Throughout the COVID-19 pandemic, the Fed injected liquidity into the financial system while driving interest rates to zero, which in turn, pushed investors to take more risk. Now, with the expectation of higher rates and diminished lending from the Fed’s balance sheet, the market is revaluing fast-growing but highly speculative businesses, as demonstrated by the selloff in many tech stocks.

For individual portfolios, this market dynamic aligns with Citi’s guidance to seek quality amid times of market uncertainty and less accommodative macro policies.

Until markets absorb the shift in monetary policy, Citi analysts expect large-cap tech stocks and quality, dividend-yielding names to outperform more speculative ventures that may not have access to the abundant and easy financing they once did.

Past performance is no guarantee of future results. Real results will vary.

The story of venture capital and PE of the past few years illustrates this point. Valuations of tech company IPOs rose dramatically over the past six years. But in Citi’s view, the upward valuation trajectory of these hot companies may not be sustained. In May 2021, Citi analysts cast doubt on the boom in IPOs of pre-revenue firms (the average of which had a US$6 billion valuation). Indeed, since May 2021, these same firms have lost about 40% in value.

Since 1Q21, the “slow, boring and prudent” approach of diversified portfolio construction has been the winning strategy. Global Investment Committee (GIC) portfolio asset allocation has moved to a more defensive positioning: keeping exposure to long-term growth assets that are changing the world economy and tactically overweighting defensive growth and income-generating assets found in dividend growth shares.

Valuations in several key elements of Citi’s Outlook 2022 Unstoppable Trends, like payments, fintech and cyber security have come down to reasonable levels relative to their expected growth rates. Citi analysts think there may be a potential opportunity to add some of these names to portfolios today.

Investors are also now turning their attention to earnings season, and record-high CEO confidence suggests another strong quarter.

An important theme to watch as the Fed enters a rate-hiking cycle is company guidance on pricing power and margins. Headline US CPI hit 7% year-over-year in December, so Citi analysts will be keeping an eye on margins to see if and how elevated price growth is impacting corporate profitability. S&P 500 profit margins rose to multi-decade highs in the first three quarters of 2021, despite rising input costs – an encouraging sign.