Mid Year Outlook Report 2023

Citi Global Wealth
Investments
Opportunities
on the Horizon:
Investing Through
a Slowing Economy
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Citi Global Wealth
Investments
CONTENTS
FOREWORD 3
OVERVIEW UNSTOPPABLE TRENDS
1.1 Our 2023 Mid-Year Wealth Outlook 5 5.1 Putting national security interests ahead of
economic cooperation: The evolution of G2
1.2 Recession, recovery: A journey unfinished 10 deglobalization and its implications 44
1.3 The value of strategic asset allocation: 5.2 Unusual investment opportunities
Mitigating portfolio risk during times of investor stress 19 in an atypical energy cycle 50
1.4 A guide to investing through a slowing economy 24 5.3 Generative AI: The beginning of
(another) technological revolution 57
CURRENCIES
REGIONAL PREVIEWS
2.1 As US dollar dominance ends,
currencies may drive returns 27 6.1 Asia: Economies get a boost from the
late reopening, weaker dollar 62
BONDS ARE BACK AGAIN 6.2 Europe: Selective opportunities amid modest growth 65
3.1 Bonds are Back Again: Where to find potential 6.3 Latin America: Favorable financial
fixed income opportunities now 34 conditions, cautious central banks 67
6.4 North America faces a rolling recession 69

A SEQUENCE OF EQUITY OPPORTUNITIES
4.1 Finding value beyond narrow leadership 39 GLOSSARY 72
| WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 2

Foreword
other regions gradually emerge from recent shocks.
Meanwhile, there is a surplus of cash sitting on the
sidelines, waiting to buy the dip. As inflation subsides,
we anticipate the US Fed will shift from interest rate
hikes to cuts and a potential recovery in 2024, unlocking
more potential opportunities for investors.
Keeping portfolios fully invested remains important,

and there is a lot you can do to preserve and grow your
assets in the interim. In this Outlook, David Bailin,
Steven Wieting and our Investment Strategy team offer
insights to capture higher bond yields, shift to more
defensive and income-oriented equities and shift to
JIM O’DONNELL diversify currency exposure. We also explore potential
CEO of Citi Global Wealth opportunities that may come from ongoing trends like
the rise of artificial intelligence or nearshoring.
I’m excited to introduce Opportunities on the
Timely guidance is even more valuable when markets
Horizon: Investing Through a Slowing Economy, our
are volatile. In addition to our long-form report, we
2023 Mid-Year Wealth Outlook. In this edition, we lay
have prepared a series of short videos and a brief
out our expectations and highlight key investment
implementation guide for your convenience. Your
themes to consider for the remainder of the year
relationship team can then suggest suitable strategies.
and beyond.
Throughout these tumultuous times, we are proud to
While 2023 has brought its share of challenges, we also
serve as your trusted partner and guide.
see it as a year of change and opportunity. Inflation is
gradually easing, but the US Federal Reserve continues
to raise interest rates, leading to an economic slowdown.
We expect a “rolling recession” in the US, while

CONTENTS
1 Overview
1.1 Our 2023 Mid-Year Wealth Outlook 5
1.2 Recession, recovery: A journey unfinished 10
1.3 The value of strategic asset allocation:

Mitigating portfolio risk during times of investor stress 19
1.4 A guide to investing through a slowing economy 24
Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 4

1.1 FROM THE DESK OF THE CIO:
Our 2023 Mid-Year Wealth Outlook

This is a time when investors are looking for a way forward. While
headlines about US debt, the impact of artificial intelligence, US-China
tensions and the war in Ukraine dominate the news, we believe the
landscape for investing has the potential to evolve positively. Our view,
reflected in our updated Strategic Return Estimates1 (See FIGURE 3:
Recession, recovery: A journey unfinished), is that investors who stay
invested and rotate their portfolios toward timely opportunities may be
well-rewarded over the next decade.
At the moment, investor sentiment appears poor, and that creates

potential opportunities. Bearishness, as measured by short equity
interest, is at multi-decade highs while the amount of money in money
funds and Treasury Bills (T-bills) is at a record high. Rates for short-term
cash are at the highest level since 2007.2 All these factors suggest that
DAVID BAILIN investors are waiting for a decline in market indices before shifting assets
Chief Investment Officer into equities. This may be the most anticipated bear market ever. It is also
Citi Global Wealth
an argument for why market timing will not work. If everyone is waiting,
any decline may be brief and untradable.
1
Strategic Return Estimates (SRE) based on indices are Citi Global Wealth Investments’ forecast of returns over a 10-year time horizon for specific asset
classes (to which the index belongs). Indices are used to proxy for each asset class. Cash refers to the US Cash SRE. The forecast for each specific asset class
is made using a proprietary methodology that is appropriate for that asset class. Equity asset classes use a proprietary forecasting methodology based on
the assumption that equity valuations revert to their long-term trend over time. The methodology is built around specific valuation measures that require
several stages of calculation. Assumptions on the projected growth of earnings and dividends are additionally applied to calculate the SRE of the equity asset
class. Hedge Fund and Private Equity SREs are linked to equity SREs. Fixed Income asset class forecasts use a proprietary forecasting methodology that is
based on current yield levels. Other asset classes use other specific forecasting methodologies. SREs are in US dollars. SREs are generally updated on an
annual basis, however they may be updated off cycle based on market conditions or methodology adjustments. Strategic Return Estimates are no guarantee
of future performance. SREs do not reflect the deduction of client fees and expenses. Future rates of return cannot be predicted with certainty. Investments
that pay higher rates of return are often subject to higher risk and greater potential loss in an extreme scenario. The actual rate of return on investments can
vary widely. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index. All SRE information shown above
is hypothetical not the actual performance of any client account. Hypothetical information reflects the application of a model methodology and selection of
securities in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading.
2
Haver Analytics as of June 1, 2023
overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 5

Markets are up so far in 2023, which might seem markets broadly, we see many assets around the government will issue an unusually large amount
surprising given all the bad economic news — world that have become unusually cheap on a of T-bills and bonds to refill its coffers. When
from high interest rates to persistent inflation. relative basis (FIGURE 1). that happens, this may crowd out deposits, drive
But we are not surprised. We continue to suggest up yields and increase the value of the US dollar.
our clients stay invested. For the better part of In our view, the landscape for investing suggests
16 months, we have maintained our positions some major shifts in portfolios. We believe that Though investors will be tempted to concentrate
in conservative, income-oriented equities as active asset allocation may add value in the assets in T-bills and money market funds, we
well as in quality fixed income, leaning toward period just ahead. Below are some ways we see think this will ultimately hurt their returns. A
US assets. During 2022, the most consistent potential opportunities evolving: different strategy is to extend duration by buying
dividend payers in the US — our largest style intermediate duration corporate bonds, US
overweight3 — lost 6.2% while the broad US municipal bonds and preferred equity securities.
equities lost 19.2%.4 Asset allocation clearly Less cash, more duration By doing so, investors can potentially retain
matters, as does diversification. higher yields for longer and may profit if and
With the resolution of the debt ceiling when interest rates fall, as they will likely do
negotiations, we expect to see peak short- when the Federal Reserve reverses course and
term interest rates. We anticipate that the US starts cutting rates.
Stay invested and be mindful
of what and when to invest
FIGURE 1: US Large- Mid-Caps and Non-US Equity Valuations
As we describe in this 2023 Mid-Year Outlook,
S&P 500
the economic policy “hangover” from the
26 S&P 400 (Mid cap)
COVID-19 shock, government intervention and
24 MSCI AC World ex-US
subsequent rate hikes still reverberate across
Forward 12m PE
the world economy (See Recession, recovery: 22

A journey unfinished). For the past 10 years, 20
US dollar assets boomed, boosted by a flight to 18
safety. Yet, the number of equity market leaders 16
in 2023 is very concentrated. Since the beginning
14
of 2023, more than 90% of US stock market
12
appreciation can be attributed to just five stocks.
10
As these issues resolve, we see potential, global 8
investment opportunities unfolding. Value '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23
creation is, in fact, underway — one reason why
our SREs are higher (See FIGURE 3: Recession, Source: Bloomberg as of May 31, 202. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes
only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would
recovery: A journey unfinished). When we
lower performance. Past performance is no guarantee of future results. Real results may vary.
look at the value of small- and mid-cap stocks
(SMID), international equities and emerging
3
Adaptive Valuation Strategies (AVS) is the Citi Global Wealth Investment’s proprietary strategic asset allocation methodology. It determines the suitable long–term mix of assets for each client’s investment portfolio.
The AVS portfolio used in the analysis is the Global USD Traditional Only Risk Level 3 portfolio. Risk levels are an indication of clients’ appetite for risk. An AVS L3 - Seeks modest capital appreciation and, secondly,
capital preservation. The Level 3 Diversification does not guarantee a profit or ensure against a loss of principal.
4
Dividend growers proxied by S&P 500 Dividend Aristocrats total return index and broad US equities proxied by Russell 3000 total return index.
Adding non-US FIGURE 2: US vs Non-US Relative CAPE
debt exposure 1.6
World Ex-US Premium/Discount to

1.4
The peaking US dollar, now near its highest level 1.2 World Ex-US
in 50 years, is likely to begin a gradual, uneven 1 Premium/Discount to US (CAPE)
decline. This trajectory suggests that credit- 0.8
worthy, non-US sovereign debt could be a solid 0.6
US CAPE
addition to fixed income holdings (See As US 0.4
dollar dominance ends, currencies may drive 0.2
returns). Not only may these securities offer 0
higher yields, but the falling dollar may provide a -0.2
higher total return to maturity. -0.4
-0.6
'35 '45 '55 '65 '75 '85 '95 '05 '15
Investing in non-US equities
Source: Factset as of April 21, 2023. Using MSCI World ex-US and MSCI US indices. Indices are unmanaged. An investor cannot invest directly in an
Non-US equities present good value. Non-US index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any
shares are trading at historically wide valuation expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. The CAPE
discounts to US shares (FIGURE 2). At the same ratio is a valuation measure that uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over
different periods of a business cycle.
time, the prospects for growth outside the
US suggest that non-US earnings may grow
substantially. We have already increased our provide profit opportunity. Focusing on
weighting to Asian, European and Latin American
Seeking value within profitable small- and medium-sized companies
equity markets, while reducing some of our US markets is advisable when the Fed reduces rates to fight
defensive equity exposures that outperformed unemployment, as we believe it will soon.
during 2022, like large cap pharmaceuticals. As Within US markets, we believe there are areas of
the global recovery unfolds, we will likely look to relative value worth investing in as we enter and
recover from a rolling recession. An important
boost non-US equities further across a range of
area of note are SMID stocks, which currently
Broadening our tech and
industries, focusing on sectors and companies
with the potential for sustainable revenue trade at a 30% valuation discount to US large growth equity exposures
growth and profits. caps for profitable firms.5 SMID stocks generally
perform best in the first year of a recovery when Early in the pandemic, from 2020-2021, the
their earnings are expected to rebound. valuations of large tech stocks surged. Then,
in 2022, we saw a reversal. Valuations of
The S&P MidCap 4006 and the S&P SmallCap growth shares dropped as the Fed increased
6007 are two additional categories that may the Fed Funds rate at an unprecedented pace.
5
S&P 400 and S&P 600 vs S&P 500 on 2023 EPS estimates.
6
Also known as the S&P 400, the index tracks 400 mid-sized companies in the US equity market.
7
Tracks 600 small-sized companies in the US equity market that meet specific inclusion criteria.
But as the yield curve inverted, investors have Loans for private equity buy-outs, lending to The US Treasury hit its debt ceiling at the start
started to refocus their attention to technology later stage venture companies, mezzanine debt of 2023 and took emergency steps to limit debt
companies with strong balance sheets and for real estate refinancings and other similar issuance. Now, we expect $1.3 trillion in new
growth prospects. Even though US industries lending opportunities are yielding more than 10% borrowings, likely by the end of the third quarter
have powerful and promising growth prospects, per annum.9 Unlike in 2008-09, we do not see a of 2023. When the Treasury needs to raise a
2023’s tech gains have been limited to a handful credit collapse on the horizon. Corporate balance huge amount of capital and the Fed continues
of companies. Large Cap US IT is up 37% year sheets are in good shape with future credit to tighten, we anticipate that fears about more
to-date.8 Firms providing the infrastructure for problems likely to be concentrated in commercial Fed policy tightening will lower prices of already
a new form of artificial intelligence, known as real estate. Capital shortages do not occur attractive assets.
generative AI (See Generative AI: The beginning frequently, so this is an area where qualified
of (another) technological revolution) are private investors may benefit for the next three
responsible for a lot of that gain. And while we to five years. Looking ahead
will add further exposure to generative AI, many
other future portfolio opportunities may lie One of the reasons we are seeking to diversify
in small- and medium-sized tech companies Watch for signals equity exposures from the S&P 500 is that large-
whose valuations do not yet reflect their future cap stocks have performed above expectations
growth potential. The double-digit declines in both stocks and over the past two years yet actual S&P 500
bonds in 2022 — the worst combined return earnings per share has declined in 2023. This
for 60/40 portfolios since 193110 — reset means we see them as expensive on a relative
Alternative investing and valuations and the relative value of different basis. While they may rise in value in 2024,
portfolio investments. In anticipation of poor US large cap shares are less likely to lead the
private credit market conditions in 2022, we doubled up on market higher.
defensive investments in 2021. Though we prefer
Finally, we see an opportunity within alternative To capture the potential of our new Strategic
the long-term return properties of dividend
investments for qualified investors. A shortage Return Estimates,1 we will consider rotating
growth shares, we expect to return to a normal
of capital now exists in private credit. Banks have toward different risk assets, geographies and
weighting. And while we currently enjoy a high
pulled back their lending due to deposit woes strategies in the second half of 2023 and into
yield on short-term high-grade bonds, we
and an overexposure to commercial real estate 2024. We may diversify our equity selections
will rotate from them to intermediate US and
assets, like office space. The Fed is continuing and “go overweight” across equity strategies as
emerging market credit to continue to seek
quantitative tightening, while the Treasury is potential opportunities become apparent.
income and potentially benefit if and when rates
ramping up borrowing and investors are hoarding
fall. We will move from defensive to overweight We expect US bonds to act as a foundation
cash and short-term investments. For qualified
risk assets as a result of valuation improvements for portfolios, seeking positive real yields and
investors, it may be possible to earn equity-like
and market dislocations as they arise. negative correlation to reduce portfolio volatility.
rates of return in selected debt securities.
Here we will seek diversification to non-US
8
S&P 500 Information Technology Index. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific
investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
9
Private equity firms lend less as demand cools, March 3, 2023 by Chibuike Oguh.
10
Source: Global Financial Data as of June 5, 2023.
bonds and to longer dated securities, but as we value of active asset allocation, which is about
expect rates to decline, we see a reallocation to choosing what to invest in and when.
equities as likely.
Over the coming months, we strongly urge
investors to reduce their exposure to cash as an
asset class. Extending duration should be an
The risk of being early versus investor’s first step. While we may be early when
staying on the sidelines buying certain equities or bonds, our goal is to
capture the “total return” of an underperforming
When T-bill rates and cash balances are high, asset class. This requires foresight and a
it is tempting to do nothing. In the near-term, willingness to act.
that may seem safe, but looking out one year,
we believe that those who do not own core
portfolios may be less well-off. After the double
market shocks of the pandemic and an overly
reactive Fed, the next decade looks like one
where returns may be above average. Those who
stay in cash will not see returns when markets
are recovering.
Market timing hurts portfolio returns. The worst

and best days in a market often occur near one
another, and you cannot afford to miss the big
up days. What investors should focus on is the
1.2 Recession, recovery:
A journey unfinished
STEVEN WIETING
Chief Investment Strategist and Chief Economist
The market rebound in 2023 has reminded investors of the futility of market
timing. While the worst looks to be behind us, the bear market journey is
not yet complete. Investors can potentially benefit from income-generating
assets while beginning to reengage portfolios in a number of building
valuation opportunities and long-term growth generators.
In 2022, we rotated to conservative, income generating assets in both equities and bonds. After playing
defense, this opens the door to further investment opportunities ahead
We have adjusted our economic forecasts slightly upward, but the effects of policy tightening in US labor
markets is still to be felt
Our present asset allocation strategy prioritizes quality income, focusing on companies with strong
balance sheets and consistent dividends. In our AVS Risk Level 3 Portfolio,1 we are overweight US
government bonds. While we have been cautious on small-cap equities, future returns have improved as
valuations collapsed. The same is true for many assets around the world where we have already begun to
shift portfolios
1
Adaptive Valuation Strategies (AVS) is the Citi Global Wealth Investments’ proprietary strategic asset allocation methodology. It determines
the suitable long–term mix of assets for each client’s investment portfolio. The AVS portfolio used in the analysis is the Global USD Traditional
Only Risk Level 3 portfolio. Risk levels are an indication of clients’ appetite for risk. An AVS L3 - Seeks modest capital appreciation and, secondly,
capital preservation. The level 3 diversification does not guarantee a profit or ensure against a loss of principal.

