Citibank Makes An Investment Outlook For Year 2009

The world is now in the middle of a global recession and financial markets remain under stress. Major industrial economies, in particular, are expected to contract well into the year, with the first half characterized by continued market volatility. Mitigating

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The world is now in the middle of a global recession and financial markets remain under stress. Major industrial economies, in particular, are expected to contract well into the year, with the first half characterized by continued market volatility.

Mitigating this cautious outlook is the fact that many asset markets already seem to have priced in very negative outcomes. Moreover, global governments are responding in a three-pronged approach by cushioning the real economy, stabilizing risk appetites and improving the financial system.

As such, Citi analysts view 2009 as a year of two halves: In the near term, investment returns are likely to be driven by ongoing trends of economic contraction, policy easing and de-leveraging, resulting in highly volatile financial markets.

At some point in the year however, the extreme valuations seen currently in equity and credit markets should provide attractive opportunities, as downside risks to economic growth dissipate and de-leveraging pressures ease.

While economic growth is likely to remain below trend for now, global equities should find a base in 2009 on anticipation of economic stabilization. This may gain a further boost with a pickup in corporate earnings in 2010 as economic recovery, albeit moderate, takes hold.

Because Citi analysts believe that the bottoming of equities is likely to be a process, rather than a singular event, they recommend that long-term investors use the bottoming process to begin a series of rebalancing in their portfolios back to their long-term allocations or enter the accumulation phase for long-term equity exposure.

Citi analysts are keeping their overweight recommendation to stocks over a 12-month period. Regionally, they continue to favor the US and emerging markets. With bonds, they prefer investment-grade corporate bonds to developed-country sovereign debt. While high yield bonds are enticing, Citi analysts believe it may be too early to increase exposure.

“We expect equity markets to complete the bottoming process this year if current policies succeed,” says Said Salman Haider, managing director and head of wealth management, Citibank Singapore Limited. “Investors can expect significant volatility in the first half; and provided we see economic headwinds receding in the latter half, we could be setting the base for the market to recover.

D.C.

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