Citigroup sees 12% gain for global equities this year; downgrades US

Global equities are likely to see a 12% gain in 2016, according to strategists at Citigroup, who see the bull market as “tired and old, but not finished”.

The bank said its bear market checklist highlights 16 factors that flashed sell at the 2000 and 2007 peaks. “We are reassured that only 3.5 are in danger territory right now.”

Citi said that with equity valuations reasonable, its main concern is the outlook for earnings per share.

Citi strategists expect global EPS to grow by 7% over the next 12 months, consistent with its current forecast of 2.8% global real GDP growth.

The bank favours Europe ex-UK and Japan where central banks are supportive and EPS momentum reasonable.

Citi’s head of Europe and UK equity strategy, Jonathan Stubbs, remains bullish on European equities and targets a total return of around 20% to end-2016, following a 10% return in 2015.

He expects markets to be driven by a combination of modest growth and re-rating helped by further stimulus from the European Central Bank.

“European equities look neither cheap nor expensive in absolute terms, but very attractive relative to super-low bond yields,” he said, adding that earnings should continue to improve in 2016-17.

The bank continues to favour the QE-supported markets and remains ‘overweight’ Europe ex-UK.

Citigroup cut its stance on US equities to ‘underweight’ from ‘neutral’ due to rising Fed funds but remained ‘underweight’ the UK and Australia and ‘neutral’ emerging markets.

It maintained a mildly cyclical sector tilt, with Financials being the most consistently-favoured sector across the Citi equity strategy team.

The bank’s asset allocation team continued the de-risking process and is now ‘neutral’ equities overall. It is ‘overweight’ government bonds and cash, and ‘underweight’ corporate credit and commodities.