2023’s first half performance for world financial FIGURE 1: US Treasury Yields Highest since 2007
markets should remind investors of the folly
450 6
of market timing. Despite ample worries to the 7yr US Treasury Yield
contrary, global equities have returned 8.0%2 in 400
5
Total Return Level

the year to date and global bonds 2.0%.3 350
300 4
Yield (%)
Of course, this rebound followed 2022’s abysmal
results, the worst combined US stock and bond 250
3
market performance since 1931. It was a severe 200
reckoning; the price to pay for government 150 2
actions that overstimulated the economy during
100
and after the COVID shock, then reversing course 1
to tame the resulting inflation. 50
MSCI All Country World, USD
0 0
'03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23
Investment Source: Bloomberg as of May 4, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes
opportunities ahead lower performance. Past performance is no guarantee of future results. Real results may vary.
The double-digit declines in 2022 created
stronger investment opportunities than the FIGURE 2: Sobering: Unprofitable Firms Have Seen an Historically Large Decline
initial economic recovery of 2020-2021.
Though off their highs, US government bond 340
yields have risen three to four percentage 290
Jan 2018 = 100
S&P 500 Info Tech

points across different points of the yield
curve (FIGURE 1). There’s been a significant 240
rotation out of speculative investments into
190
conservative, income-generating assets. All
these developments have improved our long- 140 UBS Unprofitable
term strategic asset returns estimates for the Tech Index
decade to come (FIGURE 2 and 3). 90
40
Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23
Source: Bloomberg as of April 4, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes
2
Source: S&P 500 as of June 2, 2023
3
Source: US Aggregate Bond Index as of June 2, 2023
FIGURE 3: Strategic Return Estimates (SRE) Are Higher
ASSET CLASS 2023 SRE 2022 SRE

Developed Market Equities 7.0% 3.8%
Emerging Market Equities 12.9% 8.1%
Investment Grade Fixed Income 4.6% 1.8%
High Yield Fixed Income 7.4% 2.6%
Emerging Market Fixed Income 7.8% 3.6%
Cash 3.4% 0.9%
Hedge Funds 9.1% 4.1%
Private Equity 17.6% 11.6%
Real Estate 10.6% 8.8%
Commodities 2.4% 1.5%
Source: Citi Global Wealth Investments’ data as of October 31, 2022. Strategic Return Estimates (SRE) based on indices are Citi Global Wealth
Investments’ forecast of returns over a 10-year time horizon for specific asset classes (to which the index belongs). Indices are used to proxy for each
asset class. Cash refers to the US Cash SRE. The forecast for each specific asset class is made using a proprietary methodology that is appropriate
for that asset class. Equity asset classes use a proprietary forecasting methodology based on the assumption that equity valuations revert to their
long-term trend over time. The methodology is built around specific valuation measures that require several stages of calculation. Assumptions on the
projected growth of earnings and dividends are additionally applied to calculate the SRE of the equity asset class. Hedge Fund and Private Equity SREs
are linked to equity SREs. Fixed Income asset class forecasts use a proprietary forecasting methodology that is based on current yield levels. Other
asset classes use other specific forecasting methodologies. SREs are in US dollars. SREs are generally updated on an annual basis, however they may
be updated off cycle based on market conditions or methodology adjustments. Strategic Return Estimates are no guarantee of future performance.
SREs do not reflect the deduction of client fees and expenses. Future rates of return cannot be predicted with certainty. Investments that pay higher
rates of return are often subject to higher risk and greater potential loss in an extreme scenario. The actual rate of return on investments can vary
widely. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index. All SRE information shown above
is hypothetical not the actual performance of any client account. Hypothetical information reflects the application of a model methodology and
selection of securities in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading.
FIGURE 4. How the Recovery May Unfold Across 2023 A journey unfinished
We continue to believe that the worst of the
FEDERAL RESERVE POSITIVE EMPLOYMENT reckoning is behind us. But, we aren’t at the
US RECESSION end of the bear market journey quite yet. In our
RAISES RATES TO TURNS TO NEGATIVE ECONOMY BOTTOMS
UNDERWAY
4.75-5.0% EMPLOYMENT Roadmap to Recovery (See Wealth Outlook
2023: Roadmap to Recovery) we argued there is a
likely sequence of events that will need to unfold
before we arrive at a true, sustained expansion
(FIGURE 4). In short, it is simply too early to price
in a new economic recovery while the Federal
FED HALTS RATE Reserve is still tightening monetary policy.
US DOLLAR MARKETS ANTICIPATE
INCREASES (AND So far this year, investment performance across
BEGINS TO FALL RECOVERY
EVENTUALLY CUTS)
styles and sectors has been inconsistent. Our
asset allocation has maintained a “quality
Source: Cit Global Wealth Investments’ Office of the Chief Investment Strategist as of March 31, 2023. All forecasts and expressions of opinion are income vigil.” We have retained an overweight
subject to change without notice, and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in stance on the most consistent dividend growers
an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include
any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
or companies with the strongest balance sheets
since January 2022. In the AVS Risk Level 3
Portfolio, we have remained underweight small
FIGURE 5. The Bear Market Has Claimed Victims in Smaller Companies cap equities, companies that generally are more
indebted and less able to endure macroeconomic
Equal-weighted Nasdaq 100 Nasdaq Mid-Cap growth cycles and shocks. Our overweight position on
35
bonds remains concentrated in US government
Forward 12m PE
30
issues. While our near-term returns may lag
behind episodic rallies, our positions should
hold up against any selloffs. At the same time,
25
the benefits of “playing defense” have been
diminishing. Valuations are improving in some of
20 the less defensive assets where we are currently
underweight (FIGURE 5).
15
10
'13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23
Source: Bloomberg as of May 26, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes
FIGURE 6: Correlation between Stock and Bond Returns The benefits of diversification
1.00 30% are evident again
10yr UST Yield (Inverted)
S&P 500 Return

1.50 20 After sharp yield increases, government bonds
2.00 are again providing both regular income and a
10
Yield (%)
2.50 negative correlation to risk assets (See Bonds

0 are Back Again: Where to find potential fixed
3.00
income opportunities now). These are the
-10
3.50
S&P 500 30-Day properties that allow balanced stock and bond
4.00 Rolling Total Return -20 portfolios to have higher risk adjusted returns
than individual asset classes (FIGURE 6). Thus
4.50 -30 far, performance of balanced portfolios suggests
Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23
a period of stronger longer-term returns ahead.
Source: Factset as of May 4, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only Our updated
and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower
performance. Past performance is no guarantee of future results. Real results may vary. economic forecast
We have always believed that one global shock
FIGURE 7: Money Supply Leads Inflation by 2 Full Years should not require two recessions. The supply
disruptions that came with COVID were not
CPI (Lagged 24 Months) historically unique. All global supply shocks
30 40
25 M2 Money Supply (Post 1959) — whether through wars or embargoes —
30 have destabilized consumer prices for a time
Y/Y% Change
Y/Y% Change
20 M2 Money Supply (Pre 1969)
15 20
(FIGURE 7). Policymakers arguably succeeded
in limiting long-lasting economic damage from
10
10 the initial pandemic shock. But their decision
5
to provide broad and sustained stimulus even
0 0 during the post-COVID recovery exacerbated a
-5 mismatch in supply and demand.
-10
-10
-15 -20
As the Fed eased monetary policy all through the
'25 '30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20 US growth boom of 2021, inflation surged along
with real GDP, which rose 6%. Subsequently, the
Fed chose to tighten monetary policy through
Source: Haver Analytics as of May 11, 2023.
the present economic slowdown.
We believe the full economic effects of the Fed’s FIGURE 8: US Index of Leading Economic Indicators Year-Over-Year
tightening and the retrenchment of bank lending
have not fully played out in the economy. When Recession US Leading Economic Indicators
the Fed met in May, it raised policy rates to 20%
5.125% and continued quantitative tightening 15
Y/Y% Change
(QT). This was despite the US Index of Leading 10
Economic Indicators already being down 8% 5
(FIGURE 8). 0
While the economy and Fed policy appear to -5

be on a collision course, pent-up demand and -10
momentum from the post-COVID rebound -15
have meant a stronger US economy than -20
we first anticipated in 2023. Adding to the -25
momentum has been China’s earlier-than- '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20
expected reopening plus fading war-induced
energy shocks. Taking into account all these Source: Haver Analytics as of May 11, 2023. Gray areas are US recessions. Indices are unmanaged. An investor cannot invest directly in an index. They
developments, we’ve revised our 2023 growth are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses,
fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
forecasts slightly upward (FIGURE 9 and see our
Regional Preview).
FIGURE 9: Citi Global Wealth Investments GDP Forecasts
Dragging on our 2023 and 2024 outlook,
however, are the impacts of greater-than- AS OF MAY 2023 (PREVIOUS ESTIMATES ARE IN PARENTHESIS)
expected policy tightening as the Fed confronts
“labor hoarding” by employers in the US. 2020 2021 2022 2023 2024
This suggest that the negative impact from China 2.4 7.5 3.0 5.8 (5.5)  4.5 (4.2) 
tightening has simply been pushed to a later date
US -3.4 5.7 2.0 1.0 (0.5)  1.4 (2.1) 
(FIGURE 10). Our US real GDP forecast for 2023
has been raised to 1% from 0.5%, but we have cut EU -6.3 5.4 3.6 0.8 (0.0)  1.1 
our 2024 forecast to 1.4% from 2.1%. UK -11.0 7.6 4.1 0.3 (-0.5)  1.1 
The slowest period for the US economy is Global -3.2 5.7 3.4 2.5 (2.0)  2.4 (2.4)
likely to come in either 2023 or the beginning
Source: Haver Analytics and Citi Global Wealth Investments as of May 2023. All forecasts and expressions of opinion are subject to change without
of 2024. Together, these two years are likely to notice, and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown
show below trend growth until the US economy for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales
rebuilds “slack” and US monetary policy eases. charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
For now, the US continues to reflect its major
difference in government policies pre- and
post-COVID versus China’s policy-induced
hard landing and rapidly rising unemployment
(FIGURE 11).
FIGURE 10: Falling Productivity as Employers Hoard Labor
Recession Total Hours Worked Real Output Per Hour

15% Labor input
10
Y/Y% Change
-5
-10
Labor Output
-15
'07 '09 '11 '13 '15 '17 '19 '21 '23
FIGURE 11: Contrasting Cycles – Unemployment Rates in the US and China
Recession US Unemployment Rate China Unemployment Rate

US Unemployment Rate
China Unemployment
15 7
13 6.5
Rate (%)
11
6
(%)
9
5.5
7
5 5
3 4.5
'17 '18 '19 '20 '21 '22 '23

FIGURE 12: US Multi-Family Apartments Under Construction vs Related Construction temporarily boost the US dollar. If so, we would
Employment Y/Y% see it as a stronger opportunity to add to non-
US assets for the years to come. For example,
Housing units under construction 5 or more units (SA, Thous, units, EOP)
we have already added overweights in Brazil and
1000 All employees: heavy & civil engineering construction employment (SA, Thous) 1500
emerging markets in Asia (See Currencies).
Recession
800 The situation for the US is also quite different
1300
Thousands
Thousands
from 2011 when the S&P 500 fell more than 15%
600 after a debt ceiling agreement was reached. In
1100 the period that followed, US shares recovered
400 sharply and outperformed the world during the
next decade. However, at the time of that fiscal
900 deal, the US unemployment rate exceeded
200
8.5% and the Fed’s policy rate hugged zero. US
0 700 corporate profits were still deeply depressed
'89 '92 '95 '98 '01 '04 '07 '10 '13 '16 '19 '22 from the Global Financial Crisis of 2007-2008.
Therefore, profits rose rapidly in the years that
Source: Haver Analytics as of May 22, 2023. Gray areas are US recessions. followed. Today, the Fed is still restraining the
US economy and US corporate profits are high
of rental units should significantly cool shelter but on the decline. For these reasons, we don’t
Less inflation on the horizon price inflation, a key CPI component that is still believe large cap US equities will lead global
reaching new cycle highs at mid-year 2023. equity returns in the coming few years.
We believe headline US Consumer Price Index
(CPI) inflation is set to slow to 3.5% by the end
of 2023, down from 6.5% at the end of 2022. A
further decline is likely to get close to the Fed’s More volatility to come Our future set of
2% target in 2024. Getting there will require
As we write, the US Congress has just passed a
potential opportunities
some economic pain.
suspension of the statutory debt ceiling through Last year, soaring bond yields collapsed growth
Consider how zero policy rates helped finance January 2025. This will open the floodgates stocks. This year, growth-style investing
a record number of multi-family housing to a stepped up round of borrowing as the US recovered. The gains, however, have been
construction activity since COVID struck Treasury replenishes its nearly depleted cash concentrated in the largest firms with the
(FIGURE 12). These “long cycle” apartment balance. Aside from borrowing to finance US strongest balance sheets. The S&P 500 IT sector
projects will be delivered later this year and deficits, net new Treasury bill issuance in the has returned 35% year to date while the S&P 600
all through the next. Sharply higher financing months ahead could exceed $300 billion and IT sector has returned more than 15%.
costs suggest there will be a collapse in new $1.3 trillion across all US Treasury issues by
construction and related unemployment will the end of 2023. At presently high yields, the We maintain overweight positions in long-term
follow. On the other hand, the increased supply borrowing could displace other asset classes and growth drivers such as cybersecurity and look
opportunistically at artificial intelligence and In the year to date, our position in large-cap US
renewable energy. We’re also focused on future equities has outperformed an underweight in
increases in our allocation to global small- and small caps by more than 900 basis points. We
mid-caps over large-caps as large-caps are are not yet ready to relinquish this component
already trading at 25 times trailing earnings per of our defensive posture (FIGURE 13). However,
share (EPS). By contrast, profitable US small- as “defensive” shares have become consensus
and medium-cap (SMID) shares are trading overweights - in some cases having seen
near a 30% discount to large-cap shares on substantial upward revaluation - returns are
2023 estimates. becoming more compelling for the shares left
behind, even if an investor is “early.”
Similar or even larger valuation discounts can
be found in international equity markets. The Historical data shows that only twice in the past
valuation gap is further compounded by the century has a bear market in US shares taken
strong US dollar. This should help non-US longer than two calendar years to bottom. While
markets generate enhanced returns in the we are not yet in a convincing bull market cycle,
decade to come. We’ve already shifted portfolios we expect to be further along in our investment
to address the opportunity. journey by the time of our Wealth Outlook 2024.
FIGURE 13: Small- and Mid-Cap Outperformance Tends to be Highly Concentrated in Early
Bull Markets
25% 22.1%
Performance vs. Large-Caps
20
Excess Small-Cap
15
10
5
0
-5 -0.2%
-3.1% -3.9%
-10
-15 -9.9%
1st year of 2nd year of Rest of Bear Market All Periods
Bull Market Bull Market Bull Market
Source: Haver Analytics as of May 12, 2023. Small caps proxied with Russell 2000 and large caps proxied with S&P 500. All forecasts are expressions of
opinion and are subject to change without notice and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot
invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns
do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results
may vary.
The value of strategic
1.3 asset allocation: Mitigating
portfolio risk during times
of investor stress
DAVIDE ANDALORO PAISAN LIMR ATANAMONGKOL
Senior Portfolio Manager and Head of Multi Asset Global Head of Global Asset Allocation and Quantitative
Strategy, Citi Investment Management Research, Citi Investment Management
XIN HE
Investment Quantitative Research Senior Lead,
Citi Investment Management
During times of acute market stress, a disciplined strategic asset allocation

may lead to higher risk-adjusted long-term returns by mitigating drawdowns
and volatility. Given 2022’s market downturn, the high valuation for the
US dollar and the likely growth the global economy may experience after
recessionary conditions end in the US, our strategic asset allocation
framework, Adaptive Valuation Strategies1, now forecasts higher
risk-adjusted returns over the long-term.
Using strategic asset allocation (SAA) to diversify among different asset classes may improve
investment outcomes
Citi’s proprietary SAA methodology, Adaptive Valuation Strategies (AVS), can help reduce volatility risk in
a portfolio
A long-term focus, disciplined investment framework and patience are hallmarks of a sound SAA strategy
1
Adaptive Valuation Strategies (AVS) is Citi Global Wealth Investments’ proprietary strategic asset allocation methodology. It determines the
suitable long–term mix of assets for each client’s investment portfolio. The AVS portfolio used in the analysis is the Global USD Traditional Only
risk level 3 portfolio. Risk levels are an indication of clients’ appetite for risk. An AVS L3 - Seeks modest capital appreciation and, secondly, capital
preservation. The level 3 Diversification does not guarantee a profit or ensure against a loss of principal.

Seeking better outcomes especially in turbulent times. That includes There is a belief that during times of acute
both improved returns and a better ownership market stress, the correlation for risky asset
with less investor stress experience for investors. In other words, SAA classes goes to one, while volatility rises
could potentially help mitigate portfolio risk and disproportionately. At Citi Global Wealth
Investing is stressful, especially when there are
help reduce investor stress during challenging Investments, we believe this is not a complete
contradicting trends. Investors seeking returns
market conditions. picture. Our asset allocation has historically
must put their money to work and tolerate
helped to cool down portfolios in heated
some degree of volatility in the value of their
circumstances. FIGURE 1 looks at the annualized
investments. There is no reward without some
risk, but diversification and processes designed Curbing volatility during volatility during the last three US recessions and
the associated equity bear markets: the dot-
to rebalance portfolios over time may improve stressful market conditions com bubble in 2000, the Global Financial Crisis
risk-adjusted returns.
AVS is our proprietary SAA methodology. in 2007-2008 and the COVID-19 recession in
We believe that our strategic asset allocation AVS looks forward over a 10-year horizon 2020. These figures have been computed using
methodology may deliver tangible benefits and is based on the insight that lower current daily data corresponding to the associated
to investment portfolios. By spreading risk valuations give way to higher returns over time peak-to-trough periods.
over different asset classes, SAA can lead (whereas higher valuations have generally been As shown, during the prolonged equity
to higher risk-adjusted returns over the long followed by lower returns). Our framework uses bear market of the dot-com bubble
term. In periods of acute market stress, a current asset class valuations to produce SRE. (from September 1, 2000 to October 9, 2002),
disciplined asset allocation has historically This, in turn, informs how the strategy allocates the S&P 500 recorded a volatility of 22.9% while
enabled portfolios to mitigate the incidence of to each asset class in our SAA. The assumptions our asset allocation showed a volatility of 9.6%-
drawdowns and has led to quicker recoveries. are updated on an annual basis. In 2022, we 9.7%. During the bear market associated with
witnessed a sharp valuation de-rating as the Global Financial Crisis (GFC), the volatility
We view SAA — a disciplined long-term
markets tumbled across the board. Given 2022’s for the S&P 500 was 37.3% while the volatility
portfolio strategy that involves diversifying
market downturn, the high valuation for the US for our asset allocation was less than half of that
among different asset classes and rebalancing
dollar and the likely growth the global economy at 17.1%. The COVID induced drawdown was
exposures periodically —as essential to optimize
may experience after recessionary conditions particularly short and acute, a fine example of
the process for efficiently achieving investment
end in the US, our framework forecasts higher markets in ‘panic mode’ given its intensity and
goals. Four decades of foundational investment
risk-adjusted returns over the long term. speed. The S&P 500 volatility showed 79.8%
studies2 show SAA can explain more than
90% of the variability in portfolio returns in To measure performance during stressful market while our asset allocation had 35.3% — again,
the long-term, elevating its value-add to any conditions, we compare the S&P 500 Index less than half.
investment strategy. with our AVS Risk Level 3 portfolio from our These results can have potential benefits when
proprietary AVS framework in terms of volatility, applied to investor portfolios.
While the benefits of diversification to enhance
drawdowns and recoveries.
long-term risk-adjusted returns are well known,
sticking to a disciplined investment strategy
and avoiding the temptation to “time the
market” can potentially lead to tangible benefits,
2
Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, Determinants of Portfolio Performance, Financial Analysts Journal, July/August 1986. Also see Roger G. Ibbotson, Importance of Asset Allocation, Financial
Analyst Journal, March/April 2010.
Reducing portfolio FIGURE 1: Annualized Volatility During Periods of Market Stress
drawdowns in times of stress S&P 500 AVS L3 (Net of fee) AVS L3 (Gross of fee)
Volatility is not an investor’s sole concern. It can

