PERSPECTIVES - 1Q20: Realigning - Citibank UAE
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ISSUE 15
PERSPECTIVES
Q1 2020
VIEWS INSIGHT
1Q20: Realigning Fintech: Disrupting
Portfolios Financial Services
QUARTERLY PERSPECTIVES
Perspectives
Dear Clients,
Global equities rallied 28% in 2019, as investor confidence was
boosted by the optimism over US and global economic
expansions remaining intact as well as diminished risk of
destructive global trade conflicts. In the US, for example, core
nominal retail sales grew 4.5% over the past year. This was
aided by low inflation, a historically high savings rate, and the
lack of excesses during the expansion to date.
In the year ahead, Citi analysts maintain expectations of 2.7%
global growth paired with steady inflation at 2.7%. Importantly,
financial conditions remain supportive as more than 30 central
Paul Hodes banks around the world cut interest rates in 2019, offsetting the
risks of a slowdown in the global economy. While geopolitical
Head of Wealth Management risks continue to weigh on sentiment and bouts of volatility can
Asia Pacific and EMEA be expected, Citi analysts think it may be too early to call the
Citibank N.A. end of the 11-year bull market. In terms of asset allocation, Citi
analysts are overweight global equities, underweight global
fixed income and cash, and overweight gold as a risk hedge.
In this quarter’s insights, Citi analysts look at the disruption in
the financial services industry. Financial technology, or fintech
in short, has benefited from demographic and technological
developments, and could continue its upward growth trajectory.
Traditional financial services providers are being challenged by
fintech disruptors. While their current share of mainstream
financial services may be small, the growth momentum looks
set to continue and Citi analysts see the fintech disruption as an
unstoppable trend worth keeping an eye on.
We hope you find this issue of Perspectives insightful. Please
approach your Citigold Private Client Relationship Manager to
understand how these developments can affect your portfolio.
Best regards,
Paul
PERSPECTIVES | 2
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.QUARTERLY PERSPECTIVES
Views
Realigning Portfolios
Key Takeaways
• Citi’s Global Investment Committee (GIC) raised Global Equities from Neutral to
Overweight while reducing Cash from Overweight to Underweight and deepening the
Underweight in Fixed Income. Gold remained at Overweight.
• The move follows political developments in the UK and trade policy progress between US
and China that have helped clarify a generally positive economic outlook. However,
investors should keep an eye on the developments in US and Middle East.
• Equity returns are expected to be modest relative to 2019’s near-30% gain as market
pricing has quickly adjusted to an improving outlook. Citi analysts think it is still too early to
call the end of this 11-year bull market.
Economy Stabilizing, Not Consensus predicts global earnings per
Accelerating share (EPS) growth of 10% in 2020 while
Citi analysts expect 7%. 2019 reminded us
Citi analysts forecast 2.7% growth in the global that EPS downgrades do not necessarily
economy over 2020, similar to 2019. This is a translate to declines in stock markets.
stabilization, not acceleration story. Trade
tensions remain a concern, along with
continued political uncertainty and fading US Bear Market Checklist:
economic outperformance. Brexit, Mideast Still Fine
tensions, Hong Kong protests, and the US
2020 pre-election dynamics could also add Given that only 3.5/18 signals are flagging
increased uncertainty. Muted economies and caution, Citi’s Global Bear Market Checklist
low inflation mean that monetary policy could (BMC) suggests that this bull market, even
remain supportive for financial assets. as it approaches its eleventh birthday, has
further to run. In previous cycles, the BMC
More Earnings red flags have accumulated gradually before
Downgrades Likely rising exponentially in the last year of the
bull market.
The subdued economic outlook suggests that
that corporate profit forecasts are too high.
PERSPECTIVES | 3
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.QUARTERLY PERSPECTIVES
Equities
Asia is Preferred Upside Potential amid
Trade and Political Risks
Citi analysts expect a more constructive US equities have been more resilient amid
macroeconomic environment in 2020, and trade risks relative to their global
thus global investor flows into Asia are likely counterparts. The Federal Reserve has
to be more positive. Traditionally favored shown its willingness to cushion the
companies in e-commerce, social media, economy through any uncertainty, helping
wine and healthcare may benefit. US equities sharply outperform. EPS could
rise 7% in 2020 on a rebound in trade and
China remains one of Citi’s favored equity industrial activity after declines in 2019.
markets. MSCI China still trades on 11 times
expected earnings for 2020, the lowest At a sectoral level, healthcare continues to
multiple in Asia. Chinese EPS growth is benefit from the dynamics of an aging
likely to strengthen to 12% in 2020. The auto population. Advances in medicine are
industry’s profits suffered from tighter occurring due to firms’ investment in
financing, stricter environmental regulations, research & development, particularly in
and lapsed subsidies in 2018-19. But areas such as oncology and immunology.
inventory destocking is helping auto The risk of the 2020 election leading to
production and earnings to rebound. Cyclical radical reforms of the US healthcare system
sectors such as industrials and banks may has constrained equity prices, leaving the
also get a boost from stronger economic sector on an attractive valuation relative to
growth. its own history.
