Citi Says Wealthy Clients Are Holding Too Much Cash, Time to Buy

(Bloomberg) -- Wealthy clients of Citigroup Inc.'s private bank hold way too much cash, according to chief investment officer David Bailin, and he and his colleagues have big plans to help put an end to that.

The private bank's mid-year outlook, “From Fear to Prosperity: Investing in a New Economic Cycle,” released Thursday, recommends major changes to portfolios to reflect what Bailin called “the complexities and new realities of our time.”

“There are plenty of things to buy,” Bailin said in a phone interview. “The more study that we did for the report, the more excited we got. The data is compelling.”

The report's big-picture outlook is for a “brief, extremely deep, rolling global recession” followed by a sharp snapback in global economic activity and “a partial, uneven recovery.”

Underpinning recommendations for major changes to client portfolios is a projected five-year period of low interest rates. With fixed income no longer a natural hedge for equities, achieving diversification now includes greater long-term exposure to small- and medium-sized companies, as well as emerging market debt and equity, according to the report.

The bank's 10-year return estimate for global small- and mid-cap equities climbed to 11.6% from 9.2% at the start of the year, according to the report. The estimate for global emerging-market debt increased to 6.2% from 4.7%, and for global emerging-market equity rose to 11.7% from 10.9%.

Here are other report highlights:

Some of the best returns for private equity, real estate and hedge fund managers have come after crisis periods. “In 2001 and 2008, for example, average private equity vintage returns increased by 800 and 710 basis points, respectively, over the prior year's level,” according to the report. The private bank expects that “the best distressed opportunities will become available later this year and during 2021.”
Sustainable dividends remain attractive, particularly tech companies that “have been less impacted by the economic effects of social distancing.” Some health-care stocks could also benefit as cash flow that once went to fund share buybacks and M&A activity could be reduced to support dividend payouts.
Some private bank clients hold as much as 35% of their core portfolio in cash. Fixed-income assets that top the negligible return of cash include U.S. investment grade corporate bonds maturing in three to five years. Those bonds yield almost 2%, or 50 basis points above similar debt maturing in one to three years.
Areas where Citigroup continues to see “unstoppable trends” are global health care, because of greater longevity; digital disruption (including digital media content, e-commerce and cybersecurity providers) and the rise of Asia.