News

Need to Know: Citi is moving back into U.S. equities because they see a rebound coming for this beaten-down sector

Wall Street is facing a choppy start for Thursday, with commodity prices once again sky high as an intensifying battle in Ukraine hits its eighth day.

“As long as the Russia-Ukraine crisis continues, we will maintain the view that another round of selling could be possible at any time,” said JFD Group’s head of research Charalambos Pissouros, who said Wednesday’s rally for Wall Street, driven in part by comments from Fed Chair Jerome Powell, was a mere “adjustment bounce.”

Read: Why Russia’s invasion of Ukraine adds to inflation pressures and should be ‘unsettling’ to stock market, says this strategist

The mantra from Wall Street and elsewhere has been that despite the grim here and now of this conflict, history tells us that stocks eventually rebound. Pressing that point home, Citigroup strategists pointed out to clients in a note Thursday that, thus far, the pressure has been largely on stocks with direct Russian exposure and select financials.

“We still want to buy the dips, and highlight that global equities have ended 10% to 20% higher after previous geopolitical crisis,” said a team led by Robert Buckland, chief equity strategist.

That brings us to our call of the day, also from Citi, who in the same note lifted U.S. equities and the global information-technology sector back to overweight. “Both are growth trades that should benefit, in relative terms at least, from the recent sharp drop in real yields,” said the strategists.

They point out how the outbreak of the Russia-Ukraine conflict has moved rates markets to price in more dovish monetary policy, with bond yields and real yields dropping, despite higher inflation expectations. “Having started the year at -1.10% and risen to -0.42%, U.S. 10-year TIPS yields fell back to -0.95%,” said Citi.

What that sharp drop in nominal yields has done is pressure financials, as profitability from that sector needs higher rates. But equity markets haven’t moved as fast to price in falling real yields, Buckland and the team said.

“We have frequently highlighted that these have been a big driver of the global value/growth trade in recent years. However, this latest drop in 10-year TIPs has yet to drive a similarly sharp reversal in the value rotation trade that has dominated global equity markets [year-to-date],” with other growth trades lagging.

Highlighting a “close relationship” between real yields and growth stock valuations, they noted that 83% of the MSCI U.S. 12-month forward price/earnings ratio can be explained by the level of U.S. 10-year real yields. Those are implying that U.S. markets should trade on 12-month forward P/E ratio of 21.5 times, versus the current 19.7 times.

“We had previously been expecting real yields to hit -0.25%, which would have implied the S&P trading at 20 times,” said the Citi team. Meanwhile, the MSCI All Country World IT sector is trading on a P/E ratio of 22.7 times, well below the 24.8 times implied by current 10-year TIPS yields.

“While we don’t’ want to be too slavish to this relationship, the latest plunge in real yields does imply that this year’s derating of growth stocks should stop,” said the Citi team.

The buzz

Fighting continues to rage across multiple parts of Ukraine, with Russian forces closing in on the capital city Kyiv, besieging port cities and pummeling Kharkiv in the northeast. Russian Foreign Minister Sergei Lavrov said Russia is ready for talks, but won’t stop the attacks.

The fallout of that invasion continues, with Russian markets closed again, equity-index provider MSCI deeming the country’s stocks “uninvestable,” the London Stock Exchange halting trade in Russia securities, and Fitch and Moody’s cutting the country’s credit rating to junk.

Powell is back on Capitol Hill for Thursday. Weekly jobless claims, fourth-quarter productivity and unit labor costs are due ahead of the open, followed by the Institute for Supply Management services index and factory orders.

The former boss of fund manager Cathie Wood, whose flagship ARK Innovation Fund has fallen on hard times, said she’s “a boom or bust investor.” 

Shares of software group Snowflake
SNOW,
+0.57%

are plunging after disappointing results.

The markets

Stock futures
ES00,
-0.15%

YM00,
-0.07%

NQ00,
-0.30%

are tilting south, with oil
CL00,
+1.96%

and other commodity prices
W00,
+5.26%

continuing to climb, bond yields
TMUBMUSD10Y,
1.859%

steady and gold
GC00,
+0.72%
,
silver
SI00,
+1.05%

and the dollar
DXY,
+0.20%

getting bid. The Russian ruble
USDRUB,
+9.21%

is down another 15%. European equities
SXXP,
-0.59%

are underwater and Asia had a choppy session. Bitcoin
BTCUSD,
-1.18%

is a little softer following its recent rally.

The tickers

These were the most-active tickers on MarketWatch as of 6 a.m. Eastern Time.

Ticker

Security name

AMC,
+1.15%

AMC Entertainment

TSLA,
+1.80%

Tesla

GME,
+2.48%

GameStop

RU:SBER

Sberbank

MULN,
-4.99%

Mullen Automotive

NIO,
-0.46%

NIO

AAPL,
+2.06%

Apple

SOFI,
+3.39%

SoFi Technologies

DWAC,
+0.05%

Digital World Acquisition

The chart

The energy sector remains solid on a technical standpoint, following a seven-year high for the Energy Select Sector SPDR ETF
XLE,
+2.29%

this week, says Larry Tentarelli, editor and publisher of the Blue Chip Daily Trend Report.

“XLE trades at 12.1 x forward earnings, well below the S&P 500 and yields 3.31%, well above the S&P 500,” said Tentarelli, in a blog. And while crude can be a volatile market, the chart has been trending higher. He highlighted three stock favorites right now — Chevron, Devon Energy and Halliburton, and said he would be a buyer on any potential pullbacks.

Random reads

German authorities seize the largest yacht in the world (512-foot) belonging to Russian billionaire Alisher Usmanov.

Moscow police officers detain children for laying flowers at the Ukrainian embassy.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Want more for the day ahead? Sign up for The Barron’s Daily, a morning briefing for investors, including exclusive commentary from Barron’s and MarketWatch writers.

What's your reaction?

Excited
0
Happy
0
In Love
0
Not Sure
0
Silly
0

You may also like

Leave a reply

Your email address will not be published.

More in:News