The clock is ticking on economic damage, Citi says

Rob, just walk us through the investment strategy from here because obviously we've seen higher inflation plus positive economic data stateside through February that's kind of spooked investors. And then on top of that, you also have Fed officials sounding more and more hawkish, right? Yeah, I think the question becomes, we think maybe that economic data is probably overstated. So we're still working through some of the seasonal adjustments that we have to digest. But when you look at the leading indicators that are ahead of us, it actually shows a Rob, just walk us through the investment strategy from here because obviously we've seen higher inflation plus positive economic data stateside through February that's kind of spooked investors. And then on top of that, you also have Fed officials sounding more and more hawkish, right? Yeah, I think the question becomes, we think maybe that economic data is probably overstated. So we're still working through some of the seasonal adjustments that we have to digest. But when you look at the leading indicators that are ahead of us, it actually shows a weakening macro story, especially in the US, given everything that we've seen from the Federal Reserve, it's come up.

Fed's probably going to raise interest rates to debate over 25 or 50 basis points. It's probably not. It's more of a straw man argument at this point. Rates are going to go up slightly, but we think at this point, the clock is ticking on economic damage. The further the Fed has to go up from here, probably the more likely we are to see an actual US recession in the second half of this year. Okay, so how do you trade around it? And we're evaluating weakening macro story, especially in the US, given everything that we've seen from the Federal Reserve, it's come up. Fed's probably going to raise interest rates to debate over 25 or 50 basis points.

It's probably not. It's more of a straw man argument at this point. Rates are going to go up slightly, but we think at this point, the clock is ticking on economic damage. The further the Fed has to go up from here, probably the more likely we are to see an actual US recession in the second half of this year. Okay, so how do you trade around it? And we're evaluating looking the most attractive right now. Right now, our preference is the same. So the story in China, we do think has legs.

You've seen that the stronger than expected PMI data earlier this week, we think that story is likely to continue. So there are markets where we are positive. Now, I will caveat that by saying the pace of gains in Chinese markets will probably be much slower than what we saw in the last quarter of 2022. But we are really constructive on those numbers looking the most attractive right now. Right now, our preference is the same. So the story in China, we do think has legs. You've seen that the stronger than expected PMI data earlier this week, we think that story is likely to continue.

So there are markets where we are positive. Now, I will caveat that by saying the pace of gains in Chinese markets will probably be much slower than what we saw in the last quarter of 2022. But we are really constructive on those numbers as we head into the rest of this year. Now, factor in the US and we think that when you look at what's actually rallied in the first two months of this year, it's been everything that performed poorly in the last half of 2022. There's a bit of a rebound trade and we would advise investors not to chase that from here. As the economic data and earnings start to catch up, we'll start to look at US companies as they trade off. But for now, we're looking at companies with high degrees of free cash flow.

Those are the companies for us that can hold up and are durable during an economic as we head into the rest of this year. Now, factor in the US and we think that when you look at what's actually rallied in the first two months of this year, it's been everything that performed poorly in the last half of 2022. There's a bit of a rebound trade and we would advise investors not to chase that from here. As the economic data and earnings start to catch up, we'll start to look at US companies as they trade off. But for now, we're looking at companies with high degrees of free cash flow. Those are the companies for us that can hold up and are durable during an economic downturn, which again, we do expect in the second half of this year.

Capital Connection, CNBC