Chart 1: Trade Growth within Asia bounces back
Source: Citi Private Bank. As of 20 November 2019.
PERSPECTIVES | 4
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.QUARTERLY PERSPECTIVES
More Clarity on Prefer Companies with
Brexit Strong Dividend
Momentum
European ex-UK equities look attractive in
both relative and absolute terms. They trade Consensus EPS growth of around 5% for
on an average multiple of 2020’s forecast 2020 appears achievable for Japanese
earnings per share of 14.7, while offering a equities. In particular, Citi analysts think
3.2% dividend yield. Within the region, Citi Health Care, Technology and Consumer
analysts prefer strong Swiss business Staples could lead with double-digit EPS
franchises which have substantial pricing gains while Banks and Capital Goods could
power, and Germany which could benefit lag with 3-4% EPS growth. In addition, there
from a rebound in industrial activity. Among has been a gradual shift occurring towards
sectors, healthcare and banks are favored. more shareholder friendly policies.
Companies with strong dividend momentum
Meanwhile, the results from December’s UK and high free cash flow yield are preferred.
general election provides more clarity on
Brexit. If an orderly Brexit occurs, it could The fundamental
boost consumer confidence and business
outlook for 2020 calls for
investment. UK equities also offers one of
the highest dividend yield at 4.7%. positively positioned
portfolios with broad
diversification after a
Fixed Income strong 2019.
Emerging Market bonds – Investment Grade (IG) –
Overweight Overweight US
Asia (USD) High Yield (HY) bonds have Despite rate risks, Citi analysts continue to
lagged versus their US counterparts since favor extending duration into intermediate
early 2018. The weakness can be attributed maturities. The short-end (1-3 years) is one
to a number of factors including trade of the most overvalued segment of the US
tensions and rising default rates in the IG corporate bond market, while the belly of
region. With spreads above 700bps, Citi the curve (5-10 years) offers the largest
analysts see scope for spread narrowing, relative spread pick-up. Citi analysts
particularly in the Chinese property sector. If continue to stay constructive on US
US-China trade tensions ease and Chinese financials and defensives – such as utilities
policy makers continue to support the – as a hedge against any potential
economy, this could bode well for risk assets drawdown in risk assets.
and the property sector more broadly.
PERSPECTIVES | 5
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.QUARTERLY PERSPECTIVES
Commodities
High Yield (HY) – Gold – Overweight
Neutral US
US loans have underperformed bonds in As a hedge for risk assets, gold has
2019, but higher yields and lower price continued to dampen volatility in portfolios. A
volatility around “risk-off” periods make loans stable, stronger period for global growth
a good way to supplement overall HY could result in a further decline in the value
exposure. of gold. However, with the Fed’s policy
remaining accommodative, a weaker US
dollar may provide support for gold.
WEIGHT
Asset Class
UNDERWEIGHT OVERWEIGHT
Fixed Income Equities
OVERWEIGHT
UNDERWEIGHT
Global Investment Grade US
UNDERWEIGHT OVERWEIGHT
• Global Sovereign Europe
OVERWEIGHT
OVERWEIGHT
• Corporate Investment Grade Japan
NEUTRAL OVERWEIGHT
Global High-Yield Asia ex Japan
OVERWEIGHT UNDERWEIGHT
APAC ex Japan / EM Emerging ex Asia
UNDERWEIGHT
• Emerging EMEA
OVERWEIGHT
• Emerging Latin America
UNDERWEIGHT
OVERWEIGHT
Cash Commodities
Overweight Equities, Underweight Fixed Income and Overweight Gold
Citi’s Global Investment Committee (GIC) raised Global Equities from Neutral to Overweight
while reducing Cash from Overweight to Underweight and deepening the Underweight in
Fixed Income. Gold remained at Overweight.
The move follows political developments in the UK and trade policy progress between US and
China that have helped clarify a generally positive economic outlook. However, investors
should keep an eye on the developments in US and Middle East.
PERSPECTIVES | 6
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.QUARTERLY PERSPECTIVES
Insights
Fintech: Disrupting Financial Services
Key Takeaways
• The financial services industry has been relatively insulated from technological disruption
in the past, but this is no longer the case, driven by powerful demographic and
technological drivers as well as ongoing funding.
