Important Links

Assessing Quality in Equities

6 April 2020Equities

3 criteria to evaluate "high quality firms":

  • How much cash firms held entering 2020 as a share of 2019 revenue – The higher the number, the better able a firm is likely to be able withstand revenue shocks, thus preventing cuts to dividends, capital expenditure etc.
  • Operating profit margin – A firm with a wider profit margin could be better positioned to withstand costly supply chain disruptions and potentially strong pricing power in their respective industries.
  • Leverage (net debt over equity) – Firms with lower leverage tend to have a lower risk of bankruptcy.
  • Screening for this criteria, Citi analysts find the basket is skewed towards sectors less impacted by the health crisis like IT, Health Care and Communication Services. These group may continue to outperform throughout the downturn, as earnings are likely to be much less impacted than more consumer-oriented sectors.

Assessing Quality in Equities

Past performance does not guarantee future results, real results may fluctuate.

Implications for portfolios:

  • Companies with high quality balance sheets tend to skew towards "growth" over "value", favoring IT, Health Care and Communications Services over Energy and Industrials. Firms in developed market economies also tend to be of higher quality, with more established businesses and superior corporate governance than found in most emerging markets. Lastly, high quality companies also tend to be larger. Small caps are more likely to be loss-making, have higher leverage than bigger firms and have low levels of cash on hand.
  • While most hard-hit segments of the market could have greater eventual "bounce-back potential", as the global economic contraction plays out in coming months, Citi analysts believe it is important to keep equity portfolios "healthy" with allocations to high quality, cash-rich firms.

Our recent research

Implications of a Deteriorating US-China Relationship

Just as the world is straining to see the first light of dawn from this crisis, the conflict between the US and China was reignited. In the near term, there is likely to be more negative impact from trade conflict, as the excitement of initial recovery fades, and as economic tensions escalate to sovereign.

Find out more

Asia PacEmerging MarketsEquities

Fed Support for Fixed Income Eases Liquidity Concerns

The US Federal Reserve's purchases of corporate bond ETFs alleviates liquidity concerns that created sharp price declines during March-April sell-off.

Find out more

BondsUS

A Likely Slower Grind Higher for Gold

Citi analysts remain medium-term bullish on gold, but see a likely slower grind higher, expecting 2020’s prices to average US$1,680/oz.

Find out more

Commodities

Take the first steps to your wealth management planning with Citi

Speak to a Relationship Manager
0207 500 1992

Already with Citi? Contact your relationship manager or view product availability on Citi Online

Why choose Citi

A relationship - not just a bank account

A dedicated Relationship Manager giving you access to our internal team of product experts and all our benefits

Access to exclusive Citi products

A range of current and investment products available both on shore and offshore, in the currency of your choice
Multi-currency accounts
Investment products

Global services for a global lifestyle

Our team is here to support you getting started in UK or with International travel and relocation
Moving to and from the UK
Travelling overseas

Offshore investments

We offer a diverse range of banking and investment services, including for those who want access to offshore investments

Find out more

Just moved to the UK?

We can save you time money and hassle. If you are a foreign national in the UK, Citi's International Banking Service can help you manage your money, home and away.

Find out more

Investment products are not insured by any governmental agencies, are not bank deposits, and are neither obligations of, nor guaranteed by, Citigroup, or any of its affiliates, unless otherwise stated. Investment products are subject to investment risks, including possible loss of some or all of the principal amount invested. Past performance is not indicative of future results, investments can go down as well as up.

“Citi analysts” refers to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”) and voting members of the Citi Global Investment Committee. Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. The information on this page has been obtained from reports issued by CGMI. Such information is based on sources CGMI believes to be reliable. CGMI, however, does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute CGMI’s judgment as of the date of this page and are subject to change without notice. This page is for general information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this page may be reproduced in any manner without the written consent of Citibank N.A. Information on this page has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Citi Research (CR) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this information. Investors should consider this information as only a single factor in making their investment decision.

Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions.