Don’t chase the Christmas lunch trades – Citi

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Don’t expect the current risk-on sentiment to last much longer, Citi strategists told clients in a note yesterday.

The opening few weeks of 2023 saw last year’s winners (defensives) getting sold while last year’s losers (mostly tech) are big winners. Expect this to “fizzle out once market positioning is cleared out and fundamentals reassert themselves,” strategists wrote.

“We are wary of the soft-landing story and think EPS forecasts are still too high, especially if the US economy drops into recession in 2H23. The tech stock rally has left valuations looking stretched, and the sector is vulnerable to further earnings disappointments,” Citi strategists said.

Strategists reminded Citi’s clients that markets tend to change leadership at the start of a new year before reverting to previous themes later. They expect the same scenario to take place this year.

“History is on our side,” they wrote.

“Performance may be reasonable early in any year but fades later on. 2023 has started strongly, but we suspect that returns will fall back towards the downward profile. Investors often start a year thinking it will be very different to the last and market leadership will change accordingly. On average, it doesn’t.”

On the other side, the strategists see more upside left for China stocks amidst the ongoing re-opening.