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The Four Things That Keep Citi Clients Up At Night
07-13-2016, 02:25 PM,
The Four Things That Keep Citi Clients Up At Night
The Four Things That Keep Citi Clients Up At Night

<p>Earlier today, we reported the <a href="">three-part bullish narrative </a>that according to JPM, is propping up the recent equity rally. Now, it's time to show the three (plus one) things that Citi says is most concering to its own clients. </p>
<p>As Citi's Tobias Lekvkovich writes overnight, the investment community remains in a quandary as the S&amp;P 500 hits new highs alongside fund managers struggling with portfolio performance. Three questions tend to be uppermost in their minds – <strong>1) can “defensives” keep rallying, 2) how can investors be “bearish” if the S&amp;P 500 touches record levels and 3) what if Trump wins? An added concern - or perhaps hope - is whether there a possibility of even higher P/E ratios if US bond yields are suppressed by negative yields elsewhere</strong>?</p>
<p><em>Here are the details - and answers - from Citi:</em></p>
<p>The big three worries we hear most from clients reflect the new environment of low Treasury yields and its implications. As we noted in our last Monday Morning Musings: Credit vs Equities, the best performers year-to-date in the US stock market have been the highest dividend yield sectors for the most part...</p>
<p><img src="" width="500" height="300" /></p>
<p>... and the S&amp;P Dividend Aristocrats has meaningfully outperformed in 2016 as well.</p>
<p><img src="" width="500" height="345" /></p>
<p> But, investors truly wonder if the moves are sustainable. As we have stressed, the valuation on Utilities looks stretched...</p>
<p><img src="" width="500" height="303" /></p>
<p>... yet we can find a bit more comfort in our statistically driven valuation approach to Telecom Services.</p>
<p><img src="" width="500" height="302" /></p>
<p> But, Staples also look extended on valuation. Thus, selectivity becomes key, in our opinion, even when portfolio managers seem willing to stick with momentum and could get caught offside if that pattern shifts. <strong>From our perch, the risk/reward seems skewed to risk when these share prices have so strongly outperformed </strong>and there’s little evidence that revenues and related earnings are about to soar (with the possible exception of easy comps for the Energy sector in 4Q16)."</p>
<p><strong>Another issue that is frequently brought up in meetings is how we can suggest that sentiment is poor with new highs being achieved</strong>? Panic/Euphoria in “panic”...&nbsp;</p>
<p><img src="" width="500" height="340" /></p>
<p>... money flows, and intra-stock correlation at near 87%... </p>
<p><img src="" width="500" height="307" /></p>
<p>... clearly suggest that many investors remain cautious. Indeed, buying the socalled defensives highlight that notion as well since there is little faith in underlying business strength and long-term growth prospects. But, it is fascinating that buybacks have dominated money headed into US markets for more than a decade while flows into US equity mutual and exchange traded funds have been poor.</p>
<p><img src="" width="500" height="363" /></p>
<p> Fewer new issues mixed with buybacks and M&amp;A means that de-equitization continues in the US as well.</p>
<p><img src="" width="500" height="315" /></p>
<p> Thus, stocks generally scale “cliffs of concern” and it is rare that lousy investor sentiment is linked with market tops.</p>
<p>The “what if” Trump wins question has been popping up a bunch with some investors scared silly by the concept and others resigned to the fact that both candidates are not loved by the general populace based on poll data. Wall Street believes that Hillary Clinton will win in November based on our late June client survey results... </p>
<p><img src="" width="500" height="284" /></p>
<p>...&nbsp; but they are worried about how to position if she does not, especially since the latest polls show Trump to be within margins of error in swing states when considering the President’s below 50% approval ratings in these states. </p>
<p><img src="" width="500" height="301" /></p>
<p>The Brexit vote outcome has shattered illusions about what to expect as the rise of populist voices has been heard and thus investment professionals have newfound acknowledgement (if not respect) for the rising tide of nationalism/protectionism of the middle class. <strong>There are widely accepted views that a Trump win would benefit Financials, Energy and defense names, while a Clinton win would be hard on the Health Care sector and positive for environmental stocks. </strong>But, there is a bigger split out there. Most worry that a Trump presidency could sow greater uncertainty and thereby an economic stalling out as business leaders hold off making decisions until they get a better feel for the Trump administration’s plans. There are an aberrant few who think he could unleash an economic boom by slashing taxes and going on a fiscal spending spree to stimulate the economy using debt financing that has long-term consequences but short-term benefit – what has sometimes been referred to derogatorily as “helicopter money.” <strong>In contrast, Clinton is viewed by our clients as status quo or a continuation of the Obama policies with an arguably more forceful military stance.</strong></p>
<p>* * * </p>
<p>Fascinatingly, the negative yields abroad are restraining US yields and the growth fears around Europe and the UK may hold them down even longer despite a better domestic economic story. <strong>Thus, there has been speculation in the press of even higher valuation becoming the new story for stocks. </strong>We are uncomfortable pushing for elevated valuations as the reason to buy stocks, but both our normalized earnings yield gap analysis and Panic/Euphoria Model would support double-digit gains in the next year when <strong>our current mid-year 2017 target for the S&amp;P 500 is only 5% above current levels and the market is a mere 1% away from our year-end 2016 objective</strong>. Thus, it is challenging to indicate that overshoots are unlikely. <strong>Our sense is that too many fund managers are under-invested and a shift to some more economically sensitive names might be the drivers for any new S&amp;P 500 breakout or “melt up.”</strong></p>

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