Citi Says Investors Should Avoid Chasing Value Stock Bounces

• Citibank said that the developed markets, led by the United States, is turning the曏 "value-based rebound", but this rebound is not sustainable in the long term.

• They attribute the surge in value stocks to rising 10-year interest rates and oil prices, both of which are susceptible to market volatility.

• Despite the Fed's recent dovish stance on rate cuts, the US 10-year interest rate soared to 4.35%, prompting stocks to follow suit.

Recent strength in stocks trading at discounted valuations may make the region seem enticing to investors, but Citi warns against chasing the market.

Citi attributes much of the rally in value stocks to higher 10-year Treasury rates and oil prices, but says both are vulnerable to volatility that could undermine their status as catalysts for the rally.

"Citi strategists, led by Hong Li, wrote: "In April, the rotation of U.S., European, and Japanese equities below record highs clearly shifted in favor of value stocks." Meanwhile, price momentum was stagnant (-0.1%), with growth performing worst in the U.S. and low-risk worst in Europe."

Strategists also believe that the expected interest rate cut later this year may ultimately prevent a rebound in value stocks, while growth stocks are expected to see stronger earnings growth and share price gains.

They also warn that value stocks are highly correlated with the energy sector, which itself has shown signs of overexpansion. These strategists believe that technology stocks will lead a wave of earnings that the energy and utilities sectors may miss, suggesting that value stocks may trade weaker going forward.

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