Citigroup: 10 investment themes for 2005

Citigroup is on balance positive about the investment outlook in 2005. Its investment team thinks there are a 70% likelihood of good US and Asian growth, and a 30% chance of a worst case scenario of a recession.

In a detailed presentation to clients, Citigroup highlighted 10 major investment themes for 2005:

1. Back to basics in equity markets with a focus on large-cap, high quality names with strong balance sheets and high yields.

2. Higher volatility in equity markets than in 2004 which was a six-year low for volatility. This will increase the opportunities for hedge funds to make money.

3. Inflation to rise slightly due to consumer and corporate spending. In such a scenario, commodities and commodities-related products should do well.

4. A weak dollar should spur cross-border mergers and acquisitions. Stronger equity markets and balance sheet strength will embolden CEOs to go for takeovers.

5. After two years of record-breaking new corporate bond issuance, high yield spreads seem vulnerable at these levels, although investment-grade spreads are well protected.

6. China and India still offer venture capital and private equity opportunities. The Chinese economy will continue to grow creating huge consumer demand, alongside the Indian economy.

7. The US dollar is still in long-term decline but a short-term rally can not be ruled out. Hedge funds will continue to influence volatility.

8. European equities offer better value than US equities due to the superior yield on European stocks and lower valuations. European equities are a safe haven for long-term investments as the benefits of restructuring take root.

9. Ongoing restructuring in Japan offers selected opportunities, although Citigroup is overall neutral on Japanese equity and fixed income investments.

10. The decoupling of Asian markets from the rest of the world as a result of low interest rates could lead to out-performance of Asian equity markets in the next two to three years. Citigroup expects greater portfolio shifts from deposits and fixed income into real estate and equities.