be very challenging to hold on to investments 22.9%
Dot-Com Bubble
when a portfolio plummets in value by 20%, 40% 9.7%
or more. Emotional investors may feel relieved by 9.6%
cutting losses and getting out of the market. But
37.3%
this can be damaging to their long-term returns. Global Financial Crisis 17.1%
Markets tend to recover before economies do
17.1%
and over longer time horizons choosing when to
get in and out of markets efficiently becomes 79.8%
nearly impossible. By diversifying portfolios and COVID-19 Recession 35.3%
rebalancing them with discipline, a strategic 35.3%
asset allocation can potentially reduce portfolio 0 10% 20 30 40 50 60 70 80 90
drawdowns and get to recovery faster –
FIGURE 2. During the dot-com bubble, the S&P Source: Citi Global Wealth Investments and Bloomberg, as of May 1, 2023. Dot-Com Bubble event looks at the annualized volume from peak date of
500 lost 47.4% of its value from the previous S&P 500 on Sep 1, 2000, to trough date on Oct 9, 2002; GFC from peak date on Oct 9, 2007, to trough date on Mar 9, 2009; COVID-19 episode from
peak date on Feb 19, 2020, to trough date on Mar 23, 2020. The figures refer to the realized volatility of the S&P 500 Index and the AVS Risk Level 3
peak, while our asset allocation recorded a more
allocation. The performance of the AVS Level 3 Portfolio was calculated on an asset class level using indexes to proxy for each asset class. Gross of fees
contained drawdown of 32.8% net of fees (25.9% returns do not reflect the deduction of advisory fees. Net performance results reflect a deduction of 2.5% annual maximum fee that can be charged
for a gross of fee). During the Global Financial in connection with advisory services that covers advisory fees and transaction costs. All performance information shown above is hypothetical not
Crisis, one of the most extreme events in the past the actual performance of any client account. Hypothetical information reflects the application of a model methodology and selection of securities in
several decades, the S&P 500 more than halved hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors
related to the equities, fixed income or commodities markets in general which cannot be, and have not been, accounted for in the preparation of
in value (-55.4%). Although our asset allocation
hypothetical performance information, all of which can affect actual performance. The returns shown above are for indexes and do not represent the
reached the prior high eight months after the result of actual trading of investable assets/securities. The asset classes used to populate the allocation model may underperform their respective
S&P 500 did, its drawdown was 15% (-41.5%) indexes and lead to lower performance than the model anticipates.
lower than the S&P.
To further test the validity of our strategic asset

allocation approach, we extended our analysis to
consider the 10 most severe selloffs in the S&P
500 since the dot-com bubble (FIGURE 3 and
4). As shown, on average our asset allocation
registered less than half the volatility of the S&P
500 and had an average drawdown rate that was
a third less.
FIGURE 2: Comparing Dot-Com Bubble, Global Financial Crisis and COVID-19 Recession Recovery Times
S&P 500 AVS L3 (Net of Fee) AVS L3 (Gross of Fee)
Number of Days to Recover: S&P 500 1,601 days vs AVS (Net of Fee) 1,418 days vs AVS (Gross of Fee) 986 days
$100
90
80
Dot-Com 70
Bubble 60
50 Market trough occurred on Oct 9, 2002 and started recovery
40
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06
Number of Days to Recover: S&P 500 1,169 days vs AVS (Net of Fee) 1,362 days vs AVS (Gross of Fee) 829 days
$100
90
Global 80
70
Financial 60
Crisis 50
Market trough occurred on Mar 9, 2009 and started recovery
40
Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12
Number of Days to Recover: S&P 500 123 days vs AVS (Net of Fee) 128 days vs AVS (Gross of Fee) 120 days
$100
90
80
COVID-19 70
Recession 60
50 Market trough occurred on Mar 23, 2020 and started recovery
40
Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20
Source: Citi Global Wealth Investments and Bloomberg, as of May 1, 2023. Dot-Com Bubble event looks at the annualized volume from peak date of S&P 500 on Sep 1, 2000, to trough date on Oct 9, 2002; GFC from peak date on Oct
9, 2007, to trough date on Mar 9, 2009; COVID-19 episode from peak date on Feb 19, 2020, to trough date on Mar 23, 2020. The performance of the AVS level 3 portfolio was calculated on an asset class level using indexes to proxy
for each asset class. Gross of fees returns do not reflect the deduction of advisory fees. Net performance results reflect a deduction of 2.5% annual maximum fee that can be charged in connection with advisory services that covers
advisory fees and transaction costs All performance information shown above is hypothetical not the actual performance of any client account. Hypothetical information reflects the application of a model methodology and selection
of securities in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixed income, or commodities markets in
general which cannot be, and have not been accounted for in the preparation of hypothetical performance information, all of which can affect actual performance. The returns shown above are for indexes and do not represent the
result of actual trading of investable assets/securities. The asset classes used to populate the allocation model may underperform their respective indexes and lead to lower performance than the model anticipates.
Long-term wealth creation FIGURE 3: Less Volatility, Drawdowns with AVS L3

S&P 500 AVS L3 (Net of fee) AVS L3 (Gross of fee)
Average Drawdown
It is generally recognized that the three key
Average Volatility
ingredients for long-term wealth creation are: 29.9% -23.4%
1. A long-term focus 13.4% -16.1%

2. Sticking to a disciplined investment
framework and avoiding the temptation 13.5% -15.2%
to time the market 0 5% 10 15 20 25 30 35 -35 -30 -20 -20 -15 -10 -5% 0
3. Patience
Source: Citi Global Wealth Investments and Bloomberg as of May 1, 2023.
In our view, all are elements of a strategic
asset allocation framework. Adhering to these
principles day after day is a good recipe for
FIGURE 4: Volatilities and Drawdowns During 10 Different Severe Selloffs
seeking long-term success. Some days may
Drawdown Dates --S&P 500 Annualized Volatility Drawdown
be more difficult than others, but a thoughtful
strategic asset allocation can help dampen panic Peak Date Trough Date S&P 500 AVS L3 AVS L3 S&P 500 AVS L3 AVS L3
when the market is most volatile, potentially (Net of Fee) (Gross of fee) (Net of Fee) (Gross of fee)
reducing the chance of irrational or emotional 2007-10-09 2009-03-09 37.3% 17.1% 17.1% -55.3% -40.7% -39.1%
investor decision-making. 2000-09-01 2002-10-09 22.9% 9.7% 9.6% -47.4% -30.7% -25.9%
2020-02-19 2020-02-23 79.8% 35.3% 35.3% -33.8% -23.1% -23.1%
2022-02-03 2022-10-12 23.7% 12.4% 12.3% -24.5% -21.9% -21.1%
2018-09-20 2018-12-24 20.5% 9.0% 9.0% -19.4% -10.1% -9.8%
2015-07-20 2016-02-11 19.0% 9.3% 9.3% -13,0% -11.1% -10.3
2000-03-24 2000-04-14 27.0% 12.5% 13.4% -11.1% -6.8% -6.2%
2018-01-26 2018-02-08 29.7% 10.4% 10.4% -10.1% -5.7% -5.7%
2012-04-02 2012-06-01 14.2% 8.2% 8.2% -9.6% -7.2% -7.2%
2020-09-02 2020-09-23 24.5% 10.7% 10.7% -9.5% -4.2% -4.2%
Average 29.9% 13.4% 13.5% -23.4% -16.1% -15.2%
Source: Citi Global Wealth Investments and Bloomberg as of May 1, 2023.
The performance of the AVS level 3 portfolio was calculated on an asset class level using indexes to proxy for each asset class. Gross of fees returns do
not reflect the deduction of advisory fees. Net performance results reflect a deduction of 2.5% annual maximum fee that can be charged in connection
with advisory services that covers advisory fees and transaction costs All performance information shown above is hypothetical not the actual
performance of any client account. Hypothetical information reflects the application of a model methodology and selection of securities in hindsight.
No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to
the equities, fixed income or commodities markets in general which cannot be, and have not been accounted for in the preparation of hypothetical
performance information, all of which can affect actual performance. The returns shown above are for indexes and do not represent the result of actual
trading of investable assets/securities. The asset classes used to populate the allocation model may underperform their respective indexes and lead to
lower performance than the model anticipates.
1.4 A guide to investing through
a slowing economy
ALFONSO CAMACHO JEFFRE Y SACKS
Global Head of Markets Distribution Client Portfolio Manager, Citi Investment Management
The choices investors make over the next six to nine months may have
profound implications for their portfolio returns over the years to come.
While we believe staying invested is always wise, the current environment
requires investors to reconsider their portfolio composition and the timing for
making allocation changes.
We are entering an economic slowdown or a mild recession, one that has been telegraphed. While we
believe the Federal Reserve will inhibit a rapid rebound, there is a huge amount of surplus cash waiting to
“buy the dip”. Investor sentiment is poor, the landscape for investing is improving. Long-term potential
growth opportunities in areas such as artificial intelligence (See Generative AI: The beginning of (another)
technological revolution) and Sustainable Energy (See Unusual investment opportunities in an atypical
energy cycle) are potent and unrelated to today’s economic challenges.
Investors should now reconsider their portfolio composition and the timing for making allocation changes,
while invested. As the year progresses, more active asset allocation should include lengthening duration in
intermediate duration corporate bonds, US municipal bonds, preferred securities, and increasing investments
in both non-US debt and equities. Looking forward to the next US recovery, there is relative value in US small-
and mid-cap (SMID) stocks and potential opportunities in tech outside of the leaders as growth recovers.
Our Global Investment Committee has allocated to bonds to capture higher yield and to hold defensive-
income oriented equities. With this Mid-Year Outlook, we are preparing for a reallocation in our portfolios.
Here are some strategies for investors to consider:

Fixed income allocations Our opportunistic overweights by industry Signals to follow

include cybersecurity and semiconductor
In the short-term, staying invested in cash equipment, defense shares among others (See We believe decision-making should be guided
or ultra short-term fixed income securities Putting national security interests ahead of by holding asset allocation within diversified
represents a risk to medium-term returns as economic cooperation: The evolution of G2 portfolios. In our multi-asset class strategies
reinvestment may occur at lower future yields. deglobalization and its implications). we seek to rotate to different types of equities
The US yield curve is inverted, with the shortest- and, ultimately, tilt portfolios toward a greater
term bonds yielding the most. exposure to equities. We do not believe that cash
Investors should consider transitioning away

Diversification of yields will be as strong a year or more from now.
from non-core cash and short duration fixed currency exposure

income investments. Higher yields may be
achieved by prioritizing the selection of quality After a decade of US dollar dominance, currency How can suitable
investment grade corporate credits. After a exposure diversification may be important for
the potential to strengthen investment returns
investors raise
substantial yield rise a compelling case for
adding to emerging market debt (US dollar- and long-term preservation of investors’ wealth. equity allocations?
denominated) is building. In addition, qualified investors may consider
diversifying portfolio exposures into non-US • Selection of equity markets and sectors
We also see potential opportunities in private dollar investments in applicable asset classes. that have lower than typical valuations
credit and other areas of illiquidity and In cases where investors have large holdings • Investments that may provide suitable
dislocation in the fixed income markets. For in less liquid US dollar assets, it is important to investors with an entry point at the
qualified investors, private credit and other consider the use of these risk management minimum price of a market over a
alternative funds may bolster medium-term strategies to possibly mitigate the impact of the pre-set period
fixed income returns. bearish US dollar trend.
• Strategies that seek downside risk
mitigation at the price of giving up
A coming reallocation Unstoppables remain potential returns
within equities • Markets that may benefit from foreign

Unstoppable trends continue as long-term
exchange movements into returns
multi-year trends that are likely to transform
Defensive positioning in equities should not
the world around us, including technological
mean staying out of the market. For now,
advances, demographic developments and
dividend growing companies may help reduce
new behaviours. Broad thematic funds seek to
portfolio volatility while also offering some
capture these potential opportunities. Based
growth and income.
on each investor’s objectives they may use
We believe that small and mid-sized firms strategies to build the exposure gradually with
in the US, and select emerging markets, are a long-term view. Currently, some of the sub-
becoming undervalued. trends such as cybersecurity and life sciences
offer good entry points.
CONTENTS
2 Currencies
currencies may drive returns 27

currencies may drive returns
STEVEN WIETING
Chief Investment Strategist and Chief Economist
A decade ago, we predicted that the US dollar would achieve far greater
value and that the US would attract more investment. That’s exactly what
happened. Now, we see the USD as having peaked. This turning point creates
a series of potential opportunities that are reflected in our updated Strategic
Return Estimates (SRE)1 for non-US assets.
The Federal Reserve’s aggressive tightening cycle and global shocks contributed to the strength of the US
dollar in 2022, which reached its second highest value in history
In the coming two years, we expect the Fed to unwind half of its tightening steps while other central banks
stay relatively steady
US dollar appreciation supported inflows into US stocks which are now trading at a historically high
valuation premium to international equities
Non-US equity returns are poised to gain from currencies when they appreciate against the US dollar
1
Strategic Return Estimates are no guarantee of future performance. Past performance is no guarantee of future returns. Strategic Return
Estimates based on indices are Citi Global Wealth Investments’ forecast of returns for specific asset classes (to which the index belongs) over
a 10-year time horizon. Indexes are used to proxy for each asset class. The forecast for each specific asset class is made using a proprietary
methodology that is appropriate for that asset class. Equity asset classes utilize a proprietary forecasting methodology based on the assumption
that equity valuations revert to their long-term trend over time. The methodology is built around specific valuation measures that require several
stages of calculation. Assumptions on the projected growth of earnings and dividends are additionally applied to calculate the SRE of the equity
asset class. Fixed Income asset class forecasts use a proprietary forecasting methodology that is based on current yield levels. Other asset
classes utilize other specific forecasting methodologies. SRE do not reflect the deduction of client fees and expenses. Past performance is
not indicative of future results. Future rates of return cannot be predicted with certainty. Investments that pay higher rates of return are often
subject to higher risk and greater potential loss in an extreme scenario. The actual rate of return on investments can vary widely. This includes
the potential loss of principal on your investment. It is not possible to invest directly in an index. All SRE information shown above is hypothetical
not the actual performance of any client account. Hypothetical information reflects the application of a model methodology and selection of
securities in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading.
thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 27

The king of currencies? FIGURE 1: Strong US Dollar and US Equities

70% 135
The US dollar is arguably the most successful US Share of Global Equity Market Cap (Left)
Real Trade-Weighted
fiat currency in history. Its widespread use as a 125
Dollar (1973=100)
Trade Weighted US Dollar (Right)
US Equity Market
60
Cap % of Global
store of value in finance and trade since World
War II has made it the “king of currencies” in 115
modern times. US dollar assets make up nearly 50
60% of the foreign reserves of the world’s central 105
banks, while 88% of the world’s trade is invoiced 40
in dollars. 95
In our Mid-Year Wealth Outlook a decade ago, 30

85
we forecasted that “major financial trends of
the past decade are reversing. Important trends 20 75
including the falling US dollar … and global ‘72 ‘77 ‘82 ‘87 ‘92 ‘97 ‘02 ‘07 ‘12 ‘17 ‘22
investor outflows from dollar-denominated
Source: Haver Analytics and Bloomberg as of April 22, 2023. All forecasts are expressions of opinion and are subject to change without notice and are
investments are at an end.” Sure enough, in
not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative
the ten years since, the US dollar soared, and purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges,
investors returned to the US with a vengeance. which would lower performance. Past performance is no guarantee of future results. Real results may vary.
Now we see another reversal at hand. We

believe the dollar is likely entering a secular bear FIGURE 2: Diverging USD-Euro Policy Rates
market, its third in the past 50 years (FIGURE 1).
Confidence, as expressed in dollar holdings
USD-EUR policy rate differential Market pricing of future rate differential EURUSD
Fed Funds (upper bound)
less ECB deposit rate (%)
worldwide, is peaking and so is the relative

valuation of US equities. 3.5 0.9
EURUSD (inverted)
3.0 1.0
The Federal Reserve did the US no favors when 2.5
it supported a huge fiscal expansion in 2021. 1.1
2.0
What followed was monetary inflation. The Fed 1.5 1.2
then sent the US dollar rising to its second- 1.0 1.3
highest historic level in 2022 by embarking on 0.5
1.4
a rapid tightening campaign that outstripped 0.0
the tightening efforts of the rest of the world’s -0.5 1.5
central banks. -1.0 1.6
10 11 12 13 14 15 16 17 18 19 20 21 22 23
Source: Haver Analytics as of May 4, 2023. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be
a guarantee of future events. Past performance is no guarantee of future results. Real results may vary.
A turning point FIGURE 3: Rapid Rate Hikes Expected to Ease

Recession
just ahead of us Fed Funds (Market Implied estimates)
Fed Funds Rate 12m diff (Left)
US Unemployment Rate 12m diff (inverted, Right)
6 -5
Ultimately, the highly cyclical US labor market
and the Fed’s mandate to support maximum -4
employment will likely undermine the dollar in 4
-3
the coming years. By the end of 2024, we expect
Percent Difference
Percent Difference
the Fed to unwind half its 2022-2023 tightening -2
2
steps while other central banks remain steady
-1
(FIGURE 2 and 3).
0 0
The larger question for US exchange rates
is “what’s in the price?” While we are 1
oversimplifying slightly, the near record high -2
2
US dollar means that there is an embedded
expectation that the US will have stronger 3
-4
real economic growth and less inflation than
4
other countries in the years ahead. The Fed’s
aggressive interest rate hikes attracted inflows -6 5
'84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
from international investors seeking yield. Those
inflows will likely slow during the upcoming Fed Source: Haver Analytics and Bloomberg as of May 2, 2023. The gray shaded areas are US recessions. All forecasts are expressions of opinion, are
easing cycle, weakening the dollar. subject to change without notice and are not intended to be a guarantee of future events. Past performance is no guarantee of future results. Real
results may vary.
The dollar’s decade-long rise helped drive US
equities toward a record 62% share of the world’s
equity market capitalization last year (FIGURE 1). FIGURE 4: Non-US Equities at a Discount to US Equities
This hasn’t come without a cost elsewhere. 1.5
Premium/Discount
Non-US equities currently hug a record low World Ex-US

