Citi warns markets are out of step with grim reality

Citigroup said financial markets were “way ahead of reality” with tougher times to come, warning corporate clients that they should raise as much money as they could before the pandemic’s true cost is factored in by investors.

“We definitely feel that the markets are way ahead of reality. We really are telling every client to tap the market if they can because we think the pricing now couldn’t get any better,” Manolo Falco, investment banking co-head at Citigroup, told the Financial Times.

“As the second quarter comes along and we start seeing the pain, and the collateral effects of that, we think this is going to be much tougher than it looks.”

His comments came at the end of a week when stock markets largely rallied even as millions of businesses around the world remained shut and economies lurched towards their worst recessions in memory.

“Markets are pricing a V [shaped recovery], everyone’s coming back to work, and this is going to be fine,” Mr Falco said. “I don’t think it’s going to be that easy quite frankly.”

Investors’ optimism led highly rated companies to raise a record $1tn of debt in the first five months of the year, putting investment banks such as Mr Falco’s on course for a big jump in debt capital markets revenues in the second quarter of the year compared with 2019.

Mr Falco said the demand for funding could prove to be a “great opportunity” for Citi.

Last week senior executives at some of the biggest banks also predicted another strong quarter for trading. This was especially true at JPMorgan Chase, where investment bank boss Daniel Pinto said trading revenues in the second quarter could be up as much as 50 per cent compared with a year earlier.

Mr Falco was more circumspect on the prospect of a wave of activist investment in the aftermath of the coronavirus crisis. Low asset prices can tempt activist investors to buy into companies on the cheap and then look for ways to make them more profitable, often by cutting costs and jobs.

“You gotta be careful though because an activist can become very quickly a focus of governments if they really step in too hard at a time when people, what they want is to protect employment and to actually get things going in the economy,” Mr Falco said. “We’ve got to be careful because in some cases . . . maybe those [investments] are at the wrong time and could create a lot of anger.”

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