Citi Says Buy US and UK Equities, Sees 18% Upside in Global Equities to End-2023

By Senad Karaahmetovic

Citi strategists have reiterated an Overweight rating on the U.S. equities as they believe EPS forecasts should act in a robust manner. UK equities also earned an Overweight rating, while Citi is Neutral on Emerging Markets and Europe. On the other hand, the strategists are Underweight on Japan and Australia.

The strategists see the MSCI AC World, widely used as a gauge for global equities, rallying 18% to end-2023, however, they also flag “considerable” risks facing global stocks. Overall, equity valuations are more attractive following YTD moves but investors should be more selective.

“The US (16x) still looks most expensive. The cheapest major markets are the UK (9x) and EM (11x). Higher yields increase the relative attractions of fixed income, although the US is still the only developed market where 10y bonds yield more than equities. Citi’s Levkovich sentiment index (US Panic/Euphoria) is now in Panic territory suggesting an attractive short-term entry point,” the strategists said in a client note, although they are against “chasing the rallies.”

Like his colleagues in other major research firms, the strategists also believe EPS forecasts are too high. The consensus calls for 10% EPS growth for the MSCI AC World in 2022 followed by 6% in 2023. For instance, Citi calls for a 5% contraction in 2023.

“We remind that the average EPS downturn in the last three big global profit recessions was 31%. Forecasts in more cyclical markets (Japan, Europe) look most vulnerable, although weak currencies may help limit the damage. Cyclical sectors are also exposed. Forecasts in traditional defensive sectors should prove more resilient,” the strategists added.

As far as sectors are concerned, Citi raised IT to Overweight, given more attractive valuations, and remains bullish on Financials.

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