World Ex -US
valuation compared to the US, nearly 40% below

to US CAPE
1 Premium/Discount to US (CAPE)
current-year earnings per share (EPS) estimates,
and nearly 30% below a 10-year average of 0.5
actual EPS (FIGURE 4). While US firms may
outgrow global peers based on their industry 0
and individual merits, such a premium valuation
-0.5
requires continued outperformance. '35 '45 '55 '65 '75 '85 '95 '05 '15
We believe that some foreign firms could Source: Factset as of April 21, 2023. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a
potentially make competitive headway against guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and
US companies and that returns from non-US do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower
equities may increase if foreign currencies performance. Past performance is no guarantee of future results. Real results may vary. The CAPE ratio is a valuation measure that uses real (EPS) over a
10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle.
appreciate against the dollar.
China and crypto aren’t Seeking returns as the Recession, recovery: A journey unfinished
and Europe: Selective opportunities amid
the catalysts for the dollar declines modest growth).
dollar’s decline The Fed’s abrupt tightening cycle and the We expect some emerging markets, including
Russian energy shock sank many currencies China and Brazil, to ease monetary policy in the
Over the decades, we’ve heard numerous
to record lows last year against the US dollar. coming year. Given the backdrop of US rate cuts
spurious predictions of the US dollar’s demise
The recent key pain point for Europe was the in the coming year, this should provide a boost
only to see it appreciate. The stories behind a
significant surge in natural gas import costs last to local markets and economies (FIGURE 5).
collapse in the dollar typically involve China.
autumn as Russian supplies were cut off. This We’ve broadened our overweight allocations in
Like most other global traders, China has no
generated a “term-of-trade shock” and a brief recent months to include a wider swath of Asian
particular interest in conducting business
economic contraction. Since then, we’ve raised equities markets. We expect to make additional
in US dollars, a currency it can’t control. The
our economic outlook and our allocation for the moves when we see the recognition of US
crypto world is another dollar naysayer, with a
depressed region with its low expectations (See economic risks more fully priced.
self-interest to promote alternative monetary
systems. More than once, crypto pundits have
pronounced the sudden end of the US dollar. FIGURE 5: China Recovery Impacts the Association of Southeast Asian Nation (ASEAN) Equities
Of course, an important story that didn’t get
much attention was the US government’s ASEAN 0.61 Regional equity
correlation to China
decision to freeze much of Russia’s more than China 0.59 Manufacturing PMI
$600 billion in foreign reserves. This alerted
US antagonists to the potential risk of holding Latam 0.58
US dollars to bolster domestic currencies. 0.52
CEEMEA
Nonetheless, central bank foreign reserve
holdings and the US dollar’s value are very lightly UK 0.40
correlated in all but long-term periods.
Germany 0.40
Yet at present valuation levels - and the already 0.39
Global
deep penetration of the US dollar in portfolios
and trade – forward-looking fundamentals Australia 0.39
simply suggest some unwinding of the US
US 0.24
dollar’s past decade of gains.
Japan 0.18
0.0 0.2 0.4 0.6 0.8
Correlation
Source: Bloomberg as of January 31, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative
purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges,
which would lower performance. Past performance is no guarantee of future results. Real results may vary. The Association of Southeast Asian Nations
(ASEAN) is a political and economic union of 10 member states in Southeast Asia.
The movements of foreign capital have FIGURE 6: US Dollar Impact in Recent History
historically been a powerful force affecting
local equity returns. The factors that drive Decade ending Annualized Real Total Returns S&P Change in Real Broad Trade Weighted
foreign investors to acquire more net US assets in December 500 (%) Dollar Index (%)
are generally the same factors that drive local
returns (FIGURE 6). This is especially true in 1970s 0.4 -13.9%
emerging markets where confidence in local
currencies is currently low and inflation is 1980s 13.8 3.4%
abating, which supports the higher relative
returns for emerging markets in our updated 1990s 28.4 8.3%
Strategic Return Estimates– (FIGURE 7 and 8). A
strong growth environment and low inflation are
2000s -0.9 -12.1%
typically positive for equities even if it hurts the
competitiveness of exporters.
2010s 11.9 17.7%
Source: Bloomberg as of April 25, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes
Understanding the strategic only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would
return estimates (SRE)1
The 2022 market decline – the largest combined FIGURE 7: Emerging Markets Equities at Discount to US Equities
falls in equities and fixed income since 1931 –
may be a reason for higher future returns across 100%
markets. This potentially is true for non-US 80
Premium/Discount
Emerging Markets
markets starting at a lower initial valuation. 60

40
to US CAPE
A second reason why USD returns can exceed

prior periods is the dollar’s likely decline. Our 20
asset class Strategic Return Estimates (SRE’s) 0
for emerging equities and fixed income suggest -20
a 12.9% and 7.8% respective potential return -40
opportunity per annum over the coming decade.
-60
-80
'92 '97 '02 '07 '12 '17 '22
Source: Factset as of April 21, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only
performance. Past performance is no guarantee of future results. Real results may vary.
FIGURE 8: Emerging Markets Sentiment Currently Low
350 MSCI EM Index MSCI EM Currency (Right) 2000
300 1800
1600
250
1995 Jan =100
Index Level
1400
200
1200
150
1000
100
800
50 600
0 400
97 00 03 06 09 12 15 18 21
Source: Bloomberg and Haver Analytics as of May 4, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for
illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales
charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
CONTENTS
3
1 Bonds are Back Again
3.1 Bonds are Back Again: Where to find potential
fixed income opportunities now 34

3.1 Bonds are Back Again:
Where to find potential
fixed income opportunities now
Bonds are back and there are numerous potential opportunities to diversify
bond portfolios, add to duration, and possibly earn higher total returns. This
is a time for portfolio action in the fixed income space.
BRUCE HARRIS S TEFAN BACKHUS
Head of Global Fixed Income Investment Strategy Head of Alternatives Strategy, Alternative Investments
Wise bond investors may have a second opportunity to diversify portfolios and achieve high levels of
income. As banks reduce lending and capital markets become less liquid, investors may be able to increase
their bond returns by changing where and how they invest
Investors can expect the high rates of returns they are earning in money market funds and Treasury bills
(T-bills) to decline meaningfully over the coming 12-24 months
To maintain current returns, longer-duration bonds and investment grade (IG) corporate or municipal
bonds may provide opportunities for income and appreciation while offsetting potential credit spread
widening during a recession
For suitable investors, market illiquidity is creating investment opportunities in hedge funds and private
credit. Skilled alternative bond managers may be abe to earn higher returns by investing in markets where
the “flight to safety” in money markets and government bonds has left high yielding credits in search
of buyers
Thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 34

Bonds are indeed back. The 2-year Treasury yield We think that the allure of high short-term rates not expect that degree of monetary easing, even
and 10-year Treasury yield are roughly the same has dampened demand for longer term fixed cuts of 250 basis points could reduce short-term
from the start of the year through May 26th, income securities. The focus on “income now” T-bill yields and make them less attractive than
though yields dipped significantly for a period ignores the fact that when unemployment rises, the current yields of longer-term bonds. This is
in the early spring. This price action evidenced inflation slows and consumer demand fades, why we believe investors should seek to rotate
Treasuries fulfilling their traditional role as a the Federal Reserve will likely begin cutting rates capital into longer duration bonds sooner rather
general “flight to quality” asset, most likely aggressively. Currently, the market is pricing than later.
due to heightened fears during the US regional future rate cuts that may bring the Fed Funds
banking crisis. Recent optimism in late May over rate to 3.5% by the end of 2024. In addition to adding duration, investors
the debt ceiling and more optimistic economic should consider adding intermediate
data brought yields back to roughly the same duration investment grade corporate bonds
or similarly rated longer duration municipal
yields as the beginning of the year, offering Thinking ahead bonds. Investment grade credit spreads offer
investors a chance to own bonds at these more
favorable higher yield levels. may be rewarding an additional 100-150 basis points of yield
depending on tenor. Higher-rated corporate
Year-to-date, the Bloomberg US Aggregate Index In each of the three recessions between 1990 bonds can offer 5% to 6% yields alongside T-bills
and the Bloomberg US Corporate Bond Index and the COVID-19 pandemic, the Fed cut interest and deposits (FIGURE 1).
have each risen by roughly 1.5%, driven largely by rates by at least 500 basis points. While we do
interest carry.
Investor demand for higher yields remains FIGURE 1: Corporate Bonds Yields Higher than 2-Year Treasury Yield
robust, especially when compared to the last
10
decade. Recent US regional banking stress US Corporate Bond (1-3yr) Yield
further reduced market expectations for rate 2yr US Treasury Yield
8
hikes, though this has partially reversed some
in recent weeks. Even high-yield bonds have
performed well, despite concerns over a possible 6
Yield (%)
future banking “credit crunch” and recession in

the US. The Bloomberg US Corporate High Yield 4
Bond Index is up 3.3% year-to-date.
2
What should we expect from bonds going
forward? The inverted yield curve points to
shallow recession and subsequent rate cuts. 0 ‘
Meanwhile, investors are enjoying the short end ‘01 ‘03 ‘05 ‘07 ‘09 ‘11 ‘13 ‘15 ‘17 ‘19 ‘21 ‘23
‘
of the yield curve with T-bills paying 5.25% for
1-year maturities and 5.3% for 3-month bills. only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. Real results may vary.
These rates are almost 150 basis points more
than longer-dated Treasury notes.
ABCs: Avoid bad credits When illiquidity more. As banks have become more risk averse,
there is potential opportunity for lead credit
Due to concerns over a possible recession and equals potential investors to provide private market strategies
the lack of capital for more highly leveraged opportunity for investors to companies, extending out maturities for
companies, we would not advocate for investing benefits including higher coupons, fees, and/or
in lower-rated high yield bonds or loans unless When credit tightens, borrowers pay higher improved collateral.
investors are knowledgeable about the credit risk yields and receive lower loan to value funding,
of these companies. providing bond and loan investors better This is why we suggest that investors with the
protection and higher returns on performing suitable investment objectives and two- to
Suitable investors who have patient capital to credit. Yields on B-rated new issue loans climbed five-year horizons consider an allocation to
deploy may find that alternative fixed income to 11.26% as of March 31, 2023 (FIGURE 2). We direct lending funds and business development
managers with stable capital pools and expertise expect that yields for complex credits in public companies (BDCs) that seek to generate higher
in security underwriting will prosper. By using markets and for private lenders may rise even total returns without taking excessive risk.
sophisticated modeling and due diligence, they
can seek to selectively provide liquidity in times
of uncertainty and limited capital availability FIGURE 2: Leveraged Loan Volume Is Down but New Issue Yields are Up
from capital markets and banks.
$1,000 12%
Leveraged Loan Volume B-Rated New Issue Yields
800 10
Spotlight on private credit
8
600
Yields
In marked contrast to the flood of money into
Billions
6
T-bills and money market funds, the opposite
400
has been true for leveraged loans and high yield 4
bonds. Three consecutive and sizable major bank
200 2
failures caused new loan issuance to plummet.
Seventy percent of leveraged loans issuances 0 0

in 2022 occurred in the first half of the year. In 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
the third quarter of 2022, syndicated loans got Q1
hung up on bank balance sheets, leading sellers
to deeply discount the loans they wanted to sell,
with pricing in the low 90s relative to par in many Source: LCD as of March 31, 2023 Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only
cases. Now liquidity has dried up. In the first and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower
quarter of 2023, just $69.9B of leveraged loans
were issued, the lowest quarterly amount since
the fourth quarter of 2014 (FIGURE 2).
Our views In the alternatives space, suitable investors

can choose from diversified credit hedge funds,
Potential opportunities to earn two or even private BDCs, distressed credit hedge funds
three times the rate of government securities and opportunistic private credit funds to seek
by lending to fundamentally sound companies opportunities for their portfolios. Each of these
at attractive valuations are unusual and often strategies seeks to take advantage of volatility
fleeting. As markets contemplate a recession and dislocations created from the uncertainty of
of unknown length and severity — and as capital market access. With flexible capital, they
banks preserve capital amidst deposit balance are patient and step in as a liquidity provider in
uncertainty — skilled bond managers may take order to take advantage of credit opportunities.
advantage of market dislocations.
A decline in bank lending, lower passive

investment flows and slowing collateralized
loan obligation (CLO) issuance are symptoms
of concerns with future corporate profits. But
that concern seems overblown relative to prior
recessionary periods.
CONTENTS
4 A sequence of
equity opportunities
4.1 Finding value beyond narrow leadership 39

4.1 Finding value beyond
narrow leadership
JOSEPH FIORICA
Head of Global Equity Investment Strategy
A highly concentrated US tech rally this year masks the value still present
in global equities following the 2022 bear market. Economic and profits
growth should bottom in the next few quarters, presenting an opportunity
to diversify portfolios into non-US shares, profitable small firms,
and still-depressed growth stocks.
Of the $4 trillion in global market cap created so far this year, 89% can be attributed to just 10 companies1
While US large caps look expensive relative to prevailing interest rates, we see value in non-US equities
and profitable small and mid-sized companies
While we don’t expect global equities to simply surge higher in the year ahead, we see both cyclical and
structural tailwinds for non-US shares in the next market cycle
Global dividend growth is another tactical overweight that has seen smaller drawdowns since the bear
market began in 2022. While dividend growers tend to lag in early cycle recoveries, we still believe this
strategy has a permanent place in core portfolios given their track record of long-term outperformance
1
Proxied using MSCI AC World Index as of May 31, 2023

Through May, global equities have already decade or so, it is not a law of nature. In fact, the past decade. Growth in the major trends
matched a typical year’s annual return, up 7% for much of the last 100 years US equities have of the 2010s like social media, e-commerce,
year-to-date. But under the hood, the rally has traded much closer to parity and sometimes cloud computing, and smart phones were all
been far from broad-based.1 Of the $4 trillion even at a discount to their global peers (FIGURE dominated by US tech giants. But in the next
in global market cap created so far this year, 7: Emerging Markets Equities at Discount to US decade, unstopable trends like global aging,
89% can be attributed to just 10 companies, Equities in Currencies). Over the past 15 years, electrification & decarbonization, and a rising
mostly US mega-cap tech names (there are however, US equities have gradually richened Asian middle class may benefit more than just
2,880 companies in the MSCI AC World Index). relative to international shares as America’s US firms. Pharmaceuticals, brands servicing
While these market cap-weighted indices have tech dominance offered investors a highly emerging markets consumers, and clean energy
delivered solid gains, the average return across coveted segment of growth in an otherwise leaders can be found across the global equity
S&P 500 constituents is closer to flat. US small muted global growth environment. While global landscape. Investing with a US bias risks missing
caps have also missed out on the rally. equities are unlikly to simply surge higher in the out on a key subset of these potential winners.
year ahead, we see both cyclical and structural
For many on the sidelines, the decision to tailwinds for non-US shares in the expansion
buy equities or continue to sit in cash feels a
lot harder. But the choice of whether to own
that will eventually follow the present period of Capturing improving value
economic uncertainty.
the S&P 500 at 19x expected earnings or US outside of mega-caps
T-bills at a 5% yield is an overly simplistic way As we discussed in As US dollar dominance
of looking at the investment landscape. The ends, currencies may drive returns, an eventual Aggressive monetary and fiscal stimulus
global equity universe today presents us with unwind of aggressive Fed tightening should take during the pandemic was aimed at supporting
plenty of compelling opportunities at reasonable some steam out of the US dollar’s rally vs major businesses facing existential risks from the
valuations. Our Global Investment Committee currencies. As US interest rates fall, investors stay-at-home economy. This support helped
recently added to shares in Asia, Europe, and who flocked to higher-yielding US assets and smaller, riskier firms outperform the giants in the
Latin America which in aggregate trade at a 30% high-quality US equities may need to look year following the 2020 COVID lows. But the side
discount to the S&P 500. And given very top- elsewhere in the world to find better value. effects of that stimulus – surging inflation and
heavy performance in the US, value is starting to sharply rising borrowing costs – have benefited
emerge in profitable small- and mid-cap stocks Meanwhile, meaningful corporate governance large firms with scale and pricing power.
as an additional alternative to expensive US reforms in Japan and Europe also look Meanwhile smaller firms have lagged, giving up
large caps. promising. Japanese financial authorities are all of their post-COVID era gains.
actively incentivizing companies to return more
cash to shareholders, catching the attention Small- and mid-cap stocks’ (SMID) tepid
of some of the world’s largest investors. In performance over the past two years means that
Will the next cycle be Europe, conglomerates have been spinning off valuations have improved, with profitable small
different for non-US stocks? businesses at a premium while simplifying their cap names now trading at a 26% discount to
structures. Buybacks and M&A have also picked larger peers. While large cap growth in particular
A common misconception among US-biased up this year. has rallied in 2023, fast-growing small firms
investors is that US stocks always have and remain in the doldrums (FIGURE 1). Market
always will trade at a premium to shares abroad. Lastly, long-term thematic trends can also expectations for a Fed pivot should change this
While this has certainly been true for the last explain US equity market dominance over paradigm, enabling a catch-up in small-cap
growth shares, led by non-cyclical health care Given this uncertainty on the interest rate front, What to do with
and technology firms. our preferred way to play the SMID space is
through an up-in-quality approach. Profitable expensive defensives
Small-cap value benchmarks are closely tied to small firms are more likely to survive a period
performance of regional banks. It is hard to be Hiding out in value and defensive sectors was
where capital costs remain elevated than those
sure the cascade of small bank failures is behind a winning playbook in 2022. Dividend growth
that rely on access to debt or equity markets
us, while further consolidation is likely, but shares outperformed the broad market by 12%,
to sustain growth. This is a segment of the
broad regional bank shares should recover once while sectors like energy, pharmaceuticals,
equity market where active management can
economic conditions stabilize. Regional banks staples and utilities delivered positive
add real value by hunting for under-the-radar
play a key role in the US economy, facilitating and performance as growth shares plunged. This
opportunities while avoiding value traps at risk of
underwriting loans to small businesses in local ongoing macro uncertainty has led many
stagnation or bankruptcy.
markets where large banks are not players. From investors – including us – to hoard stability
a valuation perspective, regional banks have only in portfolios.
been cheaper on a price to tangible book basis
during the depths of COVID and during the Great
FIGURE 1: Large Cap (Nasdaq) vs Mid Cap Growth Valuations
Financial Crisis. While it may be premature to
add in a tactical window, quality small cap value
35
shares look compelling at current levels with a
multi-year time horizon.
Forward 12m PE
30
25 Nasdaq
With capital costs still high,
stick to profitable small caps 20
While the value proposition in small-cap shares

is apparent, moving down in cap does not come 15 Mid Cap growth
without taking on some additional risk. When
the Global Investment Committee moved 10
SMID to overweight in April 2020, economic '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23
and pandemic-related conditions were still
Source: Bloomberg as of June 1, 2023. Mid cap growth proxied using S&P 400 Growth Index. Indices are unmanaged. An investor cannot invest directly
highly uncertain but policy was unambiguously
in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include
supportive. Investors unfortunately don’t enjoy any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results.
those same tailwinds today, with the Federal Real results may vary.
Reserve still yet to signal a shift towards easing
and US fiscal deficits more likely to contract than
expand in coming years. The longer interest rates
stay high, the greater refinancing risk will be for
small, more highly levered companies.
As economic and profits growth bottoms in

the next few quarters, this year may mark the
twilight of the defensive trade. The Global
Investment Committee already trimmed our
overweight to global pharmaceuticals after
23% outperformance vs global equities since
mid-2021. US large cap value shares are now
trading at valuations 21% above their average
since 1995. But not all defensives were spared
last year. Faster-growing health care segments
like biotech and life sciences were hit by rising
capital costs, but their underlying business
models should be relatively uncorrelated to the
economic cycle. The earnings of cyber security
specialists remain resilient and will likely be a
key secondary beneficiary from the buildout of
AI, as discussed in Generative AI: The beginning
of (another) technological revolution, Global
dividend growth is another tactical overweight
that has seen smaller drawdowns since the
bear market began in 2022. While dividend
growers tend to lag in early cycle recoveries,
this strategy should have a permanent place
in core portfolios given its track record of
long-term outperformance.
CONTENTS
5
1 Overview
Unstoppable Trends
1.1
5.1 Putting
From thenational
desk ofsecurity
the CIO:interests
The bumpyahead
roadofto recovery XX
economic cooperation: The evolution of G2
1.2 deglobalization and its
Recession, recovery: Animplications
unfinished journey 44
XX
5.2
1.3 Unusual investment
As a decade of dollaropportunities
dominance ends, how
in
currencies willenergy
an atypical cycle returns
drive future 50
XX
5.3
1.4 Generative AI: The beginning
A guide to investing through aofslowing economy XX
(another) technological revolution 57
5.1 Putting national security
interests ahead of economic
cooperation: The evolution
of G2 deglobalization and its
implications
LIGANG LIU KEN PENG
Head of Asia Pacific Investment Economic Analysis Head of Asia Pacific Investment Strategy
KERRY WHITE
Head of North America, Citi Investment Management
As economic competition between China and the US intensifies, technology

has become the primary focus. Separating the development, use and
distribution of technology by the world’s two largest economies will create
new risks and potential opportunities for investors.
The US and other western nations are prioritizing national security over economic cooperation with China
US and Japanese investments in China have declined and many US businesses are looking to diversify
operations, creating potential opportunites for reshoring or nearshoring, especially in robotics and
artificial intelligence (AI)
US neighbors such as Mexico stand to benefit from nearshoring

