Fears of a recession are overdone and 2019 should only see a slowdown in earnings-per-share growth, according to Citigroup, advising investors to buy the dip in equities.
Strategists including Robert Buckland and Jonathan Stubbs forecast returns in global equities of 14pc for the next 12 months, as their “bear-market checklist” shows just 3.5 red flags out of a possible 18.
“Equity valuations aren’t stretched, fund inflows have been miserly and corporate behaviour subdued,” wrote Buckland.
The strategist added that “a flat yield curve and rising credit spreads are worrying, but traditional signs of bull market euphoria remain notably absent”.
Citi expects global companies’ EPS to grow an average 4pc in 2019. While that estimate is below the consensus of 7pc, it’s better than the 4pc contraction being priced into markets now, Buckland said.
In Europe, the strategists downgraded UK stocks to neutral as Brexit uncertainty weighs on confidence, though they don’t expect a “no-deal” outcome and note a lot of the bad news is already discounted.
With Europe heavily exposed to a slowdown in global trade, it’s possible EPS could contract this year, according to Stubbs.
The European head strategist sees EPS downgrades remaining a drag, but said he expects a “re-rating later in the year as global recession fears abate”.
Citi estimates the Stoxx Europe 600 Index will reach the 400 level by year-end, offering an upside of around 18pc from now.
Forecasting the dollar to weaken this year, the strategists upgraded emerging-market equities to overweight, making them their preferred value trade.
They also kept an overweight rating on US stocks, with the slowdown in EPS already priced-in, while staying underweight in Australia and Japan.
Citi recommended a balanced approach to sector exposure, with a mix of cyclical and defensive equities. The bank now has an overweight rating on communication services and health care in the defensive space, and picked industrials as the preferred cyclical sector.
Energy, financials, materials and information technology are rated neutral, while consumer staples, utilities and consumer discretionary remain underweight.