Citigold. Citigold. FINANCIAL MARKET ANALYSIS 15 August Where To Now? performance. Asset Allocation. China data calls for further easing

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1 Citigold FINANCIAL MARKET ANALYSIS 15 August 2016 Where To Now? Both bonds and equities in EM have performed well this year with the Citi Global Emerging Market Sovereign bonds index and the MSCI EM index higher almost 15% year-to-date (YTD). Although gold and oil outperformed (Gold: +26% YTD; Brent Crude: +26% YTD; WTI Crude: 20% YTD), performance of EM equity and credit markets was much stronger than commodities in the past few months. Citi analysts believe that EM outperformance has legs to go further as a supportive US dollar, cheap valuations, improving fundamentals and pick-up in growth momentum may continue to provide support. In the US, all 3 major stock market indices - S&P500, Dow Jones Industrials and Nasdaq hit record highs as earnings momentum appears to be improving after 6 consecutive quarters of deceleration. According to Bloomberg, of the 457 companies in the S&P 500 that have reported thus far, nearly 56% have topped sales forecasts, while about 78% have bested profit projections. Nonetheless, we remain neutral on US equity given that the Presidential election may increase volatility. Performance All major equity markets were higher last week, with the MSCI World rising 1.31% supported by EM as well as Japan. In the US, the Dow Jones Industrial Average and the S&P 500 Index ticked up 0.18% and 0.05% respectively while the Nasdaq Composite increased 0.23%. European equities measured by the Stoxx Europe 600 Index rose 1.38% while Japanese stocks jumped higher given some weakness in Yen (Nikkei 225: +4.09% and Topix: +3.38%). Meanwhile, EM equities continued to finish the week higher (MSCI EM: 2.77%), as the MSCI Emerging Europe spiked up 2.18%, the MSCI Latin America gained 3.35% and the MSCI Asia ex-japan rose 2.35%. Within Asia, the HSCEI index was the outperformer, gaining 4.64%, driven by expectations that SZ-HK Connect could be announced soon. Asset Allocation Equities With relative EM fundamentals improving, the Fed on hold and $ rangebound, along with BoE/BoJ/ECB liquidity support, we remain constructive on EM equities. Credit Despite a significant rally this year, we believe the relative value proposition remains compelling in Emerging market debt (EMD), especially in Latin America and certain parts of Asia. Rates The low global interest rate environment should anchor the long-end for US Treasuries as foreign investors continue to bid up safe haven, higher yielding USD assets. Commodities The fundamental story for a broad recovery in commodity prices remains intact and Citi analysts believe price declines as seen in 2H15 look unlikely. China data calls for further easing Citi Economic Surprise Index CESIUSD Index CESIEUR Index CESICNY Index HY bonds and EM debts outperform Accumulated 3-month Bond Index Returns World Govt Bonds Index Global EMD Index HY Index EM equities continue recent rally Accumulated 3-month Equity Index Returns MSCI World MSCI EM MSCI Asia Week Ahead Key Data and Event % 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 20% 15% 10% Date Country Data & Event Period Survey Prior Citi Fct 15-Aug JN GDP Annualized SA QoQ 2Q 0.7% 1.9% -0.4% 16-Aug US CPI MoM Jul 0.0% 0.2% 0.0% 16-Aug US Industrial Production MoM Jul 0.3% 0.6% 0.6% 18-Aug JN Exports YoY Jul -13.8% -7.4% -15.9% 18-Aug EC CPI YoY Jul 0.2% 0.2% 0.2% 18-Aug US Leading Index Jul 0.3% 0.3% 0.4% 18-Aug US Releases July FOMC Meeting Minutes Aug CH China Property Prices Jul Aug EC ECB account of the monetary policy meeting Aug US Initial Jobless Claims 13-Aug 265K 266K 260K 19-Aug JN All Industry Activity Index MoM Jun 0.9% -1.0% 1.0% 19-Aug ID Bank Indonesia 7-Day Reverse Repo19-Aug 5.0% 5.3% 5.0% 5% 0% -5% INVESTMENT PRODUCTS: variety of economic, NOT A BANK market DEPOSIT. and other NOT factors. GOVERNMENT Likewise, past INSURED. performance NO BANK is no guarantee GUARANTEE. of future MAY results. LOSE VALUE. Page 1

