BCT Market Outlook. Feb 2019 P.1. US Europe Japan Asia ex. Japan China & HK Global Bonds Government Bonds Credit. Overweight. Neutral.

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1 Investment Markets Equities US Europe Japan Asia ex. Japan China & HK Global Bonds Government Bonds Credit BCT s Investment Views Scales of weighting: Underweight, &. US Equities After a complicated year-end and a month of December that erased the performances achieved so far, the market recovered in January in view of the Federal Reserve's decision to put rate hikes on hold and the signal that any future action would depend on economic data. However, still above its potential, economic growth is slowing down. In addition, the effect of the longest shutdown in history (interruption of some public services) which lasted for 35 days could weigh on January's activity and employment figures. The S&P 500 Index gained 8% in January driven by the change in the tone of the major central banks which have given more conciliatory signals. Meanwhile, the resumption of trade negotiations between the United States and China reassured investors. The Russell 2000 Index (an index of mid- and small-caps) outperformed the large-cap indices, with a monthly return of 11.2%. At sector-level(1), all sectors ended the month in positive territory, from 3.4% (Utilities) to 11.4% (Industrials). Several sectors performed above 10% (Communication Services & Consumer Discretionary +10.3%, Energy +11.1%, and Industrials +11.4%). The VIX Index (a measure of aversion to risk) was on a downward trend and decreased nearly 9 points from 25.4 as at end- December to 16.6 as at end-january, yet remained at a high level. Assuming no major downward revisions in earnings, the U.S. market continues to be supported. Volatility will likely remain high as the market navigates through negative earning revisions. The market has already digested earning revisions in selected industries, such as Energy and Capital goods. But it seems likely that there is still room for further revisions in those industries as well as Financials. In our view, we have increased our preference for the big technology/faang sector, which now offers more reasonable valuations and more durable business model in the U.S. economy. In general, this should be a good environment for active management. Valuation superiority plus avoiding the worst negative revisions, particularly in cases where they re not priced in should be rewarded on a relative basis. We do believe that a recession is highly unlikely in 2019, but the cycle-end story will probably return to the fore at some point by next summer, as the fiscal multiplier impact fades, and as the effects of monetary policy tightening show up. We are overweighting on U.S. equity markets mainly due to the opportunity for a tactical rebound. P.1

2 European Equities 2019 has started positively with the MSCI Europe adding gains to the tune of 6.2% in EUR terms in January. Rotation was a key feature of the European equity market in 2018, and this theme remains at play today. With the European market being dominated by the defensives during the final months of 2018, sectorial leadership in January was more mixed. On the political front, the key risks that drove investors out of the European equities in 2018 remain. Firstly, turning to Brexit, UK assets remained volatile following the failure of Theresa May to successfully negotiate an acceptable Brexit deal. Secondly, the ongoing threat of a potential trade war between the US and China continues to grab headlines. In this context, we believe that bouts of the short term volatility will remain a key component of the equity market in the near term. However, with a more medium-term view we see cause for optimism. The correction in the market that we saw during the second half of 2018 took valuations in the market back below the long term averages. Adding to this, the rise in valuation dispersion, with some cyclical areas being disproportionately punished appears to have provided a floor during the early weeks of While we are in the very early days of the earnings season, indications are pointing to a robust earnings delivery for the European corporates. Reflective of a more depressed valuations, it has been particularly interesting to look at the share price reactions on the day of earnings release. At sector level(1) (in EUR terms), with the European market being dominated by the defensives during the final months of 2018, sectorial leadership in January was more mixed. On the positive side, Real Estate (above 10%), Consumer Discretionary and Materials (+8%) led the move higher, while Communication Services (-2.4%) lagged. After a torrid end to 2018, the more positive market environment that we have seen in recent weeks has provided some respite for investors. With the current uncertainties of Brexit and the trade war dispute casting a cloud over sentiment, we believe that bouts of short term volatility are likely to persist in the coming months. European corporates are continuing to deliver Earnings Per Share ( EPS ) growth, and despite EPS forecasts being trimmed, top line growth remains robust. While we are in the very early days of the fourth quarter s earnings season, these trends appear to be confirmed. One observation of the current earnings season has been the relatively