Citi downgrades global equities to underweight, more positive on commodities

Investors should mind the curves ahead, strategists at Citi said.

The recent more favourable market backdrop might probably persist for a bit more, they said, but they were concerned about the fundamentals for global economic growth and saw potential for a "slight deterioration" with what they termed as the split between real (inflation-adjusted) growth in gross domestic product and inflation.

Up until now the reflation wave from China as authorities there eased, together with a more 'dovish' Federal Reserve, a softer US dollar and restraint in commodity supplies had driven better risk-appetite.

"This can persist for a while but from here we are more cautious," strategists Jeremy Hale, Graham S Bishop, Maximillian Moldaschl, Amir Amin and Jamie Fahy said in a research report sent to clients.

Citi downgraded its view on global equities to 'undereight', while recommending clients 'overweight' credit and sticking to an 'overweight' on government bonds.

They also broadened their 'overweight' on commodities to all sectors, arguing that "the commodity rally may be a little more solid fundamentally than the equity one."

In turn, its more constructive view on commdoities meant the broker was now more 'bullish' on emerging market asset classes like equities, which were trading on a 27% discount to their developed world peers on a price-to-earnings basis.

"Oversupplied markets should begin to diminish in 2016. And a boost in energy prices should also help to secure a floor under all commodities.

"Fading QE euphoria in Europe, rich valuations in Europe and the US, and margin pressures make us more cautious these markets."