“However, if the market moves to favouring sectors where earnings fall less than the market in a downturn, US tech [historically] has fallen minus 6 per cent versus minus 31 per cent for the market overall.”
For example, Mr Buckland said Microsoft was a “sell” for investors worried about high multiples, and a “buy” for investors worried about falling earnings.
“Sure, tech still looks expensive. Sure, real yields are still going up. Sure, real yields have told me this year to get out of tech. But I think the story is changing now that as real yields have reached a certain level, the market is starting to think more about falling earnings,” he said.
Soft landing ‘assumed’
Global technology shares have been pummelled by central bank tightening. The MSCI World Information Technology Index has lost more than 30 per cent of its value this year, while the US benchmark Nasdaq 100 Index is down 34 per cent.
Mr Buckland believes analyst profit forecasts are “too high”, with consensus at 10 per cent earnings per share growth for the MSCI AC World index this year, followed by 6 per cent next year. He says this assumes a “soft landing”. Citi assumes a 5 to 6 per cent earnings contraction for 2023.
Mr Buckland said investors should favour defensive equities over cyclicals, He likes healthcare “for defensive reasons” and technology. The only traditional cyclical sector on the overweight list is “horrible, hated and unloved” financials which should benefit from higher rates.
“I’m buying our analysts’ theory that the interest margin story will be better than the negative from the balance sheet story,” he said.
Citi’s underweight sectors are industrials, consumer discretionary and materials. Energy plummeted in previous economic downturns, but Mr Buckland said things could be “different this time round”, noting that “energy is more of a supply side story”.
Country-wise, Mr Buckland has a preference for UK and US stocks. He sees the US as “more defensive relative to other cyclical markets”, while the strong currency will continue to boost relative performance. The UK is Citi’s favourite “value trade” given cheap valuations and high overseas exposure.
Mr Buckland is underweight Australia as “it looks a little bit expensive”.
Citing Citi’s bear market checklist, which looks at a broad range of potential factors for a market downturn, Mr Buckland said there were reasons not to be as worried about the level of the sharemarket compared to previous corrections.
He noted the list showed 17.5 red flags out of 18 at the top of the market in 2000, and 13 at the top in 2007. Today, it was showing six red flags, down from highs of 8.5 last year.
“What it tells you is because the bull market wasn’t as bullish as the previous two bull markets, the requirement for a major bear market is less to clear out the froth the bear market very helpfully does,” he said.
Mr Buckland expects 15 per cent returns for global stocks by the end of next year but warned it would be a bumpy ride.