A recent shift in US-China relations has in its own technology infrastructure to a much comprehensive, targeted and systematic
far-reaching implications for businesses larger degree than it contemplated just five years approach to protect “vital US interests.” In
and investors. ago. Such actions are “inefficient” in that costs short, the focus on ring-fencing access to
for both China and the West will rise, and the advanced technologies represents a new type of
Western countries are adopting a unified benefits of globalization will fade. deglobalization against a “strategic rival.”
strategy to address China’s growing global
aspirations and economic might. Their approach
puts national security goals ahead of economic
efficiency, a major departure from what most of
Growing tensions Declining investment in China
the western hemisphere seemed to believe, as Even before Sullivan’s statements, investors The sharp acceleration of this US policy is already
their economies evolved after World World II. believed the US had sought trade, technology, impacting the willingness of multinational
and economic decoupling with China. During the companies to expand or initiate new investments
In a speech at the Brookings Institution this
Trump Administration, most Chinese exports in China. Surveys from the American Chamber of
past April, President Biden’s National Security
to the US were subject to 25% trade tariffs and Commerce in China and the JETRO, a Japanese
Advisor, Jake Sullivan, stated that the US
many Chinese technology companies were put government agency to promote international
is focused on “de-risking and diversifying,
on lists that barred firms from accessing US trade and investment12, show that only 45% of
not decoupling” from China. As part of this
technology and doing business in the US without US firms intend to expand operations in China,
approach, Sullivan said the US is following
explicit permission. down from 54% in 2017. Just 33% of Japanese
a “small yard, high fence” approach to guard
firms said they intend to expand in China, down
advanced US technology against leaks to China Since taking office, President Biden has left from 48% in 2017 (FIGURE 1).
and working to build a secure supply chain with the tariffs unchanged and further expanded
friendly nations. EU leaders expressed a similar the scope of the Trump-era policies to further Interestingly, European Union (EU)
approach in their dealings with China.1 limit US companies from selling a wider multinationals are heading in the other direction,
range of technologies to even more Chinese with 62% intending to expand operations in
Sullivan’s speech was significant because it
companies without a special license. This China, up from 51% in 2017. More US firms have
signaled that the US sees limits on the transfer
comes after severely restricting the use of also reported an intention to move out of China,
of technology and innovation to China as a
Chinese components in good produced by with 21% saying they intend to move in 2022,
means to increase its security. Technology is not
Western companies. up from 11% in 2017. Japanese firms didn’t show
a “small yard” when it comes to value-added
the same inclination to leave, while EU firms
products. This means more goods will need to be Compared to the Trump Administration, which are signaling an intention to stay, with just 21%
developed, designed and distributed away from effectively started a trade war with China, saying they intend to leave, down from 28%
China. And in response, China will need to invest the Biden Administration has taken a more in 2017.
1
Remarks by National Security Advisor Jake Sullivan on Renewing American Economic Leadership at the Brookings Institution. April 27, 2023
2
AmCham 2023 China Business Climate Survey Report includes approximately 400 survey participants, 2022 JETRO Survey on Business Conditions of Japanese Companies in Asia and Oceania includdes
approximately 700 survey participants
FIGURE 1: Shifting Investment Intentions in China Decelerating exports to China

Expansion Remaining the same Reduction Withdrawal/Relocation
The “small yard, high fence” policy has already
100 2 1 1
7 12 12 6 5 5 11 greatly impacted semiconductor makers. For US
4 12 15
global semiconductor makers, which collectively
By Percentage
80 12 9 16 6 10
represent 54% of global semiconductor
35 44 51 23 17
60 production, the new regulations mean less
60 29 34 21
business with China in the near term (FIGURE 2).
US companies are withdrawing US personnel
40
from their operations in China and are expected
54 56 62
47 45 48 43 51 to move specific equipment and assembly
20
33 operations to the US, Europe and elsewhere. The
short-term impact is already showing up in the
0
'17 '19 '22 '17 '19 '22 '17 '19 '22 drop in exports to China. Among the key global
US Japan EU semiconductor producers, Chinese imports
from the US dropped by a staggering 40%
Source: AmCham China, JETRO, European Chamber and Citi Global Wealth Investments, as of May 11, 2023. Note: The Japan data comes from the JETRO
survey asking about companies’ intention to expand business. The data for the EU comes from a survey from the European Chamber while the US data
year-over-year (YoY) in 2023 — the sharpest
comes from a survey from AmCham China. The categories of ‘Remaining the same’ and ‘Reduction’ for US and EU firms are based on estimates based on decline of any prior period (FIGURE 3). Despite
two survey questions about expansion plans and de-investment plans. the drop, we believe the potential for long-term
growth prospects in semiconductors will more
than make up for the loss of sales to China (see
FIGURE 2: Market Share of the Global Semiconductor Sector
Generative AI: The beginning of (another)
80% technological revolution).
IDM Share Fabless Share Total IC Share
60 54%
40
22%
20
9% 6% 6% 4%
0
US South Taiwan Europe Japan China
Korea
Source: IC Insights, Citi GPS, as of Oct 2022. Chart shows countries’ market share in key semiconductor subsectors: integrated device manufacturers
(IDM), which design and manufacture semiconductors in-house and fabless shares, which design semiconductors but contract out the manufacturing.
Total IC share shows countries’ total market share in integrated circuits (IC), also known as semiconductors or chips.
FIGURE 3: Chinese Imports of Semiconductors from the US and the Rest of the World of the development and investment of these
technologies. CHIPS & Science, for example,
Taiwan Korean Japan US directs $280 billion in spending over the next
40 10 years across R&D, manufacturing, workforce
30 development and tax credits.
20
As companies look to replicate advanced
10 technologies in North America, the need for
%YoY
0 robotics and AI technology expands, given that

-10 higher labor costs are inevitable with onshoring.
-20
US neighbors like Mexico also stand to possibly
-30
benefit from nearshoring. The 2020 passage
-40 of United States-Mexico-Canada Agreement
-50 (USMCA) as well as US policy preferences such
'17 '18 '19 '20 '21 '22 YTD2023
as the North American final assembly, all tilt
Source: Korean International Trade Association (KITA), as of May 2023. Note: YTD2023 includes Jan-Apr 2023. the playing field in favor of Mexico and Canada.
Indeed, Mexico is capturing an increasing share
of total US trade (FIGURE 4). Logistics and
building of Chinese investment portfolios, now
What should and in the future.
transportation companies can be attractive
investments, as are sectors that benefit from
investors consider? the rise of the Mexican consumer. Financial
The Biden Administration’s new industrial
The evolving relationship between the West and policies directly impact strategically critical institutions may also do well as more people in
China will cause costs to rise. sectors like supply-chain technology, smart Mexico enter the formal economy.
manufacturing, semiconductor, biotech, green
Shifting G2 tech policies will have significant energy, space communications, aerospace
repercussions for corporate research & technologies and new materials. US companies
development (R&D) spend in China and the US, moving operations away from China will create
opening up potential new opportunities for new reshoring or “friend shoring” opportunities.
investors. China has seen restricted technology Technologies such as robotics and AI and
firms rise in market value, just as Western industries that secure critical natural resources
suppliers have seen their share prices rally. While allow for greater onshoring and nearshoring.
CIG are presently overweight China due to its Recent legislation – the Inflation Reduction Act,
rapidly improving macroeconomics, the slowing the Infrastructure and Investment Jobs Act and
global economy and realignment of the West’s the CHIPS & Science Act – are all supportive
priorities will require even more selectivity in the
FIGURE 4: US-Mexico Trade Will Continue to Increase

US trade with Mexico as a share of total trade
18%
Share of total Trade
16
14
12
10
8
6
4
2
0
75 80 85 90 95 00 05 10 15 20
Source: Haver Analytics as of May 2023.
Cybersecurity is another high-quality subsector companies with existing demand from the US
that may benefit from larger defense budgets. and its allies, such as Germany and members
We look for companies that are focused on of NATO.
the privileged access management space and
those specializing in the proactive identification Even if the balance of power oscillates in the
of cyber threats and marketing corporations. White House or chambers of Congress, the
Demand for these services is expected to stay stance of more protectionist trade will be
strong as chief information officers make cyber steady. We are intent on seeking to identify the
defense a bigger priority (FIGURE 5). industries that may benefit from the inevitable
“high fence” the US will put up to keep others out
Both defense and cybersecurity both stand in this increasingly polarized G2 world.
to potentially benefit from the long-term
repercussions of a G2 polarization as the US and
its allies dedicate more resources to national
security. Before the Ukrainian/Russian conflict,
investments in defense were focused on drones
and advanced communications, but now
countries are spending more on aerospace and
defense. We look for companies that are part
of the defense supply chain, such as makers of
instrumentation and digital imaging, as well as
FIGURE 5: Top CIO Priorities

80
Mar-23 Dec-22 Sep-22 Jun-22 Mar-22 Dec-21 Sep-21
70
60
50
40
30
20
10%
-10%
-20
Digital Robotics / Adoption of Customer-facing Platform as a Financial Cloud Productivity Transactional
Cybersecurity Data analytics /
transformation automation public, private, or application service and software communications application databases
business
projects hybrid IaaS development / development applications (UCaaS, Contact refresh,
intelligence /
solutions deployment tools (ERP, supply Center, or CPaaS) development, or
data warehouse
(including SaaS) chain, accounting deployment
procurement) (Office, email,
collaboration,
chat, etc...)
2023 Citigroup Inc. No redistribution without Citigroup written permission.

Source: Citi Research. Net result of responses to the following two questions: Since the beginning of the year, which three indicatives have g=become a higher investment priority? Since the beginning of the year, which three
initiatives have become a lower investment priority?
5.2 Unusual investment
opportunities in an atypical
energy cycle
S TEVEN WIETING MALCOLM SPIT TLER
Chief Investment Strategist and Chief Economist Global Investment Strategist and Senior US Economist
MAYA ISSA JUDIYAH AMIRTHANATHAR
Senior Global Investment Strategist Europe, Middle East and Africa Investment Strategist
World events and the rise of renewable energy are reshaping the energy
landscape. The players leading the charge include major traditional energy
companies and energy producing nations that see the green transition as
inevitable and profitable. Capital scarcity favors leading firms with strong
capital positions.
OPEC’s early cuts to output suggests a different market outlook for energy equity and credit investors
The US and other countries are rebuilding energy stockpiles after the war in Ukraine disrupted supply.
Ongoing geopolitical conflicts highlight the important role of non-OPEC oil producers like Brazil, as well as
renewable energy
European energy companies have been trading at a 40% discount to US counterparts, but have been
investing heavily in improvements that could pay off in the near future, potentially narrowing that
valuation gap
We expect to see consolidation in the renewable energy sector

An unusual energy cycle is upon us. While the FIGURE 1: LNG Prices Surge
global price of oil has fallen 15% since April 12th
20231, there is no sign a recession at western US Field Production
energy firms. In the US, crude oil output is of Crude Oil (RHS) 400
moving toward record highs. To help replace 300
Billion Cubic Feet
Barrels (Millions)
Russian gas supplies to Europe, US liquified 300
natural gas (LNG) exports surged 45% above
their pre-COVID level (FIGURE 1). At the same 200
200
time, OPEC reduced output by about 3%
through cuts announced in October 2022 and US Liquefied Natural
April 2023.1 100 Gas Exports (LHS) 100
Under normal circumstances, OPEC cuts

production as demand falls (FIGURE 2). That’s 0 0
not the case just yet. This time around, OPEC is '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22
attempting to maintain higher prices in the face
of future demand reduction, maximizing the Source: Haver Analytics as of May 3, 2023. Grey areas note US recessions.
market price per barrel.
This is not welcome news for those counting FIGURE 2: OPEC Cut Production Before a Dip in Demand
on lower energy prices, but it does suggest that
OPEC Crude Oil Production (B/D) World Oil Demand (B/D)
energy credit and equity investors can view the
sector somewhat differently from the typical 20
boom and bust norms associated with prior 15
Y/Y% Change
economic downturns (FIGURE 3). 10

5
We are not forecasting a “new supercycle” for 0
the oil industry as suggested by other firms. Citi -5
Research’s renowned commodities team has -10
been more cautious than many in assessing risks -15
to commodities prices. Increases to petroleum -20
and gas supplies typically lag behind demand -25
recovery. History shows that higher prices will, -30
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22
over time, cause supplies to increase, forcing a
new equilibrium to be established. This time, the
Source: Haver Analytics as of May 3, 2023. Grey areas note US recessions.
new supplies will include even faster adoption of
alternative energy sources.
1
Reuters, OPEC+ announces surprise oil output cuts, April 2, 2023, https://www.reuters.com/business/energy/sarabia-other-opec-producers-announce-voluntary-oil-output-cuts-2023-04-02/
FIGURE 3: Volatile Energy Sector Equities* That said, capital inflows to conventional,
carbon-based energy have returned. The
Sector Peak to Trough Percent change world still relies on six million barrels per day
Healthcare 7.7 of Russian crude oil exports, even if many
western economies refuse to buy from them.
Consumer Staples 4.9 Since the beginning of the war in Ukraine, the
Utilities -13.2 amount of oil in the US Strategic Petroleum
Reserve has declined 38% from end-2021 levels.
Telecom Services -27.4 The US is also buying oil again to build up the
IT -32.3 stockpile. This need to hold and maintain energy
stockpiles, be it oil and gas or renewables,
Industrials -42.8
distinguishes the energy sector from other
Consumer Discretionary -50.7 cyclical industries (FIGURE 4).
Materials -58.3 As a generally fungible commodity, crude oil
Financials -71.4 trade has been redirected around the world,
but the global oil price would be much higher
Energy -113.9
without Russian crude exports to willing buyers.
Source: Haver Analytics as of May 3, 2023. The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative Geopolitical conflicts have and will continue to
purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, cause price spikes. Continued conflict in Ukraine
which would lower performance. Past performance is no guarantee of future results. and the need for the US and other countries to
*L ast four periods of US Recession dates based on official National Bureau of Economic Research (NBER) calculations: Jul 1990.(Q3) - Mar 1991.(Q1), rebuild energy stockpiles raises the investment
Mar 2001.(Q1) - Nov 2001.(Q4), Dec 2007.(Q4) - Jun.2009 (Q2) and Feb 2020.(Q4) - Apr 2020 (Q2) along with near-term peaks and troughs in EPS and development prospects for non-OPEC
associated with each of these four recessionary periods for each sector listed. producers like Brazil (FIGURE 7). It also creates
sustained opportunities for the renewable
FIGURE 4: Energy Sector Earnings Outpace Sector Market Cap energy sector.
30% Energy Share of Earnings

Global energy companies
% of S&P 500
25
20 invest in the future
15 Energy Mkt Cap Share Between geopolitical tensions affecting energy
10 supplies and the rise of renewable energy, the
energy industry is going through a sea change.
5
Companies are jockeying to maintain dominance
0 in the shifting landscape. They are also mindful
-5 of the need to be capital efficient and invest
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 more prudently.
Source: Bloomberg as of May 2, 2023. The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative
which would lower performance. Past performance is no guarantee of future results.
FIGURE 5: MSCI Brazil Equity Index vs CRB Commodity Index For the past 20 years, European energy
companies have been trading at a discount
105 500
to their US energy counterparts (FIGURE 6).
95 CRB Commodity 450 After reaching lows in 2021, European energy
85 Index (Right) 400 valuations have rallied a bit but remain at a 40%
discount to US energy firms. This valuation
Index Level
75
350
Index Level
65 difference is unjustified as European and US
300 energy companies are similar in many ways.
55
250 Part of the valuation discount could be due
45 to general European companies falling out of
35 200 favor with investors. We see this as an arbitrage
25 150 opportunity favoring investment in non-US
MSCI Brazil Equity Indext (Left) firms, a strategy that is consistent with our view
15 100
Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20 Sep-22 that the US dollar has peaked.
Source: Bloomberg as of June 5, 2023 . Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes
Green is the new brown
The European energy companies have been
FIGURE 6: European Energy Shares Trade at a Discount to US Peers leaders in making structural changes to
strengthen balance sheets to deploy capital on
Fwd P/E Premium / Discount
long-term projects, including a focus on a green

40% energy transition. We believe these changes
European Energy Premium/Discount to US Energy
will make EU energy companies more valuable,
20 boosting earnings and share prices.
0
-20
-40
-60
-80
-100
'03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23
Source: Factset as of May 15, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only
FIGURE 7: Saudi Market vs Crude Oil The Middle East is