good performance of names which have actually issued more downbeat results. On cyclicals, some names have excessively repriced, Industrials in particular offer good opportunities both in the quality cyclical and in the quality defensive compartments. We prefer this cyclical exposure to other areas such as Materials. On defensives, in contrast, some areas have become relatively expensive. We are less positive on Consumer Staples given valuations that appear complacent and given the disruption that several of the staple companies face, which expands the range of outcomes (uncertainty) in our forecast. Healthcare among the defensives have more compelling risk reward in our view. We remain neutral on European equity markets again due to an environment of political uncertainties. It will probably be necessary to wait for the European elections in May 2019 which will result in a new parliament, a new European Commission, a new Chancellor in Germany, and clarification regarding the leadership of the institutions of the European Union ( EU ) (Commission, ECB) to make significant progress in strengthening the EU and the Eurozone. Japanese Equities Receding fear for global economic slump energized Tokyo equity market in January. The TOPIX (NR) recorded 4.9% up (in JPY terms), marking first advance in two months mainly driven by large-cap stocks. The Topix Large-Cap Stock Index was up 5.4% while the Topix Small-Cap Index gained 3.0%, in JPY terms. There are news around the potential TOPIX restructuring, even though the details have not been disclosed yet, have been tapping the upside potential of small cap companies. Japanese equities rose in January 2019 as a whole in response to the Chinese economic stimulus measures and increased expectations for the US-China trade talks. Japanese equities were also buoyed by speculations of further U.S. interest rate hikes receding and a favorable reaction to results at U.S. corporations in the semiconductor industry and elsewhere. P.2

3 Looking at the performance among the TOPIX 500 stocks, investors preferred high-risk, undervalued materials and capital goods sector stocks. The Bank of Japan ( BoJ ) policy board maintained its monetary easing framework at the January monetary policy meeting. The bank released a new outlook report in which it revised down its Consumer Price Index ( CPI ) forecasts for FY2019 and FY2020 to 0.9% and 1.4% respectively. At the same time, the board maintained its firm assessment of the current state of Japan's economy and growth outlook. December s trade balance came in at -JPY55.3bn. Exports swung by -3.8% year-over-year ( YoY ), while imports grew by 1.9% YoY, both decelerating compared to the growth observed in November. On a seasonally adjusted (SA) basis, the trade balance was -JPY183.6bn, marking the sixth consecutive month of deficit, but was stronger than what we had expected. December BOJ Tankan reported with surprise that capital investment plan for this fiscal year revised up from three months ago. Although weaker exports discourage export-oriented companies, long-lasting low interest rate policy and ample idle cash at firms should ensure sustainability of business investment. Exports to Asia faltered due primarily to stagnant demand in smartphones and weaker Chinese economy on the back of US-China trade dispute. However companies see contagion from trade war inevitable, but magnitude of the negative impact will be relatively shallow. The government announced economic package worth JPY2.3 trillion (0.5% of GDP) to alleviate burden of a Value-Added tax ( VAT ) hike scheduled in October With the economic stimulus, actual burden of the household sector will be confined to 2 trillion which will be completely offset by a 0.5% increase in real wage. For 2019, BOJ is unlikely to drastically amend its policy on low consumer inflation and a series of critical events. Core CPI will be substantially lowered by hefty mark-down in mobile monthly charge in April. Meanwhile, consolidated municipal elections in April, the accession of the new emperor in May, Upper House elections in July and a VAT hike in October should prevent any policy change. We stay positive on Japanese equity markets. Two thirds of the companies have revised their earnings forecast downward. However, the valuation is already at recession level, so the negative outlook has already been factored into the share price to some extent. Even though we do not expect the market to rebound in short term, there will be some positive news flows such as further economy stimulus policy and reconstruction demand to be announced by the government in Japan and China. Asia ex Japan Equities The Asia ex Japan Equity market started the year firing on all cylinder, similarly to The MSCI Asia ex Japan Index posted a +7.8% performance in USD terms, with all countries in positive territory except India. Northern countries China and Korea led the pack, both posting double-digit performances. Multiple factors contributed to the strong equity rebound such as a dramatic dovish shift from the Fed in January, a technical rebound after December and its depressed valuations and easing development in the Sino American trade war. Taiwanese equity market started the year with a mild positive performance, with most sectors being positive by the end of the month, except Communication