"Citi Cuts US Stocks, Raises China on Pause in US Exceptionalism"

In a significant shift, Citi has downgraded U.S. equities from "overweight" to "neutral" while upgrading Chinese stocks to "overweight." This move reflects a broader economic trend and a pause in the "U.S. exceptionalism" narrative that has dominated since October 2023. According to Citi strategist Dirk Willer and his team, the interruption of U.S. exceptionalism has become more evident, suggesting that U.S. growth momentum will trail behind other global regions. However, the firm notes that U.S. stocks may regain their competitive edge once the narrative around artificial intelligence (AI) becomes dominant again.



The downgrade of U.S. equities is driven by several factors. Firstly, the firm has revised its stock ratings, indicating a pause in the "U.S. exceptionalism" narrative. Secondly, Citi anticipates that U.S. stocks may regain their competitive edge once the narrative around artificial intelligence (AI) becomes dominant again. This suggests that the current lack of AI dominance is a contributing factor to the anticipated slowdown in U.S. growth momentum.

On the other hand, Citi's upgrade of Chinese stocks to "overweight" highlights the appeal of Chinese equities, even after significant market gains. The bank emphasizes the strength of China's tech industry, government support, and attractive valuations. For instance, the "DeepSeek" initiative showcases China's technological advancements, which are at the forefront of, or even surpass, Western technology. This suggests that investors are increasingly recognizing the potential of Chinese stocks due to the country's strong economic fundamentals and supportive government policies.

The Chinese government's shift to a "moderately loose" monetary policy stance, the first time in 14 years, further supports this positive outlook. This policy change is expected to benefit the broad-based economy, including sectors such as property, consumption, and the stock market. Additionally, the anticipated expansion of the consumer trade-in program in China to include smartphones, tablets, and smartwatches is expected to boost consumption, further driving economic growth and investor sentiment.

In summary, Citi's shift in stock ratings reflects a significant change in broader economic trends and investor sentiment. The downgrade of U.S. equities is driven by a pause in the "U.S. exceptionalism" narrative and the current lack of AI dominance. On the other hand, the upgrade of Chinese stocks highlights the appeal of Chinese equities due to the country's strong economic fundamentals and supportive government policies. Investors may need to reconsider their allocations, potentially reducing their exposure to U.S. equities and increasing their investments in regions with stronger growth prospects, such as China. This shift in strategy could lead to a more diversified portfolio, reducing risk and potentially increasing returns in the long term.