15,000 110 leaning green, too
14,000 100
13,000 Meanwhile, growing geopolitical tensions and
Saudi Tadawul All Share Index LHS 90
Index Level
12,000 changing market dynamics have prompted some
$/Barrel
11,000 80 Middle Eastern countries, particularly Saudi
10,000 70 Arabia and the United Arab Emirates (UAE), to
9,000 60 invest heavily in renewable energy sources to
8,000 prepare for an eventual shift in the global energy
Brent $/barrel (RHS) 50
7,000 landscape (See Middle East Strategy). These
6,000 40 investments have taken various forms, including
5,000 30 the development of large-scale solar and green
2017 2018 2019 2020 2021 2022 2023 hydrogen projects and the construction of
refineries focused on producing petrochemicals
Source: Bloomberg as of May 31, 2023 . The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative
instead of traditional transportation fuels.
which would lower performance. Past performance is no guarantee of future results.
The shift by Middle Eastern countries toward
renewable energy sources has been driven by
FIGURE 8: Investment in Renewable Energy vs Fossil Fuels concerns over stranded assets and the growing
global focus on energy transition, as well as
1200 the favorable economics of solar power in the
Renewable energy Electrified transport
Billions of USD
sun-drenched region.
1000 Other Renewals Fossil Fuels
At the same time, Saudi Arabia and the UAE
800 continue to expand their oil production capacity,
reflecting their belief that oil demand will not
600 decline as quickly as some expect. This has led to
a delicate balancing act, as these countries seek
400
to capitalize on their vast, low-cost oil reserves
while also preparing for a future in which
200
fossil fuels play a diminishing role in the global
0 energy mix.
2018 2019 2020 2021 2022
Source: Bloomberg New Energy Finance as of May 2023. Chart shows how investment in renewables compares to investment in fossil fuels and
electrified transport.
Competition between Consolidation will accelerate strong execution capabilities. It’s likely the clean
technology (cleantech) sector will end up bigger,
renewables and carbon the adoption of renewables though with fewer firms.
energy is intensifying Renewable energy is becoming more
economically attractive as the price continues
The global transition to greener energy sources
to decline and demand increases. Even in the What should investors
presents a significant challenge for Middle
Eastern hydrocarbon exporters, which are
relatively energy-rich US, electric heat pump do now?
installations are growing rapidly, and electric
heavily dependent on revenues from fossil fuel Investors should consider investing in firms
passenger vehicle sales grew by 65%, compared
extraction. The need for large-scale investment that are cash flow positive and well financed.
with a 14% decline for those with internal
in renewable energy infrastructure, coupled As access to capital is currently constrained,
combustion engines. OPEC’s production cut
with the growing vulnerability of their existing companies with capital can more rapidly develop
means that energy prices will likely remain higher
business models, has led some observers to and dominate their respective markets.
than in previous downturns.
question whether the energy transition could
provide the impetus for improved trade and Relatively high oil prices will impact the Battery, metals, and oil & gas companies that
reform within the region. renewable energy sector unevenly. Established are slowly evolving their business models in a
energy firms that already have substantial diversified manner may be safer than startups
The United Arab Emirates and Saudi Arabia’s at this stage in the economic cycle. Startups are
revenue will have the opportunity to gain market
ambitious renewable energy targets, such as the typically more reliant on government policies
share and acquire valuable human and patent
former’s aim to achieve 30% renewable energy that focus on grants instead of consumption
resources from firms less well-positioned to
by 2030 and the latter’s goal of 50% by the same stimulus. But as the green energy industry
weather the coming downturn.
year, signal a growing awareness of the need matures, government funds are shifting from
for change. By investing in renewable energy We see conditions for a round of consolidation research to consumption stimulus. Larger
projects and infrastructure, these countries in the renewable energy sector, much like we’ve electric vehicle companies are focusing on
are securing their own energy futures and seen with railroads and oil at the beginning of vertical integration, which could lead to some
contributing to the global push toward a cleaner, the 20th century and again in the tech sector at consolidation. As battery companies try to
more sustainable energy mix. the beginning of the 2000s. We view this sort of secure mineral supply, some startups may fail,
creative destruction as a feature, not a negative, and their assets will get sold off. For better or
As the world continues to grapple with the
that is likely to help accelerate the green worse, in this cycle the winners will be able to
challenges posed by climate change and the
energy transition. compound their returns.
need for a more sustainable energy future,
the actions of OPEC+ and major oil-producing For investors, selectivity will be key. Businesses Large companies are facing meaningful
nations will play a crucial role in shaping the with a valuable product or intellectual property challenges, such as carbon taxes. Firms that
trajectory of the global energy market. asset but no good way of executing on it may be can either generate offsets or reduce carbon
absorbed by entities with access to capital and emissions create more value. For example, a tax
refund on an electric vehicle will benefit larger

companies selling more vehicles, while smaller
companies will be less able to capture as large a
share of government spending.
Like 1998, this is a moment of consolidation

and strategic decision making that will decide
winners and losers over the coming decade and
beyond. Ultimately, we see a stronger, growing,
and developing energy industry, one where old
and new energy will evolve toward a different
mix that will ultimately benefit society. We
believe this is a historically important moment
for cleantech — many of the winners of the next
few decades will be decided. Therefore, it is
particularly important for investors to focus on
cleantech companies that are consolidating and
gathering strength. Investors can also add to
leading energy firms whose cash flow, efficiency
and focused strategic execution will allow them
to seek distressed opportunities and attract
more capital for sustained growth.
5.3 Generative AI: The beginning
of (another) technological
revolution
DAVID BAILIN JOSEPH FIORICA
Chief Investment Officer Head of Global Equity Investment Strategy
WIETSE NIJENHUIS
Senior Portfolio Manager, Citi Investment Management
We are likely witnessing the birth of a technology as significant as the internet

itself. The growing demand for generative AI will have ripple effects across
industries, with winners and losers emerging over time.
The expected growth in AI suggests investment opportunities for companies that facilitate its
infrastructure, such as hardware manufacturers and cloud computing vendors
AI will drive enormous productivity gains and incremental economic growth as it is adopted
As a new industry, there are risks related to regulation, data privacy and cybersecurity
Thematic Updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 57

The internet, Wall Street and just about every engineers trained models using 570GB of books, that worries educators that want to see
manager in every business have been buzzing webtext and articles from across the internet. students produce original work. AI will help
about AI chatbots since a wave of new launches humans with increasingly intensive tasks and
began in November 2022. It took just five days Whereas machine learning could identify generate new content or ideas. The quality
for a popular AI chatbot to reach 1 million users, pictures of animals or patterns from data, of the models can produce outputs that
compared to 10 months for another popular generative AI can generate images of animals are, in certain cases, indistinguishable from
social media company and 3.5 years for a based on all available similar images or write human-generated content.
common streaming service (FIGURE 1). Tech unique paragraphs about historical events with
giants and startups alike are racing to develop appropriate contextual references to time, place AI will likely require that we revisit the concept
ever more intelligent AI algorithms to get a and participants. Ultimately, generative AI may of “original content” given its ability to “invent”.
toehold in the next generation of computing. change how a broad range of jobs are performed In medicine, AI may be able to predict what
In short, we are likely witnessing the birth of a across almost every industry. sequence a “next new medicine” might take by
technology as significant as the internet.1 looking at prior molecules or compounds.
Researchers using generative AI can quickly
summarize complex topics, a development
What is generative AI?

FIGURE 1: Worldwide Google Searches for ‘Artificial Intelligence’
These new AI-driven chatbots use technology
known as generative AI, which is machine 100 Worldwide Google searches for "artificial intelligence"
learning taken to an entirely new level. When
100 = peak popularity
90
we talk to Alexa or Siri, we are actively engaging 80
with machine learning. Machine learning 70
is also what drives weather prediction and
60
statistical modeling across industries. It drives
50
the estimates of likely outcomes we see for
everything from betting odds in sports to the 40
probability of an earthquake in a vulnerable city. 30
20
What makes generative AI models such a 10
breakthrough is their ability to discern context
0
and create new content, drawing from massive '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23
amounts of data. When starting a sentence,
generative AI can predict with high accuracy Source: Google as of April 18, 2023.
how it will end. To build the models, some of
the world’s best data scientists and computer
1
ChatGPT: Everything you need to know about OpenAI’s GPT-4 upgrade | BBC Science Focus Magazine, 2023
Potential opportunities Indeed, regulation, patents, copyright and interactions. As this revolutionary technology
data privacy concerns are key risks to watch. rolls out, these issues will require humans to
and risks Intellectual property is another major issue. create policies, practices, checks and balances.
Copyright laws vary worldwide, but if someone
PwC estimates that AI could contribute up As the technology develops, there will be
uses generative AI to write a paper, will the
to $15.7 trillion to the global economy by winners and losers across industries. In the
sources of the information be correctly
2030.2 A large chunk of this is estimated to race to establish dominance in AI, larger, well-
attributed? Another concern is generative AI
come from productivity gains ($6.6 trillion). established companies have more to lose when
creating false and even dangerous conclusions,
Examples include AI helping educators grade rolling out generative AI because of reputation
drawing from inaccurate data. People do this
exams, software developers to write or debug risk. Rushing out products or services that are
too, but generative AI can create and spread
code, job seekers to write resumes, or online misleading or low quality would be a hit to their
false information faster. The technology’s
content providers to sell and advertise products reputations. But the benefits will be bountiful for
code-writing ability arms cyber criminals with
and services. those who get it right and can use AI to support
an easier way to write malicious code or create
new phishing scams. Then there are social their businesses. There will be billions spent on
Generative AI will be a key building block for
implications, especially when it becomes learning, introducing, embedding and assessing
many other future technologies. Generative AI
difficult to discern between human and machine the impacts of generative AI.
is disruptive too, capable of driving enormous
productivity gains and incremental economic
growth in the years ahead. Winners and losers
FIGURE 2: Valuations and EPS Growth Rates for AI, Robotics and Technology Shares
will emerge from across all sectors of the
economy. And that includes a huge impact 3-5 year expected EPS growth Forward P/E Ratio (Right)
on workers.
Annualized Growth (%)
18 17.0
31
In his congressional testimony in May, Sam 16
Forward P/E
14.1 29
Altman, the CEO of OpenAI, the company 14 12.5
11.4 27
that created ChatGPT, suggested the rapid 12
10 25
regulation of generative AI — remarkable
given that few tech CEOs seek regulatory 8 23
oversight. He suggested the formation of a new 6 21
government agency charged with licensing 4 19
large AI models and empowering it to revoke 2 17
that license for companies whose models 0 15
AI Robotics S&P 500 S&P 500
don’t comply with government standards. He
Technology
also proposed safety standards for AI models,
independent audits by experts and evaluating Source: Factset as of April 18, 2023. Indices corresponding to each column AI: Indxx Artificial Intelligence and Big Data Index; Robotics: ROBO Global
and extinguishing dangerous capabilities like Robotics and Automation Index. The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes
acting independently.3 only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would
lower performance. Past performance is no guarantee of future results. Real returns may vary.
2
PwC’s Global Artificial Intelligence Study, 2017.
3
Oversight of A.I.: Rules for Artificial ... | United States Senate Committee on the Judiciary, 2023
What to do now Cybersecurity companies are another obvious

initial beneficiary that may be underrated.
Pure AI equity investment opportunities are
few and far between. The most advanced AI And finally, we will be highly mindful of the
development platforms are either privately companies that adopt the technology in
held or housed within large companies with their products and operations. Increasingly
diverse sources of revenue. That said, we see sophisticated AI models will make robots more
potential growth opportunities in companies productive and autonomous vehicles more
that provide the computing and infrastructure reliable. Services-oriented companies that can
that power AI (FIGURE 2). These include embed AI effectively into day-to-day processes
hardware manufacturers making advanced will begin to improve their enterprises’ quality,
semiconductors and infrastructure providers value, efficiency and profitability.
such as cloud computing vendors. We expect, over time, to see trends emerge and
Secondary parts of the generative AI ecosystem to see companies report on how they are using
stand to benefit as well. Semiconductor generative AI in their operations. Intuitively,
capital equipment companies that produce AI will be able to track the use of AI. That’s the
the machines that manufacture AI-optimized whole point. This technology will build upon
chips should see increased demand (FIGURE 3). itself. Firms that do not embed this technology
into their business practices may see their
competitive positions will erode.
FIGURE 3: Shares in Industry Groups Tied to AI in 2023-to-date
90% 81% YTD Return of AI beneficiaries

80
70
Return (%)
60
50
40 28%
30 18%
20 14%
10 2%
0
AI Leaders Software Robotics Cyber Future mobility
security (autonomous cars)
CONTENTS
6 Regional previews
6.1 Asia: Economies get a boost from the
late reopening, weaker dollar 62
6.2 Europe: Selective opportunities amid modest growth 65
6.3 Latin America: Favorable financial

conditions, cautious central banks 67
6.4 North America faces a rolling recession 69
Unstoppable Trends | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 61

6.1 Asia: Economies get a boost
from the late reopening,
weaker dollar
KEN PENG
Head of Asia Pacific Investment Strategy
Asia is set to outgrow and outperform relative to other regions over the
years to come. Demographics, diversification of supply chains, a weaker US
dollar and a more accommodative Federal Reserve should provide the fuel.
We see Japan, India and Southeast Asia receiving increasing attention from
global investors.
Asia’s post-Covid reopening came after other regions, but the benefit of its later reopening is faster growth
even as the US and Europe are slowing. China is a main driver, even with recent challenges. We expect China’s
real GDP growth to reach 5.8% in 2023, followed by a return to 4.5% in 2024. For the region excluding Japan
and China, we see GDP growth moderating to 4.0% in 2023, then picking up to 4.5% in 2024 (FIGURE 1).
Given this backdrop, we see potential equity opportunities across Asia, especially in industry-leading
companies with strong balance sheets. In regional fixed income, we remain focused on quality. Asia is
vulnerable to US recession and uncertainties about Chinese consumer demand and geopolitics.
China: China’s recovery has been uneven. Consumer spending, driven by a boom in travel and other service
sectors, leads the way. But residential real estate and manufacturing continue to face headwinds, as it will
take some time to digest inventories. The government’s pro-growth economic policies have not yet revived
market sentiment. We expect additional easing in both business and financial policies, as well as moderate
rate cuts in the second half of the year. These actions should spur economic and earnings growth. At current
valuations of under 10 times forward earnings, recent disappointing market performance appears overstated
as potential for a substantial and sustained economic recovery remains.
Regional Previews | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 62

Japan: Global investors increasingly see India & Southeast Asia: The post-Covid recovery
Japanese equities as a means to access Asian in India and Southeast Asia has been boosted
development, especially amidst US-China by a substantial rise in investment as global
tensions. Recent wage negotiations between companies seek to diversify their supply chains.
corporates and unions have produced a 3.8% The economic recovery is strongest in Thailand,
wage hike agreement, the largest in three India, Indonesia, and the Philippines, all of
decades (FIGURE 2). We expect that the Bank which saw stronger earnings growth. Equity
of Japan will purposefully exit its ultra-loose prices have rallied in tandem, but continue to lag
monetary policy, which could take place in the earnings, so valuations remain at the lower end
second half of this year. If this happens, the of their historical multi-year range (FIGURE 3).
yen has room to strengthen further. Corporate We expect improved equity performance in the
governance reforms are also progressing, with second half of this year, supported by potential
the Tokyo Exchange pushing a wide array of firms weakness in the US dollar, rising demand in the
to increase dividends and buybacks. This has region and increasing direct foreign investment
begun to lift valuations from low levels. due to US-China strategic competition.
FIGURE 1: We Expect GDP Growth to Remain Elevated in Asia through 2023-24
10 Real GDP Forecasts

2022 2023 2024
5
-5
ea
a
n
a
an
a
e
es
S
h P
l
nd
K
or
re
in
si
si
di
ba
pa
-C -J
U
in
Ar
iw
ay
ne
Ch
In
Ko
ap
la
Ex Ex
lo
Ja
pp
Ta
ro
ai
al
do
G
ng
h
ia
ili
Th
M
Eu
ut
In
As
Si
Ph
So
Source: Haver Analytics, Citi Global Wealth Investment CIO Bulletin Five Insights Likely to Drive Markets in 2023, Citi Research Global Economic
Outlook & Strategy, as of May 22, 2023.
FIGURE 2: Japan’s Negotiated Wage Growth and CPI Inflation Reach Highest Level in
Three Decades
6
Negotiated Wage Growth

4
Percent Y/Y
CPI
-2
'90 '95 '00 '05 '10 '15 '20
Source: Haver Analytics, as of April 2023.
FIGURE 3: ASEAN Earnings Revisions Had Been Positive, while Valuations Have Fallen Notably
Forward EPS
65 18
60 17
16
55
15
EPS
PE
50
14
45
13
40 12
ASEAN
Forward PE Ratio (RHS)
35 11
'10 '12 '14 '16 '18 '20 '22
Source: Bloomberg, as of May 30, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes
6.2 Europe: Selective opportunities
amid modest growth
GUILLAUME MENUET
Head of Europe, Middle East and Africa Investment Strategy and Economics
Both Europe and the UK are exceeding modest expectations as GDP growth
and equity valuations appear more attractive.
Europe has avoided a recession as a rapid drop in energy prices offset its war-related trade shocks.
Continued tightness in labor markets also buoyed markets. We expect 2023 real GDP growth to average 0.8%
year-on-year in the euro area and 0.3% year-on-year in the UK.
One of the key risks to economic activity will be higher interest rates and stricter bank lending standards
following aggressive central bank tightening. Although policy rates will likely peak in mid-year 2023, we
expect that there will be some drag on investment and hiring plans, dampening domestic demand.
Regional previews | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 65

Regional previews | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 66
A better 2024 FIGURE 1: Euro and UK: Equity Market Indices and 2-Year Sovereign Bond Yields
Stoxx 50 FTSE 100 German Bund (right) UK Gilt (right)
Fortunately, headline inflation is set to
decline going into 2024, contributing to some
130 5
improvement in consumer confidence, but
we’re not anticipating much growth. We are
Performance (1-Jan-19 = 100)

forecasting real GDP growth to average 1.1% in 120
4
the euro area and the UK in 2024.
110
2-year yields (%)

