A broadly cautious approach makes sense at the moment but clients should be primed to move and capture opportunities, the US banking group said. In one area – bonds – it recommends that investors should spread risks and capture yields. Bonds have regained some of their diversification status after the losses of 2022.

Citi Global Wealth, part of Citigroup, is continuing to take a broadly defensive asset allocation stance in the uncertain economic environment but said that clients have many chances to adjust and catch opportunities as they arise.

“We believe that current markets will lead into a meaningful potential recovery in 2024,” the US group said in its mid-year outlook for 2023.

The firm said the world is going through a “rolling recession” where parts of the US economy are growing even as others are slowing down. As inflation slowly eases after a period of US Federal Reserve rate rises, Citigroup believes that it is “imperative” for clients to stay invested.

Among its calls to action, Citigroup said clients should extend duration in their bond portfolios, diversify risk and earn higher yields, noting that adding private credit can add “significant yield” as banks retrench their activity. Bonds also can win back the diversification benefits they lost in 2022 when markets sold off.

“Though the broader bear market may not yet be over, we are seeing significant valuation improvements in certain sectors that provide our clients with the potential to invest in higher income-generating assets and long-term growth opportunities,” David Bailin, chief investment officer, Citi Global Wealth, said. “Our outlook for the remainder of 2023 and heading into 2024 suggests that clients may benefit most from a return to what we call `core investing’ – fully invested portfolios that move from defense to offense, from more bonds to more equities, from US-focused to global.”

“We favor investing in select non-US equities, identifying value within US markets, broadening tech and growth equity exposures and emphasizing alternative investing and private credit for suitable investors with a longer time horizon,” Bailin added. 

Elsewhere, the US firm said foreign exchange moves show that there are opportunities for clients to diversify into non-dollar assets and capture future returns in upcoming decades.

“The strong US dollar means we can buy non-US assets at deeply deflated prices,” Steve Wieting, chief economist and chief investment strategist at Citi Global Wealth, said. “While we expect periodic US dollar rallies, we ultimately will see a weakening dollar, making currency exposure more critical.”

As well as taking currency exposure into account, Citi Global Wealth is also favoring long-duration bonds to offset a potential widening of bond yield spreads and to add “defensive” equities with a strong bias to firms that are able to produce dividends, and which have strong balance sheets, Wieting said.