2 Drivers and Risks by Market United States Driver: This week, the important data readings will be for industrial production, housing, and CPI inflation. In addition, we will see the minutes from the Fed's July meeting, which occurred before the weak outturn for 2Q16 GDP was released. Risk: Heightened uncertainty in the run up to the presidential election in November and even afterwards has the potential to generate significant drag on growth (e.g., reduced investment and higher saving) that may lower GDP to below its potential End-2016 Target: 2150 Implication: We believe the Fed may choose to wait for more data, and for US presidential and congressional election-related uncertainty to subside. Thus we retain our December Fed rate hike call for now. Europe Driver: The second release of 2Q16 euro area GDP data confirmed economic growth slowed down relative to the start of the year, to 0.3% QQ, or 1.1% annualised the slowest quarterly pace since 2Q14. This was half the growth rate of 1Q16 (2.2% annualised), but still left the 1H16 average growth broadly in line with the second half of last year. Risk: Weakness in France may have been partly caused by the refineries strikes amid the labour code saga, which was also reflected in particularly weak industrial production (-0.5% MM in May, -0.8% MM in June). We reckon Italian GDP probably suffered from the negative spillovers of the ongoing bank turmoil, causing negative wealth effects amid falling share prices and hitting confidence. Implication: Looking forward, the major uncertainty on the 2H16 outlook remains the impact of the UK referendum vote on the euro area economy. Early data for Q3 mainly July monthly surveys suggest some resilience and point to the pace of economic growth having remained broadly stable relative to 2Q S&P End-2016 Target: DJ Stoxx TMI 270 Japan Driver: While there is uncertainty over the "comprehensive assessment" of monetary policy that the BoJ plans to conduct at its September policy meeting, Citi analysts expect the BoJ may largely justify the effectiveness of the current policy framework (including NIRP) while also starting to carefully communicate its intention to introduce more flexibility to the large-scale JGB purchasing operation. Risk: With almost all listed companies having announced April June results, data collated reveal a significant 15.2% YoY drop in Recurring Profit (RP) and that firms are forecasting RP down 6.2% but Net Profit (NP) up 0.9% for FY3/17 as a whole End-2016 Target: 1350 Japan Topix Implication: We believe that the earliest timing for the BoJ s next easing is its meeting on October 31-November 1 when policymakers update their quarterly Economic Outlook Report. However, it is unlikely that the BoJ will change its bullish economic projections in a way that warrants an additional easing action. As a result, Citi s base-case scenario is that the BoJ may only do so in January Asia Driver: In China, we foresee a manageable slowdown without hard landing, given the positive property chain impact and also Industrial Production resilience amid FAI slowdown. Furthermore, we expect eased bond defaults in 2H16 given less interest payment pressure and stabilizing commodity prices. Risk: Delays to a cut in the Reserve Requirement Ratio (RRR) may keep firms funding costs high, and weigh on investment growth. This in turn leads to a more sluggish growth outlook in Q3. Implication: Citi analysts raise our MSCI China (MXCN) mid-17 target to 68 (prior 62) to factor in less credit risk concern. Correspondingly, HSCEI target was raised to 10,600 (prior 9,500). Our CSI300 target was fine-tuned to 3,200 (prior 3,000). Our MXCN and HSCEI preferences over CSI300 remain unchanged despite the 15% outperformance YTD, given CSI300 s valuation premium. End-2016 Target: MSCI Asia ex JP 300 Page 2

