Citigroup sees global profits shrinking 5% in aftermath of banking turmoil

Buildings of Swiss banks UBS and Credit Suisse are seen at Paradeplatz in Zurich
Buildings of Swiss banks UBS and Credit Suisse are seen at Paradeplatz in Zurich, Switzerland March 21, 2023. REUTERS/Denis Balibouse

March 31 (Reuters) - Citigroup equity strategists flagged a likely 5% contraction in global profits this year as turmoil in the banking sector raises the risk of a recession.

Financial markets have had a turbulent few weeks after the collapse of some mid-sized U.S. lenders and a Swiss-backed takeover of Credit Suisse spooked investors about liquidity stress in the banking sector.

"Stress in the banking sector has reminded us of the consequences of monetary tightening. Going forward, we think investors' attention will increasingly shift from risks of higher rates to risks of recession," said Citi strategists led by Beata M Manthey.

The ongoing confidence crisis could limit banks' risk appetite and reduce the flow of credit, they warned, downgrading the global financial sector to "neutral."

As investors hunt for quality, Citi upgraded the technology sector - less affected by business cycles - to "overweight."

The analysts also noted that U.S. equities tend to outperform European peers during periods of profit contraction, prompting a double upgrade to "overweight," and a downgrade of the European stock market - heavy with cyclical stocks - to "neutral".

"Volatility will likely continue in the near term, as the market prices in the impact of an expected U.S. recession in (the second half of the year)," Manthey and team wrote in a note dated March 31.

They expect global equities to remain range-bound to the year-end.

Reporting by Priyadarshini Basu and Susan Mathew in Bengaluru;

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