Emerging Market Malaise Makes American Stocks Look Good to Citi

(Bloomberg) -- The selloff in emerging markets may worsen and investors should shift money to U.S. equities, according to Citigroup Inc.

Strategists led by Maximilian Moldasch raised their recommendation on American stocks to overweight from neutral, citing better-than-expected earnings. In emerging markets, they scaled back their bullish stance on stocks and urged investors to lower holdings in fixed income as currencies from the Argentine peso to the Turkish lira tumbled this month.

“Outflows have been relatively contained so far, but we fear that if the recent rates and USD moves have legs, investors may be forced to reassess EM fundamentals eventually and outflows could pick up,” the strategists wrote in a note to clients.

Investors should monitor the foreign exchange market to make decisions on equity allocations, they said. While Citigroup expects the dollar to weaken against other currencies over the median term because of rising U.S. debt and deficits, the rally in the greenback may not end soon. Generally speaking, a stronger dollar boosts Japanese and European stocks.

“For now, the dollar is bid,” they wrote. “Higher U.S. yields, higher oil prices, weak data momentum in Europe, associated weakness in 2019 ECB rate expectations and Italian political uncertainty have all brought EUR/$ down,.” they said. “Until these factors stabilize or reverse, dollar weakness is unlikely.”

©2018 Bloomberg L.P.