Despite expected progress in Ukraine’s efforts to 3
regain territory in its upcoming spring offensive,
100
we do not see an imminent end to its war with
Russia. A quicker-than-expected resolution of 2
the conflict would likely be a significant positive 90
for risk assets and Europe in particular. 1
80
Fixed income: Euro area government bond
yields likely peaked in March, but we see only a 0
further limited rally in yields given the present 70
stickiness of core inflation and the need for
the European Central Bank to defend its price 60 -1
stability mandate. In the UK, yields will likely Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 May-23
stay elevated as the government seeks to rebuild
some credibility after the hiccup from the 2022 Source: Bloomberg, as of May 31, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes
autumn budget (FIGURE 1).
Equities: Both Europe ex-UK and UK equities
are trading at low valuations compared to
the US market. Within those markets, we are
overweight the consumer discretionary sector
and see some short-term upside potential in
financials due to a stronger euro and improving
net interest margins.
6.3 Latin America: Favorable
financial conditions,
cautious central banks
JORGE AMATO
Head of Latin America Investment Strategy
We see selective opportunities across Latin America as central banks

are likely to begin easing cycles in 2023. Brazil is likely to benefit from the
rebound in China.
Latin America’s largest economies are set to slow down in 2023. Much like the rest of the world, Central Banks
in the region have tightened monetary policy to battle inflation. However, their actions were swifter and more
effective than in developed economies. As a result, inflation in the region has been decelerating. While we
anticipate more favorable financial conditions ahead, the Latin American central banks are likely to remain
cautious. Consensus growth for the region is below 1% this year, down from about 3.7% in 2022.
On the political and structural reform fronts, populist governments have been less destabilizing than markets
feared, stemming capital outflows to some extent. Local currencies have been very resilient thanks to the
combination of high local interest rates and receding inflation (FIGURE 1). This has supported local debt
markets, as reflected by the 14.6% year-to-date gain in the Bloomberg LATAM Local Debt Index.1
Mexico, with its close ties to US industry and demand, has been a beneficiary of geopolitics and the
surprisingly resilient US economy. As US companies move operations closer to home, “nearshoring” has
translated into strong capital inflows for Mexico and remittances are correspondingly robust. Capital
investment is on the upswing and consumer confidence remains firm. This positive macro environment has
not gone unnoticed by investors. The Mexican peso is up 11% and the Mexican stock market has returned a
stellar 20% in US dollar (USD) terms, year-to-date.2 Given our expectations of a mild US recession, we find
Mexican markets to now be a momentum play, with limited incremental value at current levels.
1
Source: Bloomberg as of June 1, 2023
2
Source: Bloomberg as of June 2, 2023

Brazil’s economy surprised to the upside in 2022, FIGURE 1: Higher Interest Rates, Moderating Inflation
growing 2.9%. As the impact of higher interest
15 6.00
rates take hold and the rest of the world slows 14
down, we believe Brazil is also likely to decelerate 13 5.50
12 Benchmark policy
to less than 1% real growth in 2023. Partially rate % (Left)
11
offsetting Brazil’s present slowdown is China. As 10 5.00
% p.a.
% p.a.
Brazil’s largest trading partner, China is expected 9
8 4.50
to grow close to 6% in 2023, providing broad 7
support to economic activity in Brazil in the 6
years ahead. 5 Brazil inflation % 4.00
4 consensus forecast 2023 (Right)
3 3.50
Brazil’s new fiscal rules should ease concerns 2
around fiscal excesses. It should also give the 1
central bank (BACEN) more room to manage 0 3.00
Mar-21 Jun-21 Aug-21 Oct-21 Dec-21 Mar-22 May-22 Jul-22 Oct-22 Dec-22 Feb-23
inflationary risks. Inflation is easing, and this
can give the monetary authority room to ease. Source: Bloomberg as of May 30, 2023
Right now, real rates are close to 9% while equity
multiples are below 8 times.
FIGURE 2: Brazil Valuations Down
As we assess relative and absolute value in the
30 Forward 12m Return MSCI Brazil PE 200%
region, we view Brazil’s equity and local bond
markets potentially attractive on a risk-adjusted
25 150
Forward 12m Return

basis (FIGURE 2). We expect to consider further
Trailing 12m P/E
portfolio allocation to Brazil as we rotate into 20 100

emerging market (EM) shares in the future.
15 50
10 0
5 -50
0 -100
'01 '04 '07 '10 '13 '16 '19 '22
Source: Haver Analytics as of April 28, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative
which would lower performance. Past performance is no guarantee of future results. Real results may vary.
6.4 North America faces
a rolling recession
CHARLES REINHARD LORR AINE SCHMIT T
Head of North America Investment Strategy North America Investment Strategist
The US shows signs of a “rolling recession” as we enter the second half

of 2023. Though we presently favor defensive sectors, such as large-cap
consumer staples and healthcare shares, there are undervalued segments
of the US market to consider adding in the near future. A rotation away from
Treasury bills toward diversified, longer duration fixed income assets is
also advised.
At mid-year 2023, we are suffering the aftermath of “shock and overstimulation,” a time when simultaneous
growth and contraction are occurring in the US economy. After the most rapid series of rate hikes in Federal
Reserve history, we see economic headwinds building while distortions from the pandemic dissipate.
The banking panic that resulted in the failure of three major financial institutions was exacerbated by the
Federal Reserve’s sharp pivot to fight inflation. Banks saw the value of their lending books plummet just as
depositors were able to access cash rates well above deposit returns. The Federal Reserve continues to seek
an end to an inflationary cycle that saw its balance sheet rise from $4 trillion to $9 trillion in 2020-2021 as it
dispensed record levels of monetary aid during the COVID pandemic.
FIGURE 1 is a simple illustration of the complex tailwinds and headwinds within the US economy as we
enter the second half of 2023. The fact that these contradictory conditions co-exist is responsible for the
elongation of our entry into and out of what will be a shallow or “rolling” recession. This makes it difficult to
identify an obvious recession/recovery pattern that would make for easy investment choices.

FIGURE 1: Conflicting Positives and Negatives for the US Equity Market Outlook weakness will ultimately cause the Fed to reverse
course toward the end of 2023. This sequence of
Tailwinds Headwinds events suggests that the currently high overnight
High Fed policy rates, Quantitative Tightening money fund rates and high yields of the shortest-
Resilient employment in services sustains term T-bills will not be available a year from now.
(QT), reduced bank leading, restrained
consumer spending We also expect the 10-year US Treasury yield to
capital entrepreneurs
decline to 3% at the end of 2023.
Weakening commercial real estate fundamentals,
Inflation slowing Historically, the stock market has bottomed
spillovers to SMID banks
when the Fed lowers rates during a recession.
Strong corporate balance sheets, private Treasury Bill issuance to surge post-debt
In the present case, investors built record
credit availability ceiling agreements
high short positions on the expectation of
Inventories are heading down (housing and recession in 2022. While US equities still face
Failing labor productivity to weaken labor market
manufacturing), “working off” a recession risks, considerable bad economic news has
been digested. And then there is generative AI
Historic high equity short positions and large China and EU economies gain less than expected on
(See Generative AI: The beginning of (another)
cash balances initial China reopening
technological revolution). The introduction of a
Estimated EPS far above achievable corporate profit new technology that is likely to rival the internet
gains (record high expected by 4Q 2023) in its impact on the US and world economies
Source: Citi Global Wealth Investments
has led to new highs for firms able to provide the
infrastructure for its rapid adoption.
Both employment and Positive economic signs, too

Cash waiting to invest
inflation are heading down Despite the string of negative developments,
there are positive areas within the US economy. Investors have juggled a laundry list of risks, from
US employment dropped by a record amount the recent debt ceiling brinksmanship to tight
Inflation has decreased from 9% in June 2022
in 2020 and as the economy subsequently Federal Reserve policy to further EPS declines,
to 5% in April 2023 and we forecast it will drop
recovered rapidly, many employers could not find that could trigger an elusive-until now- equity
to 3.5% by the end of the year (See Recession,
basic labor. Many firms in 2023 are still hoarding market selloff. With huge cash balances on
recovery: A journey unfinished). A measure of
labor as a result. Over the past few months, the sidelines, potential “dip-buyers” have kept
global supply chain pressures tracked by the
layoff announcements have accelerated, most US equities range bound. During this time, a
New York Fed has returned to pre-pandemic
notably in technology, finance and construction. very large valuation discount has developed in
levels. A reduction in goods inventories is
This is in response to the fact that six of the 11 profitable small- and mid-cap companies that
beginning while services spending is keeping the
major sectors of the S&P 500 were in “profit face immediate economic risks but are poised
broader growth rate of the economy positive.
recessions” after their first quarter 2023 for stronger returns in a recovery period. Our new
This is gradually setting the stage for a stronger
results. Employers have also been cutting 10-year strategic return estimates (See FIGURE
growth period within 2024.
temporary workers. 3: Recession, recovery: A journey unfinished)
We still believe the Fed’s aggressive fight against reflect the brighter prospects for markets after
inflation and the current delay in labor market the material equity and debt declines of 2022.
FIGURE 2 : Money Market Balances Are at An All-Time High small cap growth shares, led by non-cyclical
health care and technology names.
6500
Money Market Fund
5500
A move to
Assets ($ billions)
4500 longer duration bonds

