Citi: Shares will become even cheaper, further de-rating is coming

Her Eleftherias Kourtali

Citi “sees” a continuation of the fall in stock valuations in the coming period, due to the further increase that is expected to be recorded in real bond yields, ie those adjusted for inflation.

According to Citi, the MSCI global index has fallen by 17% since the beginning of the year, while the MSCI Growth global index (by growth stocks) has fallen by 25%. Energy is the only global industry to make a profit, driven by the high price of oil. Global stocks are driven by pricing on the three key issues of stagnant inflation: higher inflation, slowing growth and rising interest rates.

In this context, Citi advises investors to build their portfolio in such a way as to protect them from further downgrading of global stock valuations.

MSCI World is now trading a 12-month P / E index at 15x, well below last year’s 20x peak. More expensive trades like MSCI USA (from 22x to 18x today) or global MSCI Growth (from 29x to 22x) have fallen further. Cheaper indices such as the MSCI UK or the global MSCI Value have fallen less. But the global stock market still does not seem very cheap in relation to history. For example, a 10x drop in P / E ratios observed during the 2011-12 Eurozone crisis would result in a further de-rating of 33%.

This year’s plunge in stock valuations has been strongly correlated with rising real bond yields.

All of this raises an obvious question: how will real returns move? According to Citi analysts, loose monetary policy, especially QE, has inflated all financial markets, and now that QE is withdrawing, real returns are rising and risk assets, such as stocks, are falling. The relationship with the global QE suggests that real yields could move even higher, which would be a negative downturn for stocks and thus they would remain vulnerable to further de-rating.

According to Citi analysts, the large increase in real yields is largely due to the increased “aggression” of the Fed, as interest rates return to the highs of 2018. Further increases in Fed interest rates will put more upward pressure on bond yields. , both real and nominal. Any stabilization in nominal returns should ultimately contribute to the stabilization of real returns and, consequently, stock valuations.

According to its estimates, the aggressive monetary policy that is being followed now indicates a further downgrade of the MSCI World benchmark, with the P / E falling from 15x to 14x. MSCI USA will see the de-rating reduce its P / E from 18x to 16x. The de-rating of the world index MSC Growth at 17x from the current 22x will be the most painful.

In this context, Citi is building a global portfolio of shares that will help hedge against further de-rating of shares. Its strategy is long positions in “value” shares and short positions in “growth” shares. Preference in the UK and Emerging Markets markets over the US and mainland Europe and also a preference for cheap banking and commodity stocks over the more tech-savvy trades.