced or modeled.
Until a vaccine is found, the global economy will not fully normalize, and health frictions will dampen economic activity overall. When a vaccine is found, there will be a rapid path to a “new normal,” as well as a further acceleration of economic activity in industries and companies that are strategically and financially wellpositioned. Although we have highlighted our Unstoppable trends before (and these performed well over the past few months!), the pandemic will accelerate growth across many industries. These are investable and we believe you should own more of them – see Truly Unstoppable trends perform well even during a pandemic: Reviewing our investment themes.'
Finally, if anyone still had any doubts about the destruction that market timing can wreak upon portfolios, the pandemic should have dispelled them. Over the twenty-four trading days between 19 February and 23 March, US equities dropped 34%. From 23 March to 27 May, they gained 36%. The largest up-day was 9.4% on 24 March and the largest down-day on 16 March was negative 12%. These were some of the biggest single-day moves in stock market history and they occurred very close together. Keep your core portfolio fully invested at all times and reallocate within it – see Towards a new asset allocation and The wisdom of lump-sum investing: Why you should get fully invested now.
Source: covid19-projections.com/us as of 4 Jun 2020. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be guarantees of future events.
Although it seems almost inappropriate to talk about “prosperity” – profits and opportunity as a result of the pandemic – this is a resilient world. To earn above-average returns, you have to make calls on what to buy and when. Great investments often arise at times of great dislocation and even discomfort. We identify out-of-favor markets and those industrial groups, including airlines, which are under extraordinary stress but must come back in order for the global economy to heal again. We are prepared to look ahead with eyes wide open, and while we will be wrong on some recommendations, perhaps about the timing to invest or perhaps about the investment itself, there is greater risk if we look only in the rear view mirror.
As I said at the outset, there are some things we are more certain about. We know the global economy will fully recover, but not the exact timing. And we know that innovation, invention, and ingenuity will continue to power changes, and that leaders in such endeavors will be well rewarded. And we also know that darker days give way to lighter ones and sunshine.
It is a humble honor to work with colleagues so committed to looking long and hard at a world changing so fast. And it is an equal honor to serve all of you as CIO. I have never had so many meaningful conversations in such a short time with so many of you. I wish you and your family health, prosperity, and renewal.
Warmly,
David Bailin Chief Investment Officer Citi Private Bank