Jeanne Sun, Head of Portfolio Advisory at Citi Wealth, sees markets operating in an environment where investors are called upon to simultaneously assess geopolitical risks, energy disruptions, persistent inflation, and shifting interest rate expectations.
In this context, Jeanne Sun explains why U.S. large-cap stocks remain both a growth and a defensive choice for Citi Wealth, thanks to strong earnings growth, resilient fundamentals, and exposure to artificial intelligence.
In contrast, Europe is viewed with greater caution due to its greater sensitivity to energy shocks and structural challenges in productivity and technology.
In the following interview, Sun explains why she prefers taking on risk through equities rather than corporate bonds or emerging market debt, as credit spreads are near their lowest levels in the past 20 years.
At the same time, he explains why he maintains a preference for shorter-duration fixed-income securities, under what conditions he would increase duration in portfolios again, and why gold continues to play a critical role as a diversification tool, at a time when the relationship between U.S. Treasuries and equities is shifting.
You remain positive on large-cap U.S. companies, citing stronger fundamentals, higher profit margins, and better cash flow generation. Is this primarily a defensive position, or do you still view it as a growth opportunity?
We clearly view U.S. large-cap companies as a growth opportunity, driven primarily by continued strong earnings growth. For example, first-quarter results are expected to show an increase of nearly 30% year-over-year for the S&P 500. However, it is worth noting that, given the current risks, this is also a defensive choice, as the U.S. is the market with the strongest fundamentals and, amid geopolitical tensions, one of the least vulnerable markets to disruptions in energy supplies from the Middle East.
The shift of companies toward long-term growth as a result of ongoing structural changes and investments in artificial intelligence also mean that the earnings growth of U.S. companies shows greater resilience to cyclical fluctuationscompared to other major markets.
The report notes that Europe is more exposed to energy shocks and potential pressure on profit margins compared to the U.S. How cautious should investors be toward European stocks at this stage of the cycle?
We maintain a slightly underweight position in European equities, given that Europe appears more exposed to the energy shock caused by the turmoil in the Middle East, as well as due to the structural challenges facing the Old Continent, such as generally lower productivity growth and less exposure to structurally growing sectors, such as technology and artificial intelligence. Nevertheless, there are certain sectors in Europe that are more resilient thanks to their strong profitability. Examples include companies in the industrial or utilities sectors that may benefit from investments in energy infrastructure, which are accelerating in part due to developments in the Middle East.
Citi Wealth prefers to take on equity risk rather than credit risk, given the tight spreads. Why are equities, despite their greater volatility, a better choice for risk-taking compared to corporate or emerging market debt?
Our preference for equity over credit risk is based on two main factors. First, corporate fundamentals remain generally strong, with improved profitability, leading us to favor exposure to equities, where upside potential is unlimited.
Second, credit spreads are near their lowest levels in the past 20 years, meaning investors are receiving little compensation for the additional risk they assume relative to government bonds.
At the same time, the scope for further compression of spreads is limited, even in an environment of strong fundamentals. This holds true across a wide range of corporate and emerging market bond indices, despite the publicity surrounding concerns about private credit.
You remain underweight in terms of duration while favoring shorter-duration, high-quality fixed-income securities. What would need to change for you to increase duration in portfolios more substantially?
One of the key factors we monitor for increasing portfolio duration is the shift in the economic cycle. Today, interest rate risks—particularly in the long term—are on the rise, due to persistent inflation (even before the energy shock), concerns about fiscal deficits, and continued support from resilient economic growth.
However, if high energy prices begin to affect growth to the extent that they lead to a decline in demand (and consequently an easing of inflationary pressures) and monetary policy shifts course to become more accommodative, then we may consider increasing duration in the portfolios. Of course, all of this will depend on the overall picture of the economic data.
Gold continues to carry significant weight in your portfolios. Having delivered significant returns for investors recently, do you believe it remains primarily a hedge against geopolitical fragmentation, or has it evolved into a more structural reserve asset for investors?
For us, investing in gold primarily serves as a duration substitute and a means of enhancing portfolio diversification, particularly in light of the changing relationship between U.S. Treasuries and equities. At the same time, we observe that gold continues to be preferred by investors seeking to diversify their currency exposure.
We do not believe that the U.S. dollar will lose its role as the primary reserve currency; however, there is a gradual increase in investments in non-dollar assets, including gold.