(Bloomberg) — Investors should favor cheaper U.K. equities over their more expensive American counterparts as 10-year Treasury yields look set to climb to 1.25%, according to Citigroup Inc.
Strategists at the U.S. banking giant have proposed an “aggressive” short-term strategy into 2021 on the expectation that a selloff in Treasuries will drive a further rotation to value from growth stocks, according to a Nov. 15 note. Citigroup sees U.S. yields rising as markets look through bad fundamentals toward an economic recovery next year.
“At a regional level, the U.K./U.S. trade tracks real yields closely, reflecting its correlation with value/growth,” the strategists including Robert Buckland wrote. “We might expect the U.K. to outperform the U.S. by another 15% if nominal yields head up to 1.25%”
The U.K.’s FTSE 100 Index has surged 13% this month as investors rotated into lagging energy and financial shares on optimism over progress toward a coronavirus vaccine. It remains down 16% for the year. The S&P 500 Index is up about 10% this month and closed at an all-time high on Friday.
The Citi team recommended investors hold overweight positions in U.K. stocks as well as those from Australia, and underweight ones in the U.S. and emerging markets. Energy, financial and industrial sectors are preferred over technology, health care and consumer discretionary names, according to the note.
The strategists expect the Treasuries sell-off to stop when benchmark yields hit 1.25%, making their rotation call a short-term one only.
“A leveling out in bond yields would remove a key driver of the current rotation, especially into financial stocks,” they wrote. “That’s why we resist the temptation to say that this it, the moment to call a giant multi-year switch back to value strategies.”
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