Services and Energy. The Indonesian started the year on a positive note, with all sectors ended up in positive territory except Energy which remained flattish. Utilities, Industrials and Materials led the pack with double-digit returns. The Philippines started the year firing on all cylinder, with all sectors ended up in positive territory, and Consumer Staples, Telecoms and Industrials leading the way (double-digit performance). Singaporean equity market slightly lagged behind Asia ex Japan, but all sectors posted positive returns, with Consumer Discretionary being the main driver and Financials the laggard due to the three big banks insignificant returns. Thai Equity market started the year with a strong equity performance (buoyed by the Thai Baht, appreciating around +3.5%). All sectors but materials yielded positive absolute returns, led by both Consumer Staples and Discretionary. As said, India suffered (MSCI India -1.6% in USD terms) due to the rally in Brent crude oil prices (up 23% from December lows) and certain company-specific issues in certain stocks related to pledging of shares owned by company founders, which made mid-caps and small caps significantly underperformed large caps. P.3

4 The first GDP of Q42018 releases in the area continue to show a mildly decelerating trajectory. The Philippines GDP has remained stable at 6.0% YoY, growing less than expected, while South Korea surprised on the upside. Overall, domestic demand is proving to be more resilient than external demand. The region s inflation figures remained benign. Inflation in the Philippines continued to decline significantly, to 5.1% YoY from 6.0% YoY. The BSP (Central Bank of the Republic of the Philippines), and BI (Central Bank of Indonesia) recently took a break in their aggressive hiking cycle. Overall, CBs in the region are in a wait-and-see mood, but we do expect some easing in India in the near future. The electoral cycle is beginning in the region: the date of 24 March has at last been set in Thailand, along with 17 April in Indonesia, and between April and May in India. The most fragmented outcome is expected in India. We remain neutral on the Asia ex-japan equities due to the growth decelerating (but still decent), and the uncertainties due to the election cycle which will be starting soon. We have turned more constructive on countries that may benefit from a peak in interest rates like India and Indonesia, but continue to be cautious on Taiwan, especially as earnings sustainability of Financials and Materials looks poor. In addition, valuations in Thailand look relatively stretched, while political risks might rise again. China & Hong Kong Equities Similarly to 2018, the Chinese Equity market started the year with a strong January performance, with the MSCI Index posting a 9.5% performance in USD terms. All sectors ended up in positive territory, with Consumer Discretionary and Health Care leading the pack (with >15% positive returns). The rebound in equity valuation was mostly due to the easing development of the Sino American trade war, the ramping up of domestic easing policies, and a dovish tilt of the Fed that triggered a global rally. The resumption of negotiations between Beijing and Washington on the "trade war", first negotiations since the December s agreement between American and Chinese presidents, and the announcement of a meeting at the end of the month between the Chinese Vice Prime Minister Liu He and his American counterparts, have facilitated the return of appetite for risks. On the economic side, the manufacturing Purchasing Manager Index ( PMI) for January came out slightly better than expected, with 49.5 vs 49.3 (expected) and 49.4 for December. Both RMB and CNY remained on an upward trend, appreciated by 2.6% to and 2.4% to respectively in anticipation of good news on trade discussions. After lowering its RRR (Reserve Requirement Ratio), People s Bank of China ( PBOC ) remained on the move and injected liquidity into the interbank market in anticipation of the huge liquidity needed during Chinese New Year (the first week of February). On the economic front, One side, near term challenges look high as exports could suffer further according to recent PMI new export orders figures, with global economy slowing and signs of previous front-loading unwinding. On the other side, China s policymakers seem determined to use its cyclical policy supports to prevent a hard-landing. There was a strong push in fiscal spending in December, and the focus is on further fiscal moves. Policymakers already said: 1) to have a "larger scale of tax cut and fee reduction", 2) "to largely increase local government special bond issuance". More details to come by the annual People s Congress in early March. Overall, it looks like China s economy will continue to slow in the first half of 2019 ( H1 ) weighed by exports and Property while to a lesser extent by the Auto sector, before achieving some kind of stabilisation in the second half of the year with stronger policy passing through. If the US/China tensions do not deteriorate much further, China could still avoid a hard-landing. We are positive on Chinese & Hong Kong equities due to valuations have reached a very attractive level, post last year s correction. Global Bonds January got off to a good start for the global government and corporate bonds. Bonds and most non-dollar developed and Emerging Markets ( EM ) currencies performed well as they shrugged off the ongoing U.S. government shutdown which went on to become the longest in the U.S. government s history, before ending on the 25th of January. Treasuries yields slightly fell during January, the U.S. 2-year yields fell 0.03% to 2.46% and the 10-year yields dropped 0.05% to 2.63% mainly due to the more dovish Fed rhetoric which signalled a significant shift in interest rates and moved from a hawkish to neutral stance, and likely ending the tightening process in H1. P.4

