Citi Strategist Says Financials Will Lag Going Forward (XLF, KBE)

March 17, 2010 5:14 PM EDT
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Citi's global equity strategists are warning that the financial sector will level out over the next two years, as history shows that one year after the market bottom high beta trades, like the financials in the current cycle, do well in the surge but fade during the grind.

The firm sees the "problem child" or ultra high beta trades of the current market movement as the financial sector, which has jumped 63 percent in the last year. Citi is downgrading the financials from Overweight to Neutral heading into the second year of the bull market.

Over the next two years Citi expects the global equities to grind higher over the next two years, but the strategies that worked best in the first year following the market surge will become less appropriate as market slowly over the next two years.

"Despite all the talk about the structural impact of the global financial crisis and subsequent deep recession, this equity market rebound appears remarkably normal," the Citi report said.

The firm believes that the market movement in the early months of 2010 shows a blueprint of what is coming in the next two years. The analysts suggest that investors will be able to gain a good profit if they buy into the dips in the market, but warn that chasing a rally to hard will result in a likely poor return.

According to Citi, the global equities tend to grind higher in the 12-36 month period of the market recovery, even though global corporate earnings could be sharply turning upward.

Looking forward, Citi suggests that the initial price surge is now over and that the global equity markets will move higher over the next two years at a grinding place.

Related Stocks and ETFs:

  • Financial Select Sector SPDR (NYSE: XLF)
  • JPMorgan Chase & Co. (NYSE: JPM)
  • Bank of America Corporation (NYSE: BAC)
  • Citigroup, Inc. (NYSE: C)
  • Wells Fargo & Company (NYSE: WFC)
  • Goldman Sachs Group Inc. (NYSE: GS)

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