Don’t Hoard Money in an Inflationary World – Buy High Quality Bonds – Citigroup
As the trajectory of interest rates and what happens to growth or a possible recession becomes clearer, investors should consider areas such as tech stocks which have been hit indiscriminately by this year’s stock sell-off. And customers should also put money to work in areas such as investment-grade debt, the US bank argues.
Investors should consider moving cash into high-quality bonds to hedge against inflation and also position themselves for a likely rally in the tech stock sector that has been blindly pulled lower this year, Citigroup says.
Employment levels in the economies are full, there have already been rate hikes and plenty of negative news is already priced in. In this environment, bonds look like a smart investment in some areas, David Bailin, chief investment officer at Citi Global Wealth, told reporters in a briefing yesterday.
“The bond conversation is a tough conversation to have…and you have to have the data. The data is compelling like we’ve never seen it before,” Bailin said. “You can offset part of the reduction [caused to cash by inflation].”
Citigroup recommends that its private/wealth banking clients hold only about 2-3% of all cash wallets, but on average they hold 20%, an amount Bailin called “crazy.” “We have clients who are currently very liquid and we encourage them to invest fully.”
Customers are already reacting, and Bailin said the bank’s discussions of the case for the change in asset allocation are gaining momentum.
Bailin’s comments come at a time when bonds and stocks have sold off so far this year, due to central bank monetary tightening to curb rising inflation – now in double-digit territory in some country – as well as the war and the supply chain between Russia and Ukraine. disruptions related to the pandemic. The MSCI World equity index of developed countries (in dollars) is down 22.4% since the beginning of January. The S&P US Investment Grade Corporate Bond Index is down 14.2% this year.
Since 1963, there have only been six periods when bonds and stocks have fallen simultaneously by the amount seen in 2022, Bailin said.
The Covid/geopolitical “supply shock” on the global economy is over and now the stores are full of goods. In fact, weaker consumer demand will likely drive prices down at some point, he said.
Bailin said Citigroup’s position goes against some of the existing narratives around the markets. He argued that when it becomes clearer whether a recession is near and interest rates have peaked in the current cycle, that will be a signal for investors to buy stocks.
“Tech stocks are getting interesting again. There will be that time when quality tech companies are really desirable,” he said.
Strong inflows and hiring
Separately, Luigi Pigorini, head of Citi Global Wealth and Citi Private Bank, EMEA, said Citi’s wealth management business in EMEA has attracted around 40 private bankers since the start of 2022, bringing the total to about 140. Across Citi Global Wealth’s headcount — and not just on the private banking side — is up 15-20% from a year ago.
“What has been extraordinary is the amount of investment customers are making with us,” Pigorini said at the same press conference. “We had a record six months,” he continued, saying the central bank’s interest rate hike had helped the banking book.
The large family offices Citigroup deals with are benefiting from increased market volatility, he said.
“We’re also seeing huge growth in terms of the investments we’re making to attract people, both entry-level and professional,” he said, while discussing private banker hires.
As previously reported by this publication, under the leadership of Citigroup CEO Jane Fraser, the US bank has spun off some of its retail businesses into countries like Mexico, Australia and parts of Asia, and focuses more on areas such as wealth management.