Investing wisely through highly uncertain times

March 13, 2022

David Bailin

Chief Investment Officer and Head of Citi Global Wealth Investments

Steven Wieting

Chief Investment Strategist and Chief Economist

SUMMARY

Two extraordinary and unexpected events – the Russia-Ukraine conflict and a global pandemic – are having compounding, negative impacts on the world economy. Assessing these shocks, managing risks, altering portfolios and staying invested wisely requires iterative assessments of events and likely outcomes.

The Russia-Ukraine conflict comes as most of the world was emerging from the Covid pandemic. The conflict, along with the broad sanctions and corporate actions taken to isolate the Russian economy, is adding inflationary pressure and supply stresses to an already distorted global economy with wide-ranging impacts.
Our base case calls for no recession in 2022. Current EPS forecasts – gains in the single digits – remain consistent with our view of positive global GDP growth. Nonetheless, the risk of a recession has increased, consistent with the undefined long-term impacts of the conflict.
To address rapidly shifting world and market conditions -- and manage the consequent risks – we have made significant changes to our portfolios. We have reallocated equity holdings from vulnerable consumer industries and European economies that are more likely to bear the brunt of rising commodity prices to natural resource and oil services firms as the world replaces Russia's output. We also added to gold as a potential risk hedge in a period of falling real interest rates.
Our off-benchmark allocations are indicative of the high-performance dispersion in assets we expect over the coming 12-18 months.
We remain overweight intermediate duration US Treasuries and Treasury Inflation Protected Securities. While the real yield of TIPS has fallen to -1% -- a high valuation -- this could be a return of at least 5 percentage points above the real value of cash.
Trying to avoid bad outcomes in portfolios through market timing can be destructive to wealth. Recent day-to-day swings of 3% in global equity prices and 4x volatility in key commodities are present examples of how reactive markets are to daily news flow. But these volatile, short-term moves have almost nothing to do with long-term returns or relative values between markets.