Go On, Buy the Dips in Stocks, Says Citi, Which Still Favors EM

(Bloomberg) -- Citigroup Inc. says it’s too early to say the bull market in stocks is over, and even after a rising dollar dealt emerging equities a blow this year, they’re still the bank’s favorite value trade.

“So keep buying the dips,” Citigroup strategists including Markus Rosgen said in a report, adding that they see global stocks rising 9 percent over the next 12 months, led by continental Europe and emerging markets. Despite recent dollar strength, “rising U.S. fiscal and current-account deficits will eventually prove a drag,” and a weaker dollar should help emerging markets and U.S. equities outperform, they said.

  • Citi is overweight U.S., emerging market stocks
  • Neutral U.K., Europe (excluding the U.K.)
  • Underweight Australia and Japan

The dollar’s relentless rise struck shares across developing nations particularly hard, bringing losses this year to 9 percent, about 12 times the drop in global equities. The sell-off drove valuations last month to the lowest in more than two years. The strategists see the index the gauge rising 19 percent over the next 12 months.

“Our emerging-market overweight offers useful balance to our more expensive U.S. overweight,” the strategists said. They see earnings-per-share growth in 2018 at 17 percent. “The recent sell-off leaves emerging-market valuation looking attractive.”

  • Latin American has the highest earnings-per-share growth rate of 32 percent in emerging markets, followed by emerging Europe, Middle East and Africa at 20 percent and Asia at 14 percent
  • Within emerging markets, Citi is overweight Korea, Taiwan, Russia, Brazil and Thailand. It’s neutral China and underweight India, Indonesia, Malaysia, South Africa, Mexico, Turkey and Poland
  • Citi sees four developed-market central banks raising rates by the end of 2018, compared with 28 in emerging-markets

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