5 The slightly more cautious bias of the European Central Bank ( ECB ) and the disappointing new statistics have encouraged a trend towards seeking yield on euro area interest rate markets, which has resulted in a flattening bull movement for most countries and a marked decline in most peripheral spreads. In January, the Bund and the 10-year OAT yields fell respectively from -0.09% to 0.15% and -0.16% to 0.55%. On the peripheral securities side, the Spanish 10-year yield fell from -0.22% to 1.20% while its Italian equivalent fell by -0.15% to 2.59%. Over in EM, sentiment remained positive in line with the Fed more dovish position and a China-US trade easing. The JPM Emerging Markets Bond Index (in USD terms) had a much better month, rose +4.4% during the first month of the year. In credit markets, January marked a significant reversal of the trend. Several catalysts have helped to restore credit appetite, (1) investors are particularly cash rich at the beginning of the year, (2) inflection of the Fed's and the ECB's speech, (3) the level of "core" rates on European government bonds favours credit, (4) the growth prospects are revised downwards, increasing investors' mistrust of equities, (5) the market is optimistic about the outcome of the trade negotiations between the US and China and (6) investors were lured by particularly attractive New Issue Premiums (NIPs) on the first issues of the year. The itraxx IG and Xover indices respectively narrowed by 0.17% and 0.45%. Despite beginning the year on the back foot following weaker than expected Caixin manufacturing PMI, the currency staged a strong rally towards the middle of the month as prospects for progress on US-China trade negotiations grew, returning around (July 2018 level). Pressures on capital outflows has eased somewhat, with risks manageable for now. Near-term challenges to China s growth look high. That said, further policy supports are underway, to help anchor growth outlook and sentiment of locals. The U.S. interest rate market moved from pricing two hikes to pricing only one rate hike in the space of few weeks, following the shift in rhetoric at the Fed and the weaker global economic performance. The move in rates was fast and possibly exaggerated, however we believe the downward pressures on yields will continue, especially for the U.S. bonds. We suggest maintaining a long duration preference in the U.S. while staying defensive in core Europe as we consider the current valuations unattractive, particularly on the short end of the curve. Overall, we do not see a strong case for higher yields. We think investors should exploit relative value opportunities. At the curve level, we suggest keeping a flattening bias in the European Monetary Union ( EMU ). On European credit, the recent spread widening has opened up opportunities; we consider the upcoming supply in the primary market as a chance to reload some risks, moving from a defensive to a neutral/slightly positive stance. We are also becoming more constructive on U.S. credit. We also see opportunities in the commercial mortgage-backed securities (CMBS) and in non-agency MBS. China Policy: Policymakers determined to use cyclical policies to prevent hard lending. Monetary: Clear easing bias; further RRR cuts likely; higher likelihood for benchmark bank rates cut. Fiscal: to be more supportive, next focuses on more tax cuts and larger local government special bonds. Reforms: Strong commitments to US and also top priority for China own structural transition. More concrete reforms and opening measures are expected to come, with pressures of US/China negotiations. We are slightly positive on Government Bonds (positive on the US government bonds and neutral on European government bonds), and neutral on U.S. Corporate Credit but positive on Euro Credit, i.e. on Global Bonds. (1) Sectors of the S&P 500 (U.S. Equities), Stoxx 600 (European Equities, Topix (Japanese Equities), MSCI China (Chinese Equities) indices. Investment involves risks. Past performance is not indicative of future performance. The value of constituent funds may fall as well as rise. For further information about the risks involved, please refer to the principal brochure of BCT (MPF) Pro Choice and BCT (MPF) Industry Choice. The information contained in this document is provided for information purpose only and does not constitute any solicitation and offering of investment products. Potential investors should be aware that such investments involve market risk and should be regarded as long-term investments. BCT BCT Financial Limited (Plan Sponsor) Bank Consortium Trust Company Limited (Trustee & Administrator) Issued by BCT Financial Limited The content of this Market Outlook is contributed by Amundi Hong Kong Limited. P.5