SINGAPORE (Reuters) – Investors could wait for another 20-30 percent decline in global stocks before buying shares as there will be more pain in store for the world economy and markets, a Citigroup private bank strategist said on Friday.
“We think that, for example, a 20-30 percent decline in markets would give us a good opportunity to find lower entry points for people looking for broad-based entry into the market,” Norman Villamin, head of research and strategy at Citi Private Bank, told Reuters in an interview.
“We think we will see better entry points as we move towards mid-year. There is still some economic pain to come, there is still some pain in the markets to come.”
Villamin, who joined Citi in 2007 from HSBC and advises affluent and super rich clients on investments, said global stocks are trading at 1.5-1.6 times price-to-book value, or the top-end of a 1-1.6 times level they had traditionally traded in during a pre-bubble period.
“If you look at the Japanese experience, what you had was a period of very stable valuations pre-1985. From 1985 to 1989 you had a very large bubble in valuations and then the bubble popped and Japanese valuations collapsed over the next decade to pre-bubble levels.”
He said corporate earnings are not going to improve in the near-term therefore valuations should be lower.
For long-term investors, Villamin recommends being overweight on stocks and investment-grade bonds and underweight government debt and cash as returns are diminishing.
Citi also recommends being overweight on U.S. and emerging market stocks and being underweight on Europe, which he said, will lag the United States in recovery.
“For long-term buy and hold investors who are looking at 3-5 years, we think equities look quite attractive, we think U.S. investment-grade bonds look quite attractive,” he said.
Villamin said the global economy could hit a bottom by the third quarter of this year, helped by fiscal stimuli that will help revive sagging consumer demand as well as capital injections and asset sales that would repair balance-sheets of global banks.
“The new capital that comes in needs to outpace these writedowns. We think that was not the case in 2008,” he said.
Citi expects the global economy to grow at 0.5 percent in 2009 and a below-trend 2.5 percent in 2010.
Citi, once the world’s largest bank and now No. 3 in the United States, said on Tuesday it would combine its Smith Barney brokerage and other units with Morgan Stanley’s (MS.N) wealth management unit.
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Villamin said unlike the United States, Asia is suffering from a cyclical downturn in the global economy and should start to benefit when economies start recovering.
Citi’s key global theme for investors is to look at infrastructure as an asset class, focussing on the energy sector.
“Even as oil prices are bottoming here, we think that the needs in the energy infrastructure space are dramatic.”
(Editing by Neil Chatterjee and Lincoln Feast)
By Saeed Azhar
Fri Jan 16, 2009 6:40am GMT