The MSCI Emerging Markets lost %, the decline of which was led by MSCI EM Middle East & Africa (-3.55%). Meanwhile, the MSCI Emerging

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1 1 APRIL 2018 Geopolitical Premium Pushes Oil Higher IN THIS ISSUE Geopolitical risks are rising following the (likely) appointments of Mike Pompeo and John Bolton to US President Donald Trump s foreign policy team and this increases the potential for disruptions to oil trade and supply. The recent launch of the Shanghai Futures Exchange (SHFE) Chinese crude futures contract is also adding further uncertainty with market participants unsure as to how it will trade relative to current oil futures benchmarks. Geopolitical Premium Pushes Oil Higher Page 1 2 US Technology Stocks under Pressure? Page 3 Read more on page 2 > Market Performance How Will A Trade War Affect EM? Page 4 In the US the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite all declined by -1.77%, -1.87% and -2.68% respectively. The MSCI Emerging Markets lost %, the decline of which was led by MSCI EM Middle East & Africa (-3.55%). Meanwhile, the MSCI Emerging EUR May Appreciate in the Medium Term Page 5 However, the European Stoxx 600 Europe and MSCI AsiaXJapan climbed 1.04% while the Nikkei 225 and the Topix were up by lost -2.00% and -0.63% respectively. 1.29% and 0.47% respectively. MARKET OUTLOOK PAGE 1 INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.

2 Geopolitical Premium Pushes Oil Higher (continued) The recent movement of crude price has seemed akin to the classic geopolitical premium trading environment as futures have spiked, percentage of volume has risen despite higher prices and yet few barrels have been lost (yet) and physical crude markets are still soft. The geopolitical premium, potentially sizeable crude builds in March or April and a flurry of potential geopolitical flashpoints occurring in May look likely to keep oil markets choppy in the second quarter of this year according to Citi analysts. Despite no Iranian barrels being disrupted yet, the potential for disrupted supplies from Iran and Latin America has increased with John Bolton s appointment as US National Security Advisor. Bolton is a notable foreign policy hawk and a vocal critic of the Joint Comprehensive Plan of Action (JCPOA) deal, making it more likely that Trump won t sign the sanctions waiver that is due no later than 12 May. The issue for oil markets is how to price this risk, as the decision doesn t have a binary outcome and the timing is highly uncertain. Financial flows continue to play a crucial role in price formation and Citi analysts believe the market may be positioned for a move to the upside in the near term although Citi s structural view on the oil market remains bearish into Citi s forecast for ICE Brent prices are $59 per barrel in 2018 and $49 per barrel for Global oil demand (million barrels per day) Citi analysts believe the market may be positioned for a move to the upside in the near term. Source: EIA, FGE, IEA, JODI, NBS, PPAC, Citi Research. As of 27 March MARKET OUTLOOK PAGE 2

3 US Technology Stocks under Pressure? Several top US technology stocks fell in March over growth, safety and privacy concerns are they still attractive? Rising concerns over the safety of self-driving cars, privacy on social media and whether the tech bubble is about to burst has sent US technology stocks tumbling. In addition, reports that US President Donald Trump will crack down on Chinese companies investing in certain types of US tech companies has added fuel to the fire. But EU threats regarding new digital revenue taxes, social media investigations and alleged monopolistic behavior all were seen as passing risks but not that substantive according to Citi analysts. Technology stocks comprise roughly 25% of the S&P 500 market cap and Citi has been overweight on the sector. According to Citi analysts, the good news is that IT demand is still strong and not excessively valued as was in place in 1999/2000. According to Citi Technology as the best-performing sector in 2017: Price Performance (US$) analysts, IT demand is still strong and not excessively valued. Source: Citi Research, MSCI, Factset. As of 4 January The IT sector has indeed seen its profits climb sharply, more than already-high US profits generally. But unlike 1999, the IT sector has only seen its valuation climb slightly above its earnings contribution a far more mild valuation risk than was the case in Also quite unlike 1999 Citi analysts see no massive, obvious excesses in IT fundamentals to unwind. As such, Citi maintains a cautious but overweight view on the technology sector. MARKET OUTLOOK PAGE 3

4 How Will A Trade War Affect EM? Many Emerging Markets are dependent on trade what will happen to EM equities in the event of a trade war? Emerging market (EM) economies get their liquidity via both the trade channel and capital flows, which boosts the asset side of the central banks balance sheets thereby boosting domestic liquidity and asset prices. As such, anything that slows or reverses trade or capital flows is negative for EM equities. Some regions more than others but in aggregate, all are head lower. Asia is the most open of the three EM regions to trade and has the most connections along the global value chain, so trade issues matter most to Asia. According to Citi, yearto-date earnings growth forecasts for EM have increased but that may reverse depending on the severity of the trade issues. EM as an asset class is very export dependent. Asia the largest region is the most export-dependent part of EM and some of the larger markets such as Korea and Taiwan are especially vulnerable to a slowdown in trade. EM exports size relative to GDP Increased trade tensions is not Citi s view. Source: Citi Research. As of 16 March The effect of less trade on EM liquidity is negative. It is also negative for corporate profitability. EM isn t expensive by and large but under a trade war scenario, Citi believes it can certainly become cheaper. Nevertheless, Citi analysts do not expect a trade war and continue to remain overweight on EM equities. In terms of sectors, EM consumer and telecoms are the least risky with the highest quality attributes. MARKET OUTLOOK PAGE 4

5 EUR May Appreciate in the Medium Term The USD may be on the decline, but the medium-term outlook is bright for the EUR. Citi analysts remain bearish on the US dollar for the medium term, as the US has already seen a sharp deterioration in the trend of the net international asset position and will now run the largest twin deficits in recent history (outside of the global financial crisis period). Meanwhile, the EUR has established a solid base over the period. As Citi anticipates progressively less accommodative European Central Bank (ECB) policy, further appreciation is likely although slightly lower soft (relative) data momentum in the eurozone and dovish ECB soundings have taken some steam out of the uptrend. As Citi anticipates DM & EM Forecasts Path progressively less accommodative European Central Bank (ECB) policy, further EUR appreciation is likely. Source: Citi Research. As of March With only a year to go until Britain leaves the European Union, very little has been agreed in terms of trade. Citi analysts see the Irish border issue as a major potential stumbling block to the negotiations and represents the biggest downside risk to the GBP. While Asian currencies may be most directly in the firing line of the Trump administration when it comes to tariffs, this threat can also work to strengthen them as it reduces the extent of intervention by local authorities. Citi analysts see most upside in MYR, but also think that IDR and PHP can do well. Despite heightened risk surrounding potential trade wars from the US administration, the continued robustness of Asian currencies versus the USD is likely a boon for the AUD as the two have traded virtually in lockstep this year. MARKET OUTLOOK PAGE 5

6 World Market at a Glance Last price 52-Week 52-Week Historical Returns (%) 30-Mar-18 High Low 1 week 1 month 1 year Year-to-date US / Global Dow Jones Industrial Average % -1.77% 16.28% -2.49% S&P % -1.87% 11.52% -1.22% NASDAQ % -2.68% 19.43% 2.32% Europe MSCI Europe % 0.77% 11.38% -2.41% Stoxx Europe % 1.04% -2.52% -4.70% FTSE % -0.19% -4.25% -8.21% CAC % 0.60% 1.53% -2.73% DAX % 1.54% -1.30% -6.35% Japan NIKKEI % 1.29% 12.54% -5.76% Topix % 0.47% 12.35% -5.57% Emerging Markets MSCI Emerging Market % -0.95% 20.78% 1.07% MSCI Latin America % -1.07% 14.08% 7.24% MSCI Emerging Europe % -2.00% 15.04% 4.05% MSCI EM Middle East & Africa % -3.55% 12.65% -1.60% Brazil Bovespa % -0.46% 30.80% 11.73% Russia RTS % -0.97% 9.86% 8.23% Asia MSCI Asia ex-japan % -0.63% 22.46% 0.43% Australia S&P/ASX % -2.86% -2.32% -5.04% China HSCEI (H-shares) % -1.68% 15.86% 2.47% China Shanghai Composite % -2.63% -1.29% -4.18% Hong Kong Hang Seng % -1.60% 23.84% 0.58% India Sensex % -3.17% 11.20% -3.20% Indonesia JCI % -5.98% 10.66% -2.62% Malaysia KLCI % 0.40% 6.53% 3.71% Korea KOSPI % 1.82% 12.99% -0.88% Philippines PSE % -5.66% 8.83% -6.76% Singapore STI % -1.47% 8.03% 0.74% Taiwan TAIEX % 1.94% 10.74% 2.47% Thailand SET % -1.97% 12.43% 1.29% Commodity Oil % 6.02% 28.98% 7.48% Gold spot % 0.17% 6.63% 1.68% Source: Citi Research as of 30 March MARKET OUTLOOK PAGE 6

7 Currency Forecasts Last price Forecasts Currency 30-Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 G10-US Dollar Euro EURUSD Japanese yen USDJPY British Pound GBPUSD Swiss Franc USDCHF Australian Dollar AUDUSD New Zealand NZDUSD Canadian Dollar USDCAD EM Asia Chinese Renminbi USDCNY Hong Kong USDHKD Indonesian Rupiah USDIDR 13,768 13,677 13,526 13,420 13,538 Indian Rupee USDINR Korean Won USDKRW 1,064 1,058 1,057 1,055 1,052 Malaysian Ringgit USDMYR Philippine Peso USDPHP Singapore Dollar USDSGD Thai Baht USDTHB Taiwan Dollar USDTWD EM Europe Czech Koruna USDCZK Hungarian Forint USDHUF Polish Zloty USDPLN Israeli Shekel USDILS Russian Ruble USDRUB Turkish Lira USDTRY South African Rand USDZAR EM Latam Brazilian Real USDBRL Chilean Peso USDCLP Mexican Peso USDMXN Colombian Peso USDCOP Source: Citi Research as of 30 March MARKET OUTLOOK PAGE 7

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