Citi says investors should avoid chasing the rebound in value stocks

• Citi says US-led developed markets are shifting towards a "value rally" that's not sustainable in the long-term.
• They attribute the surge in value stocks to higher 10-year interest rates and oil prices, which are both vulnerable to market volatility.

The recent strength of stocks traded at discounted valuations may make the area seem alluring to investors, but Citi warns against chasing the rally.

Citi largely attributes the surge in value stocks to a high 10-year Treasury interest rate and oil prices, but says both are susceptible to volatility that could derail their position as upward catalysts.

"The rotation underneath an all-time high equity market has clearly turned to Value in April in the US, Europe and Japan," wrote Citi strategists led by Hong Li. "At the same time, Price Momentum performance has stalled (-0.1%) and Growth underperformed the most in the US while Low Risk posted the worst return in Europe."

The strategists also argue that anticipated rate cuts later this year could eventually halt the value rally, with growth stocks expected stronger expected earnings growth and share gains.

They also warn that value stocks are highly correlated with the energy sector, which has shown its own signs of getting overextended. The strategists see technology stocks leading a wave of earnings beats that the energy and utility sectors will likely miss out on, suggesting potential weakness ahead for the value trade.