2018 MID-YEAR OUTLOOK CAPITALIZING ON VOLATILITY

Transcription

1 2018 MID-YEAR OUTLOOK CAPITALIZING ON VOLATILITY

2 CONTENTS 2018 MID-YEAR OUTLOOK 2018 MID-YEAR OUTLOOK MANAGING RISK AND FINDING OPPORTUNITIES AMID VOLATILITY CITI S TOP THEMES 1 GROWTH Strong Growth, Steady Inflation 2 In the first half of 2018, financial markets benefitted from broadening global economic expansion but with higher levels of market volatility from rising questions on global trade negotiations. The MSCI World Index gained 0.8%, led by US equities which grew 2%. On the downside, rising interest rates put pressure on bonds Emerging Market (EM) bonds fell 4.7% and Investment Grade (IG) bonds were down 1.3%. The dollar index rallied 2.0% year-to-date. The sudden and rather unexpected strong rally in USD in mid-april appears to be a function of a positioning squeeze following a continuous decline from October 2017 to February 2018 that may 2 EQUITIES Preference For Cyclicals 3 BONDS Seeking Shelter With Income 4 COMMODITIES Growth Expected Ahead 5 CURRENCIES Still Bearish On USD Longer Term 6 POLITICS Risks From Uncertainty Citi Analysts project global growth to rise from 3.2% in 2017 to 3.4% in 2018, the highest level since This is supported by the positive effects of fiscal stimulus in the US as the link between business sentiment and activity (business capital expenditure, industrial production or GDP) has remained strong. Underlying inflation pressures remain contained in Developed Markets (DMs) ahead of a pass-through of higher oil prices. Average headline DM inflation ticked down to 1.8% year-over-year in April from 1.9% yearover-year in March. have led to a market being overly short USD. Political risks are likely to remain in 2018 and these risks may drive market volatility. Historically, geopolitical events have not caused a synchronized and sustained sell-off in financial markets. In fact, attractively priced financial markets can still perform and benefit investors holding diversified portfolios. * All returns in USD as of 31 May Contributors: Celestee Tan Investment Specialist Xiou Ann Lim Investment Specialist Jaideep Tiwari FX Strategist CAPITALIZING ON VOLATILITY II CAPITALIZING ON VOLATILITY 1

3 1 STRONG GROWTH STRONG GROWTH, STEADY INFLATION 2018 MID-YEAR OUTLOOK 2018 MID-YEAR OUTLOOK GROWTH, STEADY INFLATION / 1 Key Takeaways Citi Analysts maintain their forecast of aboveconsensus global real GDP growth of 3.4% for 2018 and steady inflation of 2.5%, as global growth continues broadly across economies and sectors. Inflation remains subdued across Developed Markets (DMs), particularly outside of the US. Downside risks to growth include faster-than-expected tightening of monetary policy across DMs, rising protectionism and trade war threats, heightened political risks and a China and/or US slowdown. Although growth is slowing as the economic cycle matures, Citi Analysts emphasize that this is not the start of a downturn. Citi Analysts maintain a forecast of above-consensus global real GDP growth of 3.4% for 2018 and steady inflation of 2.5% as global growth continues broadly across economies and sectors. Real GDP Growth %YY Global growth is expected to be supported: US JAPAN Additional fiscal stimulus during the next two years from the passage of the Bipartisan Budget Act of 2018 as well as from the 2017 US Tax Reform. EUROPE Uptrend in exports, continued recovery in business investment and 2020 Tokyo Olympics. Domestic oriented sectors outperforming and economic activity expanding to narrow output gap EM Global DM Source: Citi Research. As of 8 May Forecasts are expressions of opinion, are not a guarantee of future results and are subject to change. Past performance is no guarantee of future results. Real results may vary. EMERGING MARKETS (EMs) Strengthening EM macro fundamentals and solid domestic economic growth. CHINA China s trade connections to the world and domestic economic strength suggest it could endure through US trade threats. The government has expressed commitment to open markets. CAPITALIZING ON VOLATILITY 2 CAPITALIZING ON VOLATILITY 3

