SINGAPORE Investors should shun all risky assets and hold cash until early November when the Group of 20 leading economies (G20) meets to find a solution for the euro zone debt crisis, a Citigroup (C.N) strategist said.
"The way with which the euro zone crisis is managed will dictate whether or not we have slow growth in the United States or a global financial crisis," John Woods, chief Asian strategist at Citi Private Bank, told the Reuters Global Wealth Management Summit, on Tuesday.
"If Europe does the right thing, if we have a sensible European solution, then I do believe we're actually going to have a fairly aggressive relief rally."
His comments came as world stocks hit a fresh 15-month low on Tuesday on growing doubts over Greece's ability to avert a default that would spark a major banking crisis in Europe and accelerate a global economic slowdown.
In a meeting in Luxembourg, euro zone finance ministers said they were reviewing the size of the private sector's involvement in a second bailout package for Greece, a move that threatens to hasten a default.
Citi's Woods, who has been underweight on equities for the last six to nine months, said he would not advise clients to buy risky assets at a time when gold, considered by many as a safe haven, is also hammered.
FURTHER DOWNSIDE LIKELY
European officials are scrambling to put in place a comprehensive crisis-fighting plan by the time leaders from the G20 meet in France on Nov 3-4.
"I think there is further downside likely. My sense is we have an awful lot of volatility between now and the November meeting," he said.
Woods said Citi has been bullish on the U.S. dollar and U.S. fixed income.
"There is one reserve currency in the world, there is only one market with a depth and breadth that can absorb pretty much every single bit of ex-dollar liquidity into the system," he said.
But one of the investment themes has also been to advise clients to diversify into the Japanese yen and the Swiss franc and in other fixed-income assets such as sterling gilts.
The bank has also been promoting coal as a theme because the commodity is "under-owned."
"Thermal coal is the only commodity that's likely to increase in price this year because of underlying demand from China and India."
While hedge funds would have been a good investment in the current environment, even they are turning risk averse, taking cognizance of counter-party risk, Woods said.
European banks have lent around $2 trillion to emerging markets, and a new banking crisis would be very painful for Asia, he said.
"If there is a European banking crisis, the sucking sound of money leaving Asia is going to be deafening as all this liquidity is taken back."
(Additional reporting by Kevin Lim and Cerelia Lim; Editing by Muralikumar Anantharaman and David Cowell)