3 Currency Forecast Last price Forecasts Currency 12-Aug-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 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 13,121 13,316 13,464 13,515 13,535 13,555 13,575 Indian Rupee USDINR Korean Won USDKRW 1,103 1,168 1,178 1,168 1,152 1,136 1,120 Malaysian Ringgit USDMYR Philippine Peso USDPHP Singapore Dollar USDSGD Thai Baht USDTHB Taiwan Dollar USDTWD EM Europe Russian Ruble USDRUB South African Rand USDZAR EM Latam Brazilian Real USDBRL Mexican Peso USDMXN Source: Citi Research and Bloomberg as of 12 August 2016 \\ Weekly Market Performance (8 12 August 2016) 0.4% 0.1% 0.0% 1.1% 0.8% 0.6% 1.8% 1.6% 1.4% 1.3% 2.8% 2.5% 2.4% 2.2% 3.4% 3.4% 6.4% 4.6% 0% 5% 10% Gold China HSCEI Japan TPX Index MSCI Latin America HK Hang Seng China Shanghai Composite MSCI AsiaXJapan MSCI Emerging Europe UK FTSE 100 Korea KOSPI Europe Stoxx Europe 600 MSCI AC World Citi Global Emerging Mkt Sovereigns Citi High Yield Taiwan TAIEX Citi World Broad Inv Grade US S&P 500 Market Performance (Year-To-Date) (As of 12 August 2016) Oil Short Rates and 10-Year Yield Forecasts Last price 12-Aug-16 3Q16 4Q16 1Q17 2Q17 3Q17 Short Rates (End of Period) US Japan Euro Area Year Yield (Period Average) US Japan Euro Area Source: Citi Research and Bloomberg as of 12 August % -5.4% -13.8% -14.5% 36.8% 25.9% 20.1% 16.8% 14.1% 13.9% 10.8% 9.7% 9.3% 6.9% 6.5% 5.4% 4.5% 3.9% MSCI Latin America Gold Oil MSCI Emerging Europe Citi Global Emerging Mkt Sovereigns Citi High Yield UK FTSE 100 Taiwan TAIEX MSCI AsiaXJapan US S&P 500 Citi World Broad Inv Grade MSCI AC World Korea KOSPI HK Hang Seng China HSCEI Europe Stoxx Europe 600 China Shanghai Composite Japan TPX Index -40% -20% 0% 20% 40% Page 3

4 World Market At Glance US / Global Last price 52-Week 52-Week 12-Aug-16 High Low 1 week 1 month 1 year Year-to-date Year-to-date (USD) MSCI World % 3.09% 0.27% 5.42% 5.42% Dow Jones Industrial Average % 1.25% 6.75% 6.61% 6.61% S&P % 1.48% 4.70% 6.85% 6.85% NASDAQ % 4.18% 3.74% 4.50% 4.50% Europe MSCI Europe % 3.59% -9.82% -1.93% -1.93% Stoxx Europe % 2.92% -9.63% -5.39% -2.76% FTSE % 3.52% 5.25% 10.79% -2.84% CAC % 3.90% -8.63% -2.95% -0.25% DAX % 7.52% -1.93% -0.28% 2.07% Japan NIKKEI % 5.12% % % 5.99% Topix % 2.92% % % 1.96% Emerging Markets MSCI Emerging Market % 6.56% 5.61% 14.60% 14.60% MSCI Latin America % 7.81% 14.80% 36.78% 36.78% MSCI Emerging Europe % 2.55% 1.89% 16.79% 16.79% Brazil Bovespa % 7.45% 20.48% 34.48% 67.63% Russia RTS % -0.09% 14.79% 26.09% 26.09% Asia MSCI Asia ex-japan % 6.06% 4.33% 9.27% 9.27% Australia S&P/ASX % 3.32% 2.77% 4.44% 9.70% China HSCEI (H-shares) % 7.90% % -1.10% -1.18% China Shanghai Composite % 0.04% % % % Hong Kong Hang Seng % 7.27% -4.80% 3.89% 3.80% India Sensex % 1.24% 2.33% 7.79% 6.72% Indonesia JCI % 5.44% 20.04% 17.07% 23.85% Malaysia KLCI % 1.82% 4.61% -0.49% 6.71% Korea KOSPI % 2.98% 3.80% 4.55% 11.64% Philippines PSE % 0.23% 6.14% 14.44% 15.25% Singapore STI % -1.19% -6.34% -0.53% 4.72% Taiwan TAIEX % 3.49% 10.47% 9.74% 15.00% Thailand SET % 5.27% 10.25% 20.54% 25.28% Commodity Historical Returns (%) Oil % -4.94% 2.75% 20.11% 20.11% Gold spot % 0.21% 18.80% 25.85% 25.85% Page 4

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