4 1 / STRONG GROWTH, STEADY INFLATION 2 EQUITIES PREFERENCE FOR CYCLICALS Global growth may peak in 2018 with risks to outlook: China and/or US slowdown. Faster-than-expected tightening of monetary policy across Developed Markets (DMs). Rising protectionism and trade war threats. Heightened political risks. (See "6. Politics Risks from Uncertainty") Inflation remains mostly subdued across DMs, particularly outside of the US. Citi Analysts global inflation forecasts remain unchanged for 2018 at 2.5%. In DMs, Citi Analysts continue to expect below-consensus 1.8% inflation in In EMs, Citi Analysts forecast slightly increased inflation in 2018 of 3.5% (+0.1 percentage point). Key Takeaways Citi Analysts expect single-digit percentage gains for global equities by year-end underpinning a positive outlook on equities. Citi Analysts favor Emerging Markets, Europe and Japan. Synchronized growth in the global economy and tax cuts in the US are likely to help drive another year of healthy earnings-per-share (EPS) gains in the US. Citi Analysts forecast an EPS of +13% in Citi Analysts highlight Energy, Financials, IT, Materials and Telecoms as the sectors to watch. Citi Analysts expect single-digit percentage gains for global equities by year-end underpinning a positive outlook on equities. Citi favors Emerging Markets, Europe and Japan. MSCI Regional Trailing PEs US DM Latam Eur Trailing PE x UK Long Run Median UK AUS EM Source: Citi Research. As of 4 April Past performance is no guarantee of future results. Real results may vary. Asia EM Japan CEEMEA Upside risks to inflation include: Unexpected rises in oil prices. Higher-thanexpected DM wage growth. CAPITALIZING ON VOLATILITY 4 CAPITALIZING ON VOLATILITY 5

5 PREFERENCE FOR CYCLICALS / 2 Synchronized growth in the global economy and tax cuts in the US are likely to help drive another year of healthy earnings-per-share (EPS) gains in the US. Citi Analysts forecast global EPS of +13% in 2018, which is supportive for global equities. The MSCI AC World benchmark trades on a trailing price-earnings ratio (PE) of 19x, above the long-run median of 17x. The US at 23x is expensive compared with other regions. EM, Japan and CEEMEA equities are the least expensive on a relative basis. Equities still look cheap against bonds. Sectors to watch Continued economic growth is likely to favor cyclical over defensive stocks and Citi Analysts prefer Energy, Financials, IT, Materials and Telecoms sectors. ENERGY OPEC cuts as well as US sanctions against Iran alongside a backdrop of strong demand is supportive of oil prices. If spot oil prices remain above consensus, the Energy sector could also benefit. US EUROPE JAPAN EMERGING MARKETS (EMs) While US valuations still look expensive compared to other markets, Citi Analysts believe that earnings momentum has been boosted by tax cuts and expect S&P 500 EPS to grow 19.7% in Risks of rising inflation and interest rates as well as potential trade friction could restrain PE. Given these potential risks, Citi Analysts are neutral on the US. Citi Analysts expect above-trend regional and synchronised global growth to support 10% EPS growth in 2018, but upside looks less likely now as European earnings have disappointed over the last five years with key headwinds from regional growth, banks and commodities. Citi Analysts are moderately positive on Japanese equities and in line with the 7% consensus 2018 EPS growth given profit margins have reached their highest level since 1995 despite a strong yen. Citi Analysts positive outlook for EM equities is supported by robust earnings momentum and attractive valuations. Further weakness in USD would also be helpful. For the 2017 full-year earnings season, more EM companies reported earnings in line with expectations and China had more companies beating expectations than missing. FINANCIALS Citi Analysts are positive on the Financials sector expecting macro recovery and rising interest rates to benefit financial institutions. Citi Analysts prefer Europe due to EPS expansion, stable margins, lower restructuring charges and improving asset quality over US banks which are neutral on valuations. Consensus expects EPS growth of 18% in 2018 and the sector trades at 12x 2018 PE, a 23% discount versus the market. IT The IT sector may look expensive, however earnings momentum is strong. Citi Analysts believe that the near-term volatility for internet stocks may persist, but sell-offs in the first half of 2018 represent opportunities for long-term investors. Other areas of focus for investors are artificial intelligence, virtual reality and cloud computing. Consensus expects EPS growth of 16% in 2018 and the sector trades at 18x 2018 PE. MATERIALS Citi Analysts remain bullish on Materials based on demand from China however support may wane in the second half of Citi Analysts expect EPS for the global Materials sector to grow by 16% in The sector is currently trading at roughly 20% discount relative to the market. TELECOMS Citi Analysts believe telecom firms have yield sensitivity and macroeconomic factors remain important. Dividend sustainability remains a key focus. The sector trades at 13x 2018E PE, an 18% discount to the market. CAPITALIZING ON VOLATILITY 6 CAPITALIZING ON VOLATILITY 7

