Citi's 5 Conviction Calls

While remaining generally constructive on the equity market long term, Citi analysts advised investors to buy on weakness. They said that recent weakness had provided “a better return environment.”

The analyst said that market trends are likely to be driven in 2016 by earnings growth in the 5 percent range. The maintained an Overweight view on Banks, Capital Goods, Diversified Financials, Energy, Household & Personal Products, Media, and Semi & Semi Equipment; while having an Underweight view on Consumer Durables & Apparel, Consumer Services, Food, Beverage & Tobacco, Food & Staples Retailing, Pharma & Biotech, and Transportation.

Conviction Calls

The analysts enumerated their five high conviction calls as:

1. Large Caps - Valuations, lead indicators, foreign investors and activists, all supported continued outperformance.
2. Value Handoff – Lead indicator and likely higher rates suggested a value exchange, recommending Energy over Consumer Discretionary.
3. Capex – Credit conditions support capital investment outside the Energy and Mining industries. They benefit IT, and tech companies should continue to increase capex by nearly double digits in 2016.
4. Buybacks – Serial shrinkers have been the preferred vehicles for new stock purchases for the past few years.
5. Bond Yield Shift Implications – With wage inflation pressures escalating, REITS, Pharma/Biotech, Utilities & Staples are vulnerable to rising bond yields. Here, Tech and Financials are poised to benefit.

Bull Thesis Intact

The analysts listed the following expectations for 2016:

1. The S&P 500 is expected to close 2016 at 2,150, backed mainly by earnings and improving sentiment. Margins are likely to be under pressure in 2H16 from rising employee compensation.
2. Companies would continue to use cash for capital spending and buybacks.
3. Investors should select industries to invest in.
4. “The “Raging Bull Thesis” remains intact (even with Millennials and Automation) as we maintain that the secular rally theme initiated in December 2011 could last for many more years.”