Citigroup cuts FTSE target, but says investors should be 'brave' and buy stocks

Citigroup cut its 2015 year-end target for the FTSE 100 to 6900 from 7400 to take into account recent GDP and EPS downgrades and rising risk from China.

The bank said the new target still suggests around 10% returns to year end, adding that it expects a fourth quarter rally to be supported by a combination of modest growth and re-rating following the recent correction.

Citi noted that UK equities have returned 135% since March 2009 lows versus 44% from UK gilts and 3% from UK cash, reiterating its call that “The only way is equities”.

In the law few months, however, equity returns have been more disappointing, the bank said.

Still, it said the recent correction is not the beginning of a new equity bear market.

“A bear market, we think, needs a global recession. With European and US economies enjoying modest growth, supported by domestic demand and backstopped by easy money, the shock from China/EM needs to be severe to drive a global recession.”

In a separate note, Citi said its strategists have collectively forecast a 20% gain for global equities to end-2016.

“We think that latest global equity sell-off represents a correction in an ageing bull market, rather the beginning of the next major bear market,” it said, arguing that it’s time to be brave and buy stocks.

The bank said it favours Europe ex-UK and Japan where central banks are supportive and EPS momentum reasonable. It remains ‘underweight’ the more EM-tilted UK and Australian markets and ‘neutral’ US and EM.

Citi said its global sector strategy has a mild cyclical tilt, with Financials being the standout favourite across the strategy team.