• Those at greater risk from financial technology (“fintech”) disruptors are traditional financial
services providers who may face sweeping changes. While their current share of
mainstream financial services may be small, there is considerable space for disruptors to
grab a much larger share.
• Fintech firm revenues have grown at a rapid pace in the last decade and the momentum is
expected to continue. Citi analysts see the most potential in the payments space in this
unstoppable trend.
Sustained Disruption in traditional bank accounts. The World Bank
Financial Services estimates that 1.7bn adults globally, or
around one-third of adults, are still without
Perhaps for the first time, financial services access to financial services, but this number
are facing genuine and sustained disruption. is falling rapidly.
A number of key developments have made
the industry more susceptible to disruption With these powerful demographic and
today, including shifting demographics and technological drivers, certain financial
greater availability of funding. technology (“fintech”) have managed to
break into the financial services mainstream,
Millennials, the generation born between though their current share may be small.
early 1980s and 2000s, now make up a
larger proportion of the population. Having There is
grown up with digital technology, millennials
considerable scope
are much more open to non-traditional
banking services. Governmental and for disruptors to
regulatory support for innovation has grab a much bigger
increased, while the proliferation of internet
connectivity via smartphones is opening up
share of consumer
banking access to people who never had banking.
PERSPECTIVES | 7
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.QUARTERLY PERSPECTIVES
The Tipping Point
The financial services industry has been Given ongoing funding going into fintech,
relatively well insulated from disruptive there is great scope of disruption in
technological forces, and high barriers to traditional financial services. With the
entry have also helped prevent new momentum achieved so far, fintech
competitors from breaking into the industry. represents an unstoppable trend.
Capital adequacy requirements, licensing
and heavy compliance costs count among
the many barriers that remain today. In the
Chart 2: Increase in Banked Adults over Time
decades leading up to the global financial
crisis, such barriers served to keep banks’
average returns on equity high.
The advent of the internet and the dotcom
boom around the turn of the millennium
provided a test of financial services’
resilience to technological disruption. But the
industry emerged unscathed with new
entrants during that period few and far
between.
This is no longer the case though. Citi
analysts see that sufficient investment and
independent challengers have now entered
the space to create a tipping point as we
kick off the 2020s.
In countries that lack the western world’s
regulatory and governmental barriers, entire
new financial ecosystems have been built.
Across China and Africa, payments are
predominantly digital and the world is seeing Source: The World Bank. As of 2018.
those same technologies entering the
developed market mainstream.
PERSPECTIVES | 8
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.QUARTERLY PERSPECTIVES
Disruptors and the
Disrupted
Fintech disruptors come in many shapes To date, fintech companies have largely
and sizes. While many traditional financial plugged gaps in the market, for example
services group offer a broad range of focusing on new activities such as peer-to-
products and services, many fintech peer lending. For incumbents, this is more of
disruptors focus upon a single niche. They a case of opportunities foregone.
include online payment platforms, digital
lenders, micro-loan providers in developing However, disruption typically progresses
countries, mobile-only stock trading apps, through stages. Initially, disruptors may eat
regulatory and compliance software makers, into industry growth by targeting new market
and cryptocurrency providers. segments, co-existing with incumbents. After
all, each has what the other wants: new
Those at greater risk from fintech disruptors entrants need customers and data, while
are traditional financial services providers. incumbents require innovative technologies
They face threats not only from fintech and cultural change.
startups, but also from established internet
retailers and giant tech companies. For Having achieved a certain scale and
instance, new technologies could sweep establishing a reputation, they eventually
away the need for many customer-facing start competing head-to-head for the
staff in banks and call centers. incumbent’s core business revenues.
Chart 3: Many in Emerging Markets are Going Straight to Mobile Banking
Source: Citi Private Bank. As of December 2019.
PERSPECTIVES | 9
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.QUARTERLY PERSPECTIVES
Conclusion
Over the last decade, fintech firm revenues
have grown at an annualized rate of 12.1%,
relative to S&P500 companies with overall
growth rate of 4.2%. With the
Fintech is likely to continue to experience
momentum
strong growth, driving up stock prices as well achieved so far,
as valuations of privately held fintech fintech represents
players. Citi analysts see the most attractive
potential in the payments space. At the
an unstoppable
same time, traditional providers’ response to trend.
fintech should be monitored. Reducing or
avoiding exposure to the most susceptible
may be fruitful.
Further and wider ranging fintech disruption
is coming and presents an opportunity for
investors.
Chart 4: Fintech Firm Revenue (US$tn)
Source: Citi Private Bank. As of December 2019.