6 BONDS 3SEEKING SHELTER WITH INCOME SEEKING SHELTER WITH INCOME / 3 Key Takeaways Citi Analysts project 6 out of 10 Developed Market (DM) central banks to raise rates in 2018 with US Federal Reserve (Fed): +75bps and Bank of Canada: +75bps. The average DM policy rate is expected to rise to 1% by end-2018, which is the highest rate since 2008 and the largest increase since Although stronger USD has contributed to recent underperformance in local currency Emerging Market Debt (EMD), Citi Analysts remain overweight, though selectivity remains important. Within Investment Grade (IG) bonds, US IG yield levels are at 7-year highs and offer attractive opportunities within Energy, Materials and Financials sectors. In High Yield (HY) bonds, US bank loans continue to offer attractive gains and low price sensitivity. Citi Analysts continue to expect gradual tightening by some DM central banks, while the outlook for Emerging Markets central banks is more mixed. Expected Rates Hikes in '18 Expected Rates Hikes in '19 Within Asia, Citi Analysts expects rate hikes this year in India, Korea and Taiwan. The European Central Bank (ECB), Reserve Bank of Australia (RBA), Reserve Bank of New Zealand (RBNZ) and the Bank of Japan (BoJ) are not expected to raise policy rates until The US Federal Open Market Committee (FOMC) is projected to hike policy rates three times in 2018, the first of which occurred in March, and the second in June. The Bank of Canada (BoC) hiked monetary policy rates in January, and are likely to follow up with two additional interest rate increases in July and October 2018, once progress has been made on reaching an agreement on the North American Free Trade Agreement (NAFTA). Selective regional markets offer value EMERGING MARKET DEBT (EMD) Despite some pullback in risk appetite, Citi Analysts believe Emerging Market Debt (EMD) can still outperform. For US dollar-denominated bonds, Citi Analysts continue to favor Latam over Asia and Eastern Europe/Africa. In Latam, Citi Analysts are overweight on Brazilian, Colombian and Argentinian bonds. Stronger USD has contributed to recent underperformance in local currency bonds. Citi Analysts remain overweight on local EM markets, though selectivity remains important. Higher short IG yields have attracted inflows Spread (bp) Nov-17 Jan-18 Mar-18 May-18 US short-dated IG corp spread Spread (bp) US long-dated IG corp spread (right) Source: Citi Research. As of 14 May Past performance is no guarantee of future results. Real results may vary. CAPITALIZING ON VOLATILITY 8 CAPITALIZING ON VOLATILITY 9

7 2018 MID-YEAR OUTLOOK 2018 MID-YEAR OUTLOOK SEEKING SHELTER WITH INCOME / 3 INVESTMENT GRADE (IG) Within Investment Grade (IG) bonds, US IG yield levels rose to 7-year highs, creating attractive opportunities within Energy, Materials and Financials. IG bonds have become attractive for investors given supportive fundamentals, wider spreads and benchmark yields at nearly 4%. US INVESTMENT GRADE YIELDS ARE AT 7-Year High Though bond supply should remain robust, the repatriation of off-shore profits may allow some corporations to delever. Given the current US economic recovery is in its ninth year, adding high-quality assets with relatively low correlations to equity markets can help clients diversify their portfolios. HIGH YIELD (HY) In High Yield (HY) bonds, concerns over credit fundamentals have driven lower quality issuers to outperform this year. US bank loans continue to offer attractive gains and low price sensitivity. Citi Analysts favor B-rated issuers over BB and prefer HY bank loans over bonds within Euro HY. US markets are rapidly evolving post-qe, and Citi Analysts believe US HY should continue to benefit from a supportive global growth outlook, 20%+ 1Q18 EPS growth, declining net supply and low rates of defaults. CHINA In Asia, Chinese real estate and banks can provide value as Chinese real estate yields have increased about 100bps since November Spreads have been less volatile, an indication that investors are not as concerned about credit risk. Chinese bank results indicate that margins have expanded while nonperforming loans (NPLs) have reduced. Bank capital adequacy ratios rose and have not yet been affected by the ongoing trade dispute as they tend to be more focused on domestic business. CAPITALIZING ON VOLATILITY 10 CAPITALIZING ON VOLATILITY 11