High-quality US bonds are currently offering
3500 above average yields versus the past decade (See
FIGURE 1 in Bonds are Back Again). We see value
2500 in government and investment-grade corporate
bonds with two- to five-year maturities and
1500 in municipal bonds for US investors seeking
after-tax income.
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22
For qualified investors that do not require highly
Source: Bloomberg as of May 19, 2023. Past performance is no guarantee of future results. Real results will vary.
liquid portfolios, the recent US banking turmoil
mixed with volatility in the bond market have
provided potential credit opportunities for
What should SMID to rise alternative fixed-income managers with deep
investors consider now? Regional bank shares have pulled back enough research expertise and strong risk management
for long-term investors to take notice. While it is processes, in our view.
Though we are favoring defensive sectors such
hard to say for sure that further bank failures are
as Consumer Staples and Healthcare now, there Finally, we expect this rolling recession to be
behind us, their systemic importance to the US
are several areas that are likely candidates for shallow. Whereas robust recoveries tend to
economy as a whole suggest a rebound in 2024
inclusion into portfolios in the coming months. follow deep recessions, moderate recoveries
when loan volumes, lending margins and credit
These are sectors that tend to outperform the tend to follow shallow ones. This is why being
conditions improve. Regional banks now trade at
broader market during and after initial Fed rate fully invested is critical. The down and up pivot
1.1 times tangible book value, versus a COVID low
cuts. We will continue to favor companies that points in markets will likely occur near one
of 1 times.
grow their dividends or are aligned with our another. Capturing the best days will be essential
Unstoppable Trends. US small caps have completely given up their given the modest growth we expect in 2024.
outperformance versus large caps in the post-
COVID era. As a result of their tepid performance,
valuations have improved, with profitable SMID
names now trading at 14 times trailing 12-month
earnings, a 26% discount to their larger brethren.
An expected Fed pivot later in 2023 should
change this paradigm, enabling a catch-up in
GLOSSARY
ASSET CLASS DEFINITIONS: Global Developed Investment Grade Fixed Income company or individual that holds legal claim to the
is composed of Bloomberg Barclays indices capturing borrower’s assets in the event of a corporate bankruptcy.
Cash is represented by US 3-month Government
investment-grade debt from twenty different local These loans are usually secured by a company’s assets,
Bond TR, measuring the US dollar-denominated active
currency markets. The composite includes fixed- and often pay a high coupon due to a company’s poor
3-Month, fixed-rate, nominal debt issues by the
rate treasury, government-related, and investment (noninvestment grade) credit worthiness.
US Treasury.
grade rated corporate and securitized bonds from the
High Yield Fixed Income is composed of Bloomberg
Commodities asset class contains the index composites developed market issuers. Local market indices for US,
Barclays indices measuring the non-investment grade,
— GSCI Precious Metals Index, GSCI Energy Index, GSCI UK and Japan are used for supplemental historical data.
fixed-rate corporate bonds denominated in US dollars,
Industrial Metals Index, and GSCI Agricultural Index —
Global Emerging Market Fixed Income is composed of British pounds and euros. Securities are classified as high
measuring investment performance in different markets,
Bloomberg Barclays indices measuring performance of yield if the middle rating of Moody’s, Fitch, and S&P is
namely precious metals (e.g., gold, silver), energy
fixed-rate local currency emerging markets government Ba1/BB+/BB+ or below, excluding emerging market debt.
commodity (e.g., oil, coal), industrial metals (e.g., copper,
debt for 19 different markets across Latin America, EMEA
iron ore), and agricultural commodity (i.e., soy, coffee) Private Credit is debt financing provided by non-bank
and Asia regions. iBoxx ABF China Govt. Bond, the Markit
respectively. Reuters/Jeffries CRB Spot Price Index, the lenders such as hedge funds, private debt funds, business
iBoxx ABF Index comprising local currency debt from
TR/CC CRB Excess Return Index, an arithmetic average development companies (BDCs) and specialty finance
China, is used for supplemental historical data.
of commodity futures prices with monthly rebalancing, is companies. Private credit can take on various forms,
used for supplemental historical data. Ibbotson High Yield Index, a broad high yield index including direct loans, mezzanine financing or private
including bonds across the maturity spectrum, within debt funds. Small- and medium-sized companies most
Direct Private Investments or Direct Investments imply
the BB-B rated credit quality spectrum, included in commonly take on private credit.
the purchase or acquisition of a stake or controlling
the below-investment-grade universe, is used for
interest in a business, asset or special purpose vehicle/ Private Equity is an alternative investment class which at
supplemental historical data.
instrument by means other than the purchase of shares. its most basic form is the capital or ownership of shares
Hedge Funds are composed of investment managers not publicly traded or listed on a stock exchange. Its
Emerging Markets (EM) Hard Currency Fixed Income
employing different investment styles as characterized characteristics are often driven by those for Developed
is represented by the FTSE Emerging Market Sovereign
by different subcategories – HFRI Equity Long/Short: Market Small Cap Equities, adjusted for illiquidity, sector
Bond Index (ESBI), covering hard currency emerging
Positions both long and short in primarily equity and concentration, and greater leverage.
market sovereign debt.
equity derivative securities; HFRI Credit: Positions in
Real Estate Investment Trust or REIT is a corporate
Global Developed Market Corporate Fixed Income is corporate fixed income securities; HFRI Event Driven:
entity that either has bulk or all its asset base, income
composed of Bloomberg Barclays indices capturing Positions in companies currently or prospectively
and investments related to real estate. In the US under
investment debt from seven different local currency involved in a wide variety of corporate transactions;
Security and Exchange Commission (SEC) guidelines,
markets. The composite includes investment grade rated HFRI Relative Value: Positions based on a valuation
for an entity to qualify as an REIT, at least 90% of its
corporate bonds from the developed-market issuers. discrepancy between multiple securities; HFRI Multi
taxable annual income to shareholders in the form of
Strategy: Positions based on realization of a spread
Global Developed Market Equity is composed of dividends must be from real estate. While typically REITs
between related yield instruments; HFRI Macro: Positions
MSCI indices capturing large-, mid- and small-cap are publicly traded, not all are, as Public Non-Listed REITs
based on movements in underlying economic variables
representation across 23 individual developed-market (PNLRs) can register with SEC as REITs, but do not trade
and their impact on different markets; Barclays Trader
countries, as weighted by the market capitalization of on major stock exchanges.
CTA Index: The composite performance of established
these countries. The composite covers approximately programs (Commodity Trading Advisors) with more than
95% of the free float-adjusted market capitalization in four years of performance history.
each country.
High Yield Bank Loans are debt financing obligations
issued by a bank or other financial institution to a
INDEX DEFINITIONS: CRB Commodity Spot Index is an unweighted geometric hybrid securities. Managers employ fundamental credit
mean of the individual commodity price relative to the processes focused on valuation and asset coverage of
Ball Metaverse Index is a selection of companies in base period prices. The computation procedure involves securities of distressed firms; in most cases portfolio
categories defined by the Metaverse Market Map. obtaining for each commodity, the ratio of its price in any exposures are concentrated in instruments which are
Bloomberg Electric Vehicles Index aims to represent the given period to its price in the base period and taking the publicly traded, in some cases actively and in others
performance of a set of companies that are expected to 22nd root of the product of these ratios. This product under reduced liquidity but in general for which a
derive significant revenues from electric vehicles, energy is then multiplied by 100 to obtain the index number reasonable public market exists. In contrast to Special
storage technologies, lithium, cobalt and copper mining, for each period. The calculation is made by means Situations, Distressed Strategies employ primarily
and hydrogen fuel cells. of logarithms. debt (greater than 60%) but also may maintain related
equity exposure.
Bloomberg Global Aggregate Bond Index is a flagship Euro Stoxx 50 Index is derived from the Euro Stoxx
measure of global investment grade debt from twenty- Index and represents the performance of the 50 largest Indxx Artificial Intelligence & Big Data Index tracks the
four local currency markets. This multi-currency companies among the 20 supersectors in terms of free- performance of companies that are positioned to benefit
benchmark includes treasury, government-related, float market capitalization in the Eurozone. The index from the development and use of AI in their products and
corporate and securitized fixed-rate bonds from both captures about 60% of the free-float market cap of the services, as well as companies that produce hardware
developed and emerging markets issuers. Euro Stoxx total market Index. used in AI applied for the analysis of big data. The index
includes companies such as AI developers, AI-as-a-
Bloomberg JPMorgan Asia Currency Index or ADXY is FTSE 100 Index or The Financial Times Stock Exchange
service, AI hardware and quantum computing.
a US dollar tradable index of emerging Asian currencies. 100 Index is a share index of the top 100 companies
It creates a benchmark for monitoring Asia’s currency listed on the London Stock Exchange with the highest Indxx Global Cloud Computing Index tracks the
markets on an aggregate basis. market capitalization. performance of companies that are in the Cloud
Computing Industry. The Cloud Computing Industry is
Bloomberg US Aggregate Index is a broad-based FTSE All-World Index is a stock market index
involved in the delivery of computing services, servers,
flagship benchmark that measures the investment grade, representing global equity performance that covers over
storage, databases, networking, software, analytics and
US dollar denominated, fixed-rate taxable bond market. 3,100 companies in 47 countries starting in 1986.
more over the Internet which is referred to as ‘The Cloud’.
Bloomberg US Corporate Bond Index measures the FTSE NAREIT Mortgage REITS Index is a freefloat
Indxx Global Fintech Thematic Index tracks the
investment grade, fixed-rate, taxable corporate bond adjusted, market capitalization-weighted index of US
performance of companies listed in developed markets
market. It includes US dollar denominated securities Mortgage REITs. Mortgage REITs include all tax-qualified
that are offering technology-driven financial services
publicly issued by US and non-US industrial, utility and REITs with more than 50 percent of total assets invested
which are disrupting existing business models in the
financial issuers. in mortgage loans or mortgage-backed securities
financial services and banking sectors.
secured by interests in real property.
Bloomberg US Treasury Index measures US dollar- MSCI AC Asia ex-Japan Index captures large and mid-
denominated, fixed-rate, nominal debt issued by the US HFRI ED Distressed/Restructuring Index tracks
cap representation across 2 of 3 Developed Markets (DM)
Treasury. Bloomberg-JP Morgan Asia currency index is a distressed/restructuring strategies which employ an
countries* (excluding Japan) and 9 Emerging Markets
spot index of the most actively traded currency pairs in investment process focused on corporate fixed income
(EM) countries* in Asia. With 1,187 constituents, the index
Asia’s emerging markets valued against the US dollar. instruments, primarily on corporate credit instruments
covers approximately 85% of the free float-adjusted
of companies trading at significant discounts to their
Consumer Price Index or CPI is a widely-used economic market capitalization in each country.
value at issuance or obliged (par value) at maturity as a
indicator that tracks the average price of a basket of result of either formal bankruptcy proceeding or financial MSCI AC World Automobiles Index is composed of large-
goods or services used by the typical consumer, including market perception of near-term proceedings. Managers and mid-cap automobile stocks across emerging and
housing, transportation, clothing and food. It’s published are typically actively involved with the management developed countries.
regularly by various government statistical agencies and of these companies, frequently involved on creditors’
used to gauge inflation or deflation. MSCI ACWI World ex-USA Index covers large and mid
committees in negotiating the exchange of securities for
cap representation across 22 of 23 Developed Markets
alternative obligations, either swaps of debt, equity or
(DM) countries (excluding the US) and 27 Emerging
Markets (EM) countries. With 2,352 constituents, the covers approximately 85% of the free float-adjusted MSCI World Index covers large- and mid-cap equities
index covers approximately 85% of the global equity market capitalization in each country. across 23 Developed Markets countries. With 1,603
opportunity set outside the US. constituents, the index covers approximately 85% of the
MSCI Emerging Markets Currency Index measures the
free float-adjusted market capitalization in each country.
MSCI AC World Index is designed to represent total return of 25 emerging market currencies relative to
performance of the full opportunity set of large- and the US dollar. The weight of each currency is equal to its MSCI World Momentum Index is designed to reflect
mid-cap stocks across 23 developed and 24 emerging country weight in the MSCI Emerging Markets Index. the performance of an equity momentum strategy by
markets. As of May 2022, it covers more than 2,933 emphasizing stocks with high price momentum, while
MSCI Emerging Markets (EM) Latin America Index
constituents across 11 sectors and approximately 85% maintaining reasonably high trading liquidity, investment
captures large and mid-cap representation across five
of the free float-adjusted market capitalization in capacity and moderate index turnover.
Emerging Markets (EM) countries in Latin America.
each market.
With 113 constituents, the index covers approximately Nasdaq 100 is a large-cap growth index consisting of
MSCI AC World ex-USA Index captures large- and mid- 85% of the free float adjusted market capitalization in 100 of the largest US and international nonfinancial
cap companies across 22 of 23 development markets, each country. companies listed on the Nasdaq Stock Market based on
excluding the US. With 881 constituents, the index market capitalization.
MSCI Germany Index is designed to measure the
covers about 85% of the free float-adjusted market
performance of the large and mid cap segments of the Nasdaq CTA Cybersecurity Index tracks the performance
capitalization in each country.
German market. With 59 constituents, the index covers of companies engaged in the Cybersecurity segment
MSCI ASEAN Index captures large and mid cap about 85% of the equity universe in Germany. of the technology and industrial sectors. The Index
representation across 4 Emerging Markets countries, 1 includes companies primarily involved in the building,
MSCI Global Alternative Energy Index includes
Developed Market country and 1 Frontier Market country. implementation and management of security protocols
developed and emerging market large-, mid- and small-
With 156 constituents, the index covers approximately applied to private and public networks, computers and
cap companies that derive 50% or more of their revenues
85% of the free float-adjusted market capitalization in mobile devices in order to provide protection of the
from products and services in Alternative energy.
each country. integrity of data and network operations.
MSCI Japan Index is designed to measure the
MSCI Australia Index is designed to measure the Nasdaq OMX Clean Edge Smart Grid Infrastructure
performance of the large and mid cap segments of the
performance of the large and mid cap segments of the Index includes companies that are primarily engaged
Japanese market. With 237 constituents, the index covers
Australia market. With 59 constituents, the index covers and involved in electric grid; electric meters, devices,
approximately 85% of the free float-adjusted market
approximately 85% of the free float-adjusted market and networks; energy storage and management; and
capitalization in Japan.
capitalization in Australia. enabling software used by the smart grid and electric
MSCI United Kingdom Index is designed to measure infrastructure sector.
MSCI Brazil Index measures the performance of large
the performance of the large and mid cap segments of
and midcap segments of the Brazilian market. With 48 Manufacturing Purchasing Managers’ Index or PMI
the UK market. With 79 constituents, the index covers
constituents, the index covers about 85% of the Brazilian is a survey-based economic indicator that measures
approximately 85% of the free float-adjusted market
equity universe. the activity level of purchasing managers in the
capitalization in the UK.
manufacturing sector. PMI is expressed as a number from
MSCI China Index captures large and mid-cap
MSCI USA Index is designed to measure the performance 0 to 100, a figure above 50 indicates expansion.
representation across China A shares, H shares, B shares,
of the large and mid cap segments of the US market. With
Red chips, P chips and foreign listings (e.g. ADRs). With Prime Mobile Payments Index provides a reference
626 constituents, the index covers approximately 85% of
704 constituents, the index covers about 85% of this measure for the global payments industry by focusing
the free float-adjusted market capitalization in the US.
China equity universe. on companies facilitating the mass migration from
MSCI World Information Technology Index tracks the physical cash registers to a mobile point of sale. Potential
MSCI Emerging Markets Index captures large and
large- and mid-cap IT segments across 23 developed beneficiaries of this growing trend include software
midcap representation across twenty-four Emerging
markets countries. providers, payment processors, gateways, and credit card
Markets (EM) countries. With 837 constituents, the index
networks. Those companies collectively represent mobile
payments industry.
Real broad trade weighted dollar index shows the value members of the Global Industry Classification Standard® media industry, including companies that provide
of a currency, usually the US dollar, against a basket (GICS®) information technology sector. social networking, file sharing, and other web-based
of foreign currencies, adjusted for inflation. It is used media applications. A maximum of 50 components are
S&P 500 Software & Services Index is a sub-index of
by policymakers, economists and investors to gauge included and weighted according to freefloat market
the S&P 500 Index and represents the performance of
a currency’s strength or weakness relative to multiple capitalization. The index is calculated as a total return
IT services and Software that are represented in the
trading partners. index in US dollars.
latter index.
ROBO Global Robotics & Automation Index tracks the UBS Unstoppable Tech Index tracks the performance of
S&P MidCap 400 includes 400 companies and
robotics, automation, and AI revolution for investors. It emerging high growth tech and tech-enabled companies
represents about 6% of the US markets. Companies
includes more than 80 robotics and automation stocks which have yet to complete a full-year with positive
included in the index are based in the US, meet market
across 11 subsectors in over 14 countries. earnings. The basket has been optimized for liquidity with
capitalization requirements and maintain a public float of
initial weights capped at 4%.
ROBO Global Healthcare Technology and Innovation at least 10% of its shares outstanding.
Index tracks the global value chain of healthcare VIX or the Chicago Board Options Exchange (CBOE)
S&P MidCap 400 Growth Index measures growth stocks
technology and innovation. It includes more than 80 Volatility Index, is a real-time index representing
using three factors: sales growth, the ratio of earnings
stocks across 9 subsectors in 15 countries. the market’s expectation of 30-day forward-looking
change to price and momentum. Constituents are drawn
volatility, derived from the price inputs of the S&P 500
Russell 2000 Index measures the performance of from the S&P MidCap 400.
index options.
the small-cap segment of the US equity universe. The
S&P Global Dividend Aristocrats is designed to measure
Russell 2000 Index is a subset of the Russell 3000 Index
the performance of the highest dividend yielding OTHER TERMINOLOGY:
representing some 10% of the total market capitalization
companies within the S&P Global Broad Market Index
of that index. Adaptive Valuations Strategies or AVS is Citi Private
(BMI) that have followed a policy of increasing or stable
Saudi Tadawul All Share Index (TASI) tracks the dividends for at least ten consecutive years. Bank’s own strategic asset allocation methodology. It
performance of companies listed on the Saudi Stock determines the suitable long-term mix of assets for each
S&P SmallCap 600 is comprised of 600 companies. It client’s investment portfolio.
Exchange, also known as Tadawul.
measures of performance of the small-cap segment of
S&P 500 Index is a capitalization-weighted index the US market. Assets Under Management or AUM are the total market
that includes a representative sample of 500 leading value of the investments that a person or entity handles
Securities Industry and Financial Markets Association on behalf of investors.
companies in leading industries of the US economy.
or SIFMA Municipal Swap Index is a 7-day high-
Although the S&P 500 focuses on the large-cap segment Basis points or BPS is used to express small changes in
grade market index comprised of tax-exempt Variable
of the market, with over 80% coverage of US equities, it is interest rates or yields on bonds, notes and bonds. One
Rate Demand Obligations (VRDOs) with certain
also an ideal proxy for the total market. basis point is 0.01% or one one-hundredth of a percent of
characteristics. The Index is calculated and published by
S&P 500 Healthcare Index includes companies from Bloomberg. The Index is overseen by SIFMA’s Municipal yield while 100 basis points is 1%.
the S&P 500 Index that are involved from such areas Swap Index Committee. Business development company, also known as a BDC, is
as pharmaceuticals, healthcare equipment & supplies, a regulated investment company that raises capital from
Solactive E-commerce Index tracks the price movements
biotechnology and healthcare providers and services. individual and institutional investors through the sale
in shares of companies which are active in the field of
S&P 500 Hotels, Resorts and Cruise Lines Index is a e-commerce. This may include companies that operate of shares in the stock market. BDCs provide financing
sub-index of the S&P 500 Index and represents the e-commerce platforms, provide E-commerce software, to private companies, typically small- and mid-sized
performance of hotels, resorts and cruise line companies analytics or services, and/or primarily sell goods and businesses. BDCs are required to distribute a significant
that are represented in the latter index. services online and generate the majority of their overall portion of their taxable income to shareholders in the
revenue from online retail. form of dividends.
S&P 500 Information Technology Index is a sub-index of
companies included in the S&P 500 that are classified as Solactive Social Media Index tracks the price movements Correlation is a statistical measure of how two assets or
in shares of companies which are active in the social asset classes move in relation to one another. Correlation
is measured on a scale of 1 to -1. A correlation of 1 implies measure of return takes into consideration the time value dividend growth. It is expressed as a percentage of the
perfect positive correlation, meaning that two assets or of money and allows for comparison with projected rates amount invested.
asset classes move in the same direction all of the time. A of return on other investments.
Sharpe ratio is a measure of risk-adjusted return,
correlation of -1 implies perfect negative correlation, such
Liquified natural gas, or LNG, is a form of natural gas expressed as excess return per unit of deviation, typically
that two assets or asset classes move in the opposite
that has been converted into a liquid by cooling the gas referred to as risk.
direction to each other all the time. A correlation of 0
to very low temperatures. By liquifying the natural gas, it
implies zero correlation, such that there is no relationship SMID is short for small- and mid-cap stocks.
takes up less space and can be transported by specialized
between the movements in the two over time.
tankers or stored in cryogenic tanks. Strategic Return Estimates or SREs are based on Citi
Digital commerce involves transactions conducted Global Wealth Investments’ forecast of returns for
Mobile POS payments are payments made at the point of
online to purchase goods and services. Digital specific asset classes (to which the index belongs) over a
sale but facilitated via mobile devices like smart phones.
remittances are funds sent from one person to another 10-year time horizon. The forecast for each specific asset
over the internet, typically across borders. OPEC or the Organization or Petroleum Exporting class is made using a proprietary methodology based
Countries is an intergovernmental organization that on the assumption that equity valuations revert to their
Earnings per share, or EPS, portion a company’s profit
helps countries coordinate and unify petroleum policies. long-term trend over time.
allocated to each outstanding share of common stock.
The organization plays a significant role in influencing
EPS is widely used to assess a company’s profitability. Yield Curve is a graph that plots the yields of all bonds of
global oil prices and supply. OPEC consists of 13
the same quality with maturities ranging from shortest
EU or the European Union is a political and economic member countries including Saudi Arabia, Iraq, Iran
to longest. When short-term rates are lower, it is called
union of 27 member states in Europe. and Venezuela.
a positive curve. When short-term rates are higher, it
Eurodollar futures and options are market tools for Par is the nominal or face value of a security. It represents is called an inverted yield curve. When there is little
traders to express views on future interest rate moves. the value the security was originally issued at or its difference between long- and short-term rates, it’s called
redemption value at maturity. A bond selling at par is a flat yield curve. The most common version of the yield
Fed funds rate or the effective federal funds rate
worth the same amount it was issued for or at which it will curve plots US Treasury securities.
(EFFR) is calculated as a volume-weighted median of
be redeemed at maturity.
overnight federal funds transactions reported in the US
FR 2420 Report of Selected Money Market Rates. The Quantitative Tightening also known as QT is a monetary
federal funds market consists of domestic unsecured policy tool that central banks use to reduce the amount
borrowings in US dollars by depository institutions from of money in circulation. It is the opposite of quantitative
other depository institutions and certain other entities, easing. QT typically involves central banks selling its
primarily government-sponsored enterprises. holdings of government bonds, allowing existing bonds
to mature without reinvesting the proceeds or raising
Internal Rate of Return or IRR is used to measure the
reserve requirements for banks.
profitability of potential investments. It is defined as the
discount rate at which the net present value (NPV) of all Real total return shows a return that has been adjusted
cash flows from an investment are equal to zero. This to include capital appreciation, dividend income and
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forecast of future events or a guarantee of future results.
Past performance is not a guarantee of future results. (MLP’s) - Energy Related MLPs May Exhibit High Changes in Regulatory or Tax Treatment of Energy Related
Real results may vary. Volatility. While not historically very volatile, in certain MLPs. If the IRS changes the current tax treatment of
market environments Energy Related MLPS may exhibit the master limited partnerships included in the Basket
Although information in this document has been high volatility. of Energy Related MLPs thereby subjecting them to
obtained from sources believed to be reliable, Citigroup higher rates of taxation, or if other regulatory authorities
enact regulations which negatively affect the ability of include losses due to leveraging or other speculative production costs, including storage, labor and energy
the master limited partnerships to generate income or investment practices, lack of liquidity, volatility of costs; costs associated with regulatory compliance,
distribute dividends to holders of common units, the returns, restrictions on transferring interests in the fund, including environmental regulations; and changes in
return on the Notes, if any, could be dramatically reduced. potential lack of diversification, absence of information industrial, government and consumer demand, both
Investment in a basket of Energy Related MLPs may regarding valuations and pricing, complex tax structures in individual consuming nations and internationally.
expose the investor to concentration risk due to industry, and delays in tax reporting, less regulation and higher Index components concentrated in futures contracts
geographical, political, and regulatory concentration. fees than mutual funds and advisor risk. on agricultural products, including grains, may be
subject to a number of additional factors specific to
Mortgage-backed securities (“MBS”), which include Asset allocation does not assure a profit or protect
agricultural products that might cause price volatility.
collateralized mortgage obligations (“CMOs”), also against a loss in declining financial markets.
These include weather conditions, including floods,
referred to as real estate mortgage investment conduits
The indexes are unmanaged. An investor cannot invest drought and freezing conditions; changes in government
(“REMICs”), may not be suitable for all investors. There is
directly in an index. They are shown for illustrative policies; planting decisions; and changes in demand for
the possibility of early return of principal due to mortgage
purposes only and do not represent the performance of agricultural products, both with end users and as inputs
prepayments, which can reduce expected yield and result
any specific investment. Index returns do not include into various industries.
in reinvestment risk. Conversely, return of principal may
any expenses, fees or sales charges, which would
be slower than initial prepayment speed assumptions, The information contained herein is not intended to be
lower performance.
extending the average life of the security up to its listed an exhaustive discussion of the strategies or concepts
maturity date (also referred to as extension risk). Past performance is no guarantee of mentioned herein or tax or legal advice. Readers
interested in the strategies or concepts should consult
Additionally, the underlying collateral supporting future results.
their tax, legal, or other advisors, as appropriate.
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Citi Global Wealth

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OVERVIEW UNSTOPPABLE TRENDS

6.4 North America faces a rolling recession 69

| WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 2

Keeping portfolios fully invested remains important,

| WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 3

1.2 Recession, recovery: A journey unfinished 10

1.3 The value of strategic asset allocation:

1.4 A guide to investing through a slowing economy 24

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 4

Our 2023 Mid-Year Wealth Outlook

At the moment, investor sentiment appears poor, and that creates

overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 5

the world economy (See Recession, recovery: 22

Adding non-US FIGURE 2: US vs Non-US Relative CAPE

debt exposure 1.6

World Ex-US Premium/Discount to

Market timing hurts portfolio returns. The worst

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 10

Total Return Level

S&P 500 Info Tech

FIGURE 3: Strategic Return Estimates (SRE) Are Higher

ASSET CLASS 2023 SRE 2022 SRE

S&P 500 Return

2.50 negative correlation to risk assets (See Bonds

While the economy and Fed policy appear to -5

FIGURE 10: Falling Productivity as Employers Hoard Labor

Recession Total Hours Worked Real Output Per Hour

Source: Haver Analytics as of May 22, 2023.

FIGURE 11: Contrasting Cycles – Unemployment Rates in the US and China

Recession US Unemployment Rate China Unemployment Rate

Source: Haver Analytics as of May 22, 2023.

During times of acute market stress, a disciplined strategic asset allocation

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 19

Reducing portfolio FIGURE 1: Annualized Volatility During Periods of Market Stress

Volatility is not an investor’s sole concern. It can

To further test the validity of our strategic asset

Long-term wealth creation FIGURE 3: Less Volatility, Drawdowns with AVS L3

1. A long-term focus 13.4% -16.1%

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 24

Fixed income allocations Our opportunistic overweights by industry Signals to follow

Investors should consider transitioning away

from non-core cash and short duration fixed currency exposure

within equities • Markets that may benefit from foreign

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 26

thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 27

The king of currencies? FIGURE 1: Strong US Dollar and US Equities

In our Mid-Year Wealth Outlook a decade ago, 30

Now we see another reversal at hand. We

worldwide, is peaking and so is the relative

A turning point FIGURE 3: Rapid Rate Hikes Expected to Ease

Non-US equities currently hug a record low World Ex-US

valuation compared to the US, nearly 40% below

markets starting at a lower initial valuation. 60

A second reason why USD returns can exceed

FIGURE 8: Emerging Markets Sentiment Currently Low

350 MSCI EM Index MSCI EM Currency (Right) 2000

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 33

Thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 34

within equities • Markets that may benefit from foreign