U.S. Equities Cut to ‘Underweight’ at Citigroup (Update1)
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By Patrick Rial
April 7 (Bloomberg) -- Investors should “underweight” U.S. shares as a rally there is likely to end and other markets are cheaper, Citigroup Inc. said in a quarterly report.
“While absolute valuations still look cheap, relative valuations are not attractive” for the U.S., strategists led by London-based Robert Buckland wrote in a report titled “Welcome to the Twilight Zone” dated yesterday. “The year may be marked by powerful rallies and meaningful pullbacks as was evident in the 1930s and 1970s.”
Buckland raised Japanese shares to “neutral” from “underweight,” saying the weakening yen, a forthcoming stimulus package that may total 10 trillion yen ($99 billion) and improving fundamentals should aid market performance.
The MSCI World Index has rallied 23 percent since March 9, when it dropped to the lowest since 1995. The U.S. Treasury department unveiled a plan last month to rid banks of toxic assets in a bid to spur loan growth. Central banks from the U.S. to Switzerland and Japan have stepped up purchases of government and corporate debt to unfreeze credit markets, helping to lift sentiment.
The U.S. is expensive based on both estimated earnings and price to book in comparison with global equities while dividend yields are also lower, Citigroup said. The market was previously rated “neutral.” Shares in the Standard & Poor’s 500 Index trade at 1.85 times book value, according to Bloomberg data, versus 1.38 for stocks in the MSCI World.
‘Twilight Zone’
Citigroup lowered its forecast for the global economy to a 2.1 percent contraction in 2009 from its previous target for 0.5 percent growth. Even so, the “twilight zone” for shares is likely to be marked by an end to falling prices even as economies worsen, he said.
The brokerage also lifted global industrial stocks to “overweight” while cutting telecommunications shares to “neutral” to reflect investors’ need to increase holdings of companies that will benefit from a recovery. Buckland said the main stance of Citigroup remains defensive.
Japan’s shares are cheap based on book values, but expensive relative to forecast earnings, the strategists wrote. The Nikkei 225 Stock Average has surged 26 percent from a 26-year low reached on March 10. Prime Minister Taro Aso said yesterday a new economic stimulus package being compiled will exceed 2 percent of gross domestic product, or 10 trillion yen.
The yen fell to 101.44 against the dollar yesterday, the weakest since October. The weaker yen lifts the profitability of sales generated overseas.
“There are conditions falling into place for rising equity prices,” Buckland wrote. “Brighter news flow on the fundamentals front is gradually emerging, with the shift to a weakening yen and the implementation of sizeable stimulus plans.”
Citigroup’s recommended “overweight” markets of Europe, the Middle East and Africa and emerging Asia were unchanged. |
