Opportunities on the Horizon: Investing Through a Slowing Economy

overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 6 Markets are up so far in 2023, which might seem surprising given all the bad economic news — from high interest rates to persistent inflation. But we are not surprised. We continue to suggest our clients stay invested. For the better part of 16 months, we have maintained our positions in conservative, income-oriented equities as well as in quality fixed income, leaning toward US assets. During 2022, the most consistent dividend payers in the US—our largest style overweight 3 — lost 6.2%while the broad US equities lost 19.2%. 4 Asset allocation clearly matters, as does diversification. Stay invested and be mindful of what and when to invest As we describe in this 2023 Mid-Year Outlook, the economic policy “hangover” from the COVID-19 shock, government intervention and subsequent rate hikes still reverberate across the world economy (See Recession, recovery: A journey unfinished ) . For the past 10 years, US dollar assets boomed, boosted by a flight to safety. Yet, the number of equity market leaders in 2023 is very concentrated. Since the beginning of 2023, more than 90% of US stock market appreciation can be attributed to just five stocks. As these issues resolve, we see potential, global investment opportunities unfolding. Value creation is, in fact, underway —one reason why our SREs are higher (See FIGURE 3: Recession, recovery: A journey unfinished ). When we look at the value of small- and mid-cap stocks (SMID), international equities and emerging 3 Adaptive Valuation Strategies (AVS) is the Citi Global Wealth Investment’s proprietary strategic asset allocationmethodology. It determines the suitable long–termmix of assets for each client’s investment portfolio. The AVS portfolio used in the analysis is the Global USD Traditional Only Risk Level 3 portfolio. Risk levels are an indication of clients’ appetite for risk. An AVS L3 - Seeks modest capital appreciation and, secondly, capital preservation. The Level 3 Diversification does not guarantee a profit or ensure against a loss of principal. 4 Dividend growers proxied by S&P 500 Dividend Aristocrats total return index and broad US equities proxied by Russell 3000 total return index. markets broadly, we see many assets around the world that have become unusually cheap on a relative basis ( FIGURE 1 ) . In our view, the landscape for investing suggests some major shifts in portfolios. We believe that active asset allocation may add value in the period just ahead. Below are some ways we see potential opportunities evolving: Less cash, more duration With the resolution of the debt ceiling negotiations, we expect to see peak short- term interest rates. We anticipate that the US government will issue an unusually large amount of T-bills and bonds to refill its coffers. When that happens, this may crowd out deposits, drive up yields and increase the value of the US dollar. Though investors will be tempted to concentrate assets in T-bills and money market funds, we think this will ultimately hurt their returns. A different strategy is to extend duration by buying intermediate duration corporate bonds, US municipal bonds and preferred equity securities. By doing so, investors can potentially retain higher yields for longer and may profit if and when interest rates fall, as they will likely do when the Federal Reserve reverses course and starts cutting rates. FIGURE 1 : US Large- Mid-Caps and Non-US Equity Valuations 8 10 12 14 16 18 20 22 24 26 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 Forward 12m PE S&P 500 S&P 400 (Mid cap) MSCI ACWorld ex-US Source: Bloomberg as of May 31, 202. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.