Citigroup explains changing investment environment

'For 20 years from 1982-2002 interest rates, taxes and regulation was all broadly coming down,' says Chief Global Investment Strategist Clark B. Winter. 'This was what I call a period of lubrication and good for investment in equities and bonds.

'The decade before that from 1972-1982 was a time of stagflation, and the best investment was to keep cash in the bank. Now since 2002 interest rates, taxes and regulation has been increasing again, and the lubrication is exhausted, and everything is slightly more difficult for investors.'

So where should global investors look for value now? Mr. Winter and his team are touring the world right now, meeting some of Citigroup's clients, and endeavoring to strike an optimistic note.

European, Japanese equities

On the one hand, Citigroup can highlight 'tremendous worldwide liquidity' of around 4% which needs to find a home, and points to opportunities like Japanese and European equities which appear to offer reasonable value in a climate of structural reform.

But at the same time Mr. Winter observes a global trend towards investment closer to home, with Brazilians just as likely to back their own stock market as Gulf nationals, and a consequent narrowing of the risk premium paid in local markets by comparison to global markets.

'What I would expect is that at some point this risk premium will re-emerge, something will happen to put risk back into perspective,' he says. 'We think there will be a shift from local to global markets or at least towards global investments that offer strong dividends'.

In the meantime, Mr. Winter says that since 2002 markets have been driven by the 'incomprehensible and invisible', most spectacularly the 9/11 attacks, but also hurricanes in the USA, SARS in Asia and now the mounting threat of bird flu. Yet Citigroup does not feel this necessarily means a return to the stagflation of the 1970s, with inflation still under control.

Higher energy costs

But higher energy and commodity prices are one of its investment themes for 2006, with the voracious appetite of China and India for commodities spurring prices higher. Thus the bank recommends structured products such as commodity-linked notes, managed futures, as well as funds focused on real assets and alternative fuels.

Other investment themes include the ageing of advance country's populations and the concurrent demand for healthcare, pharmaceuticals and financial services as well as leisure. And the strength of global balance sheets which will deliver enhanced merger activity.

It was interesting that the Citigroup team viewed the biggest one-day fall on Wall Street last Friday as a buying opportunity, and did not equate this with a more fundamental change of investor sentiment, beyond observing that 'incomprehensible and invisible' factors were again at work.