Citi's Drew Petti outlines overweight stance on China, Korea and neutral view on India

With the US Federal Reserve's next policy meeting on the horizon, the market has largely priced in a 25 basis point rate cut, but the key focus remains on the path of future cuts and the resilience of the US economy. Speaking with CNBC TV18, Drew Pettit, Director of US Equity Strategy ETF Analysis Strategy Research at Citi, outlined his firm's global market strategy, highlighting an overweight position on select emerging markets and a neutral stance on India.

Pettit noted that while a rate cut in the upcoming meeting is expected, the more critical factor for markets is the trajectory of monetary policy into the next year. "Our economists and team expect 25 basis points, I believe at the next four meetings after December," he stated. The central question, according to Pettit, is whether these cuts will be accompanied by economic weakness or if the US economy will remain resilient. A scenario where the economy holds up despite rate cuts would signify a "soft landing," which could broaden market participation beyond mega-cap growth stocks into cyclical sectors where earnings growth might improve.

Looking at the S&P 500, which has already seen a 12% gain year-to-date, Pettit believes strong sentiment is likely to persist through the typically low-volume end-of-year trading period. He suggested that the index could close the year somewhere between 6,600 and 7,000, potentially threatening Citi's bull case scenario of 7,000.

Contrary to some assumptions, Pettit clarified that Citi's global strategy is currently overweight on Emerging Markets (EM). This is complemented by an overweight position on Europe (excluding the UK) as a cyclical play with potential for inflecting growth. However, the primary engine for their EM preference is the opportunity to gain exposure to growth and Artificial Intelligence (AI) at a reasonable valuation.

"EM is actually a way to get growth and AI exposure at a pretty reasonable price, and we lead the overweight in EM with China and South Korea," Pettit explained. He pointed to companies like Alibaba, Tencent, SK Hynix, and Samsung as examples of firms that screen well in their "AI at a reasonable price" basket.

Regarding India, Citi maintains a "neutral" stance. While acknowledging the strong and unchanged growth narrative, Pettit believes the positive outlook is already reflected in the country's valuations. "You have priced in a really good earnings and growth backdrop for India, so it remains neutral to us," he said. He also touched upon India's significant underperformance relative to the broader EM basket this year, attributing it partly to currency weakness, which he links to perceived tariff risks. He noted that for global macro traders, the currency often acts as the first "relief valve" for such concerns.