(Bloomberg) — Citi Private Bank is advising its wealthiest customers to put more money into U.S. investment-grade corporate bonds and bank loans, while staying underweight government debt and equities.
The Citigroup (NYSE:) unit that caters for clients with a minimum $10 million also favors emerging-market bonds, which are likely to benefit as the Federal Reserve cuts interest rates, said Roger Bacon, head of investments Asia Pacific based in Hong Kong.
“Extending duration is something the clients are very focused on,” Bacon said in an interview in Singapore. “We are increasing allocation to U.S. investment-grade corporate debt. We are increasing client allocations to certain parts of emerging-market debt.”
The average Citi private client’s balanced portfolio now has a 1.5% overweight in income-producing securities, and an average underweight of 2% for stocks, Bacon said, citing data as of June.
Bonds have rallied around the world this year as the Fed has signaled a willingness to ease policy amid signs global growth is faltering. A Bloomberg Barclays (LON:) index of U.S. investment-grade corporate bonds has returned 10% over the past 12 months, while the of stocks has gained just 3%.
Bacon says the Fed will probably cut its benchmark rate by 25 basis points in July and by the same amount in September, which matches the pricing given by fed fund futures. “We are now in the cutting part of the cycle, which we wouldn’t have said 12 months ago,” he said.
Citi Private Bank also favors the debt of companies that are domestically focused, such as those in the food and beverage industry, which are likely to outperform amid the U.S.-China trade war.
“We’ve been taking the opportunity to raise quality within clients’ fixed-income portfolios,” Bacon said.
Here are some of his other views:
- Firm has a “slight bias” for U.S. high yield over equivalent European paper in a balanced model portfolio, and underweight government debt
- Prefers U.S. bank loans which are less volatile than junk bonds
- Citi remains “very constructive” on Asia and the region’s equities
- Likes yen as a “store of value” amid ongoing market volatility and U.S.-China trade tensions
- Sees scope for Chinese authorities to cut the required deposit reserve ratio for banks by a full percentage point or more in the coming months
- “In terms of the Chinese currency, we think that 7 will be very, very strongly defended”
(Adds view on equities in third bullet point, updates prices.)
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