U.S. equities typically underperform right after the Federal Reserve's first interest-rate hike of a cycle, while Japanese and European markets tend to outperform in that same stretch, Citigroup strategists say. The bank still sees a September hike as unlikely and expects global equities to gain 5% by the end of the year.
U.S. stocks usually stumble at the start of a Federal Reserve rate hike cycle before advancing over the following six to 12 months, Citigroup strategists led by Beata Manthey wrote in a note published Sunday. Before that later climb, Japanese and European markets generally outperform, they said.
Japanese and U.K. equities perform better than their U.S. counterparts on average just over 50% of the time around the first hike in a cycle, Citigroup found. Japan's relative returns average 3%, while the U.K. and Australia both near 2%. The U.S. market, by contrast, averages a loss of almost 2% in relative returns directly after a hike.
If the Fed tightens policy on Sept. 16, concerns over rising long-term bond yields will probably increase, Citigroup said. But the strategists see a hike this month as unlikely. Markets currently price in around a 60% chance of a rate increase, per FedWatch, while Citigroup sees a hike not happening until June.
The strategists said that, on average, global cyclical stocks do better than defensive stocks after the Fed raises rates. Citigroup is overweight financial, material and technology stocks, and expects 5% upside for global equities by the end of the year.
Yet the bank cautioned that no tightening cycle is truly "average." According to Citigroup strategists: "history leaves us comfortable with our call for more global equity upside to mid-27."
Source: MarketWatch.com
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