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A Pandemic Pause Amidst the Recovery?

29 June 2020Covid-19Asset AllocationEquities

Recent spike in US COVID-19 cases

  • The US came out of lockdown over six weeks on a rolling State-by-State basis. As individual States emerge from the first-order effect of lockdowns, the result has been a uniform, major jump in economic activity, but an acceleration in the spread of the virus across half the country. Health experts also worry there could be a further rise in infections from nationwide protests. The 7-day rolling average number of new cases in US is 24,000 vs 4,000 in Europe (as of 19 June). This is in stark contrast to Europe whose plans to mitigate the virus are more centralized and consistent.

But economic data is showing improvement

  • The snap back in economic activity is clear. US manufacturing rose 3.8% in May after a record April plunge of 11.2%. Sentiment by manufacturers surveyed by the Federal Reserve Bank of Philadelphia indicates optimism hit a 28-year high. US retail sales posted a 17.7% gain in May, the largest monthly rise in history. Homebuilder sentiment jumped 21 percentage points in June after building permits jumped in May. And people are driving again, getting "on the road” at 95% of normal levels for this time of year, suggesting increased activity.
  • This activity confirms Citi's view that after an exogenous shock, there may be a partial “return to normal" that is faster because (1) the economy was healthy before the pandemic began and (2) the fiscal and monetary policy support was both massive and timely.

A Pandemic Pause Amidst the Recovery?

Past performance is no guarantee of future results. Real results may vary.

What does this mean for portfolios?

  • Citi analysts expect financial market volatility to remain high. However, improving financial conditions, supportive macroeconomic policies, improving sentiment by consumers and business suggest that the new economic recovery could endure.
  • Last week, Citi Private Bank’s Global Investment Committee (GIC) added a special thematic allocation to Real Estate Investment Trusts (REITs) while reducing weights in fixed income. The combined forecast yield of the REITs is about 7%, while the short-duration, cash equivalent US Treasury and corporate bonds that were reduced yielded just 0.7%.
  • Citi analysts also highlight that cyclical equities, which are predominantly value rather than growth stocks have become unusually undervalued. Looking back at history, recent election cycles have also favored value over growth, even though both have appreciated after elections. As such, Citi analysts see a higher probability that US small and mid-cap firms may experience a quicker and more decisive rebound in the near term.

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