The Citi Private Bank Global Investment committee (GIC) has slightly cut its tactical overweight position in global equities and made a parallel reduction in its underweight position in fixed income.
 
(For the average-risk reference portfolio, the equity overweight position was cut from +6.8% to +6.0% and the fixed income underweight was raised from -6.8% to -6.0%).


The various country and asset changes were aimed at shifting currency, energy and interest rate risks and opportunities.
 
The GIC believes the U.S. dollar will probably strengthen further in 2015. While we are already overweight dollar assets, the tactical changes made today further increase this overweight position.

The record high yield-premium on US Treasuries and dollar appreciation led to strong returns for international investors in US bonds in 2014. These factors are expected to continue to boost returns for unhedged international investors in 2015, even if long-term interest rates rise somewhat.
 
Meanwhile, the 5% jump in returns on long-term Treasuries during early October’s short-lived correction in global equities underlined their value as a portfolio hedge, despite providing poor yields as a standalone investment. While remaining underweight Treasuries overall, we raised our allocation to long-term Treasuries to a neutral weighting.
 
Since this is a very small share of the overall U.S. bond market, we made additional small increases in inflation-linked securities, intermediate-term investment-grade debt and government-agency securities, the latter of which we remain underweight.
 
The stronger dollar has lowered returns this year on international assets for U.S. investors who did not hedge currency exposure. While local-market returns may be quite attractive in many international markets going forward, we suspect depreciating currencies will eat into those returns.

This led us to pare our overweight in Europe slightly, even though we believe there is still a compelling opportunity as the recovery in southern European markets catches up with that of northern European markets. In the case of UK equities, we cut our allocation to a small overweight owing to significant political and policy uncertainties mostly tied to next year’s elections.
 
The drop in the global crude oil price of roughly 25% will benefit oil-consumers greatly but will negatively affect oil-producers. Asia in particular should benefit. We have therefore slightly added to our Asian hard-currency and local-currency bond holdings, raising our US dollar weighting as well.
 
Based on strong domestic demand growth, an improving external position and a high but falling deficit in petroleum, we raised the allocation to India’s stock market to overweight. We also cut Malaysian equities to underweight, reflecting its petroleum trade surplus and raised Turkey to a neutral weighting. Although Korea should gain from lower oil-import costs, we reduced our allocation to Korean equities to neutral on the impact of a weakening Japanese yen and other factors.
 
The GIC believes its underweight allocation to emerging-market debt outside of Asia should help provide protection from the negative impact of falling oil, while our overweight positions in many equity markets should benefit from cheaper oil’s impact as a consumer stimulus.

Wieting is Global Chief Investment Strategist with Citi Private Bank, a unit of Citigroup.