Real yields could be set to continue rising, which is “bad” for equity markets, strategists at Citi said.
Those tilted towards highly-rated Growth stocks were especially exposed to such a development.
Their recommendation to clients who fearful of higher real yields was therefore was to underweight the US and overweight the UK, favouring so-called Value stocks over Growth and Energy/Financials over Technology.
Some of the most favoured Environmental, Social and Governance plays might also be vulnerable, they said.
Between early-2019 and the end of 2020, real yields had dropped from 1.2% to -1.1% and were now back to -0.6%.
A further rise to 0% could see the MSCI AC World Index derate from a 12-month forward price-to-earnings multiple of 20 to 17.
However, it was unlikely that the Fed would allow real yields to rise “much above” 0% “given high levels of public and private sector leverage,” they argued.
“A stock market sell-off might also provoke more aggressive central bank asset purchases.”