PERSPECTIVES | 10
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.QUARTERLY PERSPECTIVES
World Market at a Glance
Last price 52-Week 52-Week Historical Returns (%)
14-Jan-20 High Low 1 week 1 month 1 year Year-to-date
US / Global
Dow Jones Industrial Average 28939.67 29054.16 23887.93 1.25% 2.86% 21.04% 1.41%
S&P 500 3283.15 3294.25 2585.10 1.42% 3.61% 27.13% 1.62%
NASDAQ 9251.33 9298.33 6928.12 2.02% 5.91% 33.96% 3.11%
Europe
MSCI Europe 486.15 489.79 414.66 0.32% 1.89% 16.63% 0.11%
Stoxx Europe 600 419.59 421.43 347.11 0.46% 1.84% 20.74% 0.90%
FTSE100 7622.35 7727.49 6734.00 0.64% 3.66% 11.19% 1.06%
CAC40 6040.89 6071.66 4754.69 0.47% 2.06% 26.84% 1.05%
DAX 13456.49 13548.20 10812.59 1.74% 1.31% 23.96% 1.57%
Japan
NIKKEI225 24025.17 24091.12 20110.76 1.91% 0.01% 18.00% 1.56%
Topix 1740.53 1747.20 1462.41 0.90% 0.03% 13.78% 1.11%
Emerging Markets
MSCI Emerging Market 1143.86 1149.54 956.59 2.51% 5.24% 15.23% 2.62%
MSCI Latin America 2912.71 2988.77 2461.73 -0.16% 2.65% 2.79% -0.17%
MSCI Emerging Europe 198.32 200.70 159.34 1.86% 5.42% 23.56% 2.76%
MSCI EM Middle East & Africa 269.90 266.27 248.45 1.90% 4.81% 6.60% 0.87%
Brazil Bovespa 117632.40 118791.90 89408.90 0.83% 4.50% 24.51% 1.72%
Russia RTS 1604.96 1625.61 1139.16 2.33% 6.90% 39.91% 3.62%
Asia
MSCI Asia ex-Japan 711.92 716.40 589.36 2.94% 5.47% 17.75% 3.44%
Australia S&P/ASX 200 6962.15 6990.00 5773.40 1.99% 3.30% 20.59% 4.16%
China HSCEI (H-shares) 11355.37 11881.68 9731.89 1.40% 4.77% 10.33% 1.68%
China Shanghai Composite 3106.82 3288.45 2532.43 0.06% 4.69% 22.52% 1.86%
Hong Kong Hang Seng 28885.14 30280.12 24899.93 1.99% 4.32% 9.84% 2.47%
India Sensex30 41952.63 41994.26 35287.16 2.65% 2.30% 17.01% 1.69%
Indonesia JCI 6325.41 6636.33 5767.40 0.73% 2.07% -0.17% 0.41%
Malaysia KLCI 1580.60 1732.27 1548.45 -1.89% 0.60% -5.70% -0.51%
Korea KOSPI 2238.88 2252.05 1891.81 2.91% 3.16% 8.45% 1.88%
Philippines PSE 7793.25 8419.59 7469.41 -0.61% -1.07% -2.88% -0.28%
Singapore STI 3270.54 3415.18 3040.16 0.70% 1.76% 3.06% 1.48%
Taiwan TAIEX 12179.81 12197.64 9701.93 2.52% 2.11% 25.46% 1.52%
Thailand SET 1586.90 1748.15 1543.22 0.11% 0.83% 0.27% 0.45%
Commodity
Oil 58.23 66.60 50.52 -7.13% -3.06% 15.28% -4.63%
Gold spot 1546.39 1611.42 1266.35 -1.78% 4.75% 19.72% 1.92%
Source: Bloomberg, as of 14 January 2020.
PERSPECTIVES | 11
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.QUARTERLY PERSPECTIVES
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12
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.QUARTERLY PERSPECTIVES
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Citibank N.A., Jersey Branch is regulated by the Jersey Financial Services Commission. Citi International Personal Bank is registered in Jersey as a business
name of Citibank N.A. The address of Citibank N.A., Jersey Branch is P.O. Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank N.A. is incorporated
with limited liability in the USA. Head office: 399 Park Avenue, New York, NY 10043, USA.
© All rights reserved Citibank UK Limited and Citibank N.A. (2019).
Vietnam
This document is distributed in Vietnam by Citibank, N.A., - Ho Chi Minh City Branch and Citibank, N.A. - Hanoi Branch, licensed foreign bank’s branches
regulated by the State Bank of Vietnam. Investment contains certain risk, please study product’s prospectus, relevant disclosures and disclaimers and the
terms and conditions for details before investing. Investment products are not offered to US persons.
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All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our
expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.You can also read
