Citi Strategists Advise Buying Stock Dips, Citing AI and US Resilience

Strategists at Citi are maintaining an overweight stance on equities and advise clients to increase exposure during any market pullbacks, citing the enduring strength of the artificial intelligence theme. In a recent note outlining the bank's house views, strategists expressed a preference for the U.S. market, which they believe is better positioned to weather rising oil prices.

A 'Buy the Dip' Stance

Citi's team noted the equity market's resilience in the face of several headwinds, including higher oil prices, rising interest rates, and historically poor September seasonality. "We are impressed how well the equity market has been trading," strategists wrote in the Friday note.

The bank is waiting for a dip before adding further risk. The note highlighted that historically, stock markets tend to weaken ahead of midterm elections before a typical year-end rally. "We prefer the US as we still believe that the AI trade will continue," the strategists added.

Cross-Asset Allocation

Beyond U.S. stocks, Citi's next preference for adding risk is Emerging Asia, a region the bank had downgraded in early July. The bank's broader asset allocation reflects a cautious but pro-risk stance:

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• Bonds: Citi remains neutral on duration, or sensitivity to interest rate changes. It is long emerging market debt and short European government bonds, citing risks from the upcoming French election. U.K. gilts were moved back to neutral.
• Credit: The bank is underweight both U.S. and European investment-grade credit, using the position as a hedge for its equity overweight.
• Commodities: Strategists are long base metals and neutral on energy. They also recently reduced a long position in gold.
• Currencies: Emerging market currencies were moved back to neutral due to rising volatility in U.S. interest rates.

Navigating a Hawkish Fed

The strategists acknowledged the challenge posed by persistent monetary tightening from the U.S. Federal Reserve. "At this stage, it is unclear to us what it will take to stop a hawkish Fed," the note stated.

This uncertainty is a key factor in the bank's positioning, particularly its decision to remain neutral on bond duration and move emerging market currencies to the sidelines. The note suggests that while the outlook for equities is positive, investors must remain aware of the risks posed by central bank policy and geopolitical events.