* Ageing Bull Market — Collectively, Citi strategists forecast a 12% gain for global
equities in 2016. We see this global bull market as tired and old, but not finished.
* Credit/Equity Cycle: Phase 3 — This began in mid-2014 as US credit spreads
started to rise. Previous Phase 3s lasted up to three years. They were characterised
by reasonable equity returns, but also rising volatility.
* Bear Market Checklist: Still Not Saying Sell — It is right to buy the dips in Phase
3, but right to sell them in Phase 4. Our bear market checklist suggests that it is still
too early to call the shift into Phase 4. Of 16 factors that flashed sell at previous
major global market peaks, 3.5 are currently in danger territory.
* Global EPS: Downside Risks — Citi strategists forecast 7% global EPS growth in
2016, similar to the bottom-up analyst consensus and consistent with our
economists’ 2.8% global GDP growth forecast. Willem Buiter’s feared 2.0%
outcome would imply a 0-5% EPS contraction.
* Regions: Favour QE Markets — Decent EPS momentum and continued central
bank support mean that we prefer Europe ex UK and Japan equities. Fading EPS
momentum and rising Fed funds mean that, after 6 consecutive years of
outperformance, we cut the US to Underweight. We remain Neutral on EM, where
we prefer the Asian markets.
* Sectors: Mild Cyclical Tilt — Citi strategists most consistently favour Financials
where valuations remain attractive and EPS momentum is improving. Strong FCF
generation attracts us to the IT sector. Amongst defensives, we prefer Health Care
to Consumer Staples and Utilities. We are Neutral on the commodity sectors.