8 COMMODITIES GROWTH EXPECTED AHEAD GROWTH EXPECTED AHEAD / 4 Key Takeaways Citi Analysts expect oil prices to stay at-or-above the current US$78-80 per barrel mark, as non- OPEC supply growth may not be able to materially outpace demand growth and rebuild inventories until later in Citi Analysts maintain a neutral bullish price outlook on gold, forecasting COMEX gold price to average US$1350/oz in Higher energy prices have been a tailwind for both commodities returns and sentiment more broadly, given the relatively high weight of crude oil in underlying benchmark indexes. While the base metals complex has lagged since January, Citi Analysts forecast copper, zinc and aluminum could also play catch-up in Q3 and provide a further boost for commodities returns in the short-term. OIL PRICES MAY STAY AT-OR-ABOVE US$78-80/ bbl IN Oil: Prices likely to remain supported Oil prices are rising due to sharply lower and declining OPEC production. With non-opec oil production able to meet global demand, market balances are being determined by OPEC supply which is falling due to both orchestrated supply cuts and unintentional supply declines. Until OPEC returns oil to the market, prices are likely to stay at or above current US$78-80 per barrel as non-opec supply growth may not be able to materially outpace demand growth and rebuild inventories until later in Potential disruptions in Iran include: President Trump refusing a sanctions waiver, Joint Comprehensive Plan of Action (JCPOA) breakdown, US sanctions in Venezuela, and Saudi s Houthi facility attack, could disrupt >500k barrels a day by the second half of These disruptions, combined with binding constraints on US infrastructure and production could drive oil back to US$80 per barrel. Citi Analysts expect iron ore prices to drift lower from the second half of 2018 onwards but remain highly volatile due to headwinds from a slowdown in global steel output growth and increasing steel scrap intake. Global observable oil stocks (bln bbls) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Range Average 2018E Source: Citi Research. As of 22 May Past performance is no guarantee of future results. Real results may vary. CAPITALIZING ON VOLATILITY 12 CAPITALIZING ON VOLATILITY 13

9 4 / GROWTH EXPECTED AHEAD 5 CURRENCIES STILL BEARISH ON USD LONGER TERM Precious Metals: Gold may outperform Base Metals: Copper prices may bounce back Bulk Commodities: Iron ore prices likely to remain volatile A weak US dollar together with elevated stock market volatility can be supportive for gold inflows used for portfolio tail risk hedges. Citi Analysts maintain a neutralbullish price outlook, forecasting COMEX gold price to average US$1,350/oz in Citi Analysts forecast a 30% probability that gold could even spike to $1,450/oz by end A further 5-7% US dollar sell-off or US rates rallying basis points on a geopolitical shock or equity bear market could trigger prices higher than $1,400/oz, in Citi s view. Citi Analysts foresee near-term elevated risks for copper prices but expect it to bounce back, forecasting average price at US$7,040/t in Copper demand growth is likely to remain solid, given Chinese and global growth as well as the ongoing disruptions to Chinese scrap supply which could help the market return to balance after its surplus in Demand for iron ore could be challenged by structurally improved scrap intake in China given higher scrap availability and mills preference for scrap amid blast furnace curtailments. Citi Analysts expect iron ore prices to remain volatile and drift lower from the second half of Iron ore is expected to encounter medium to long-term headwinds from a slowdown in global steel output growth and increasing steel scrap intake. Citi s Iron Ore Spot (TSI) average forecast for 2018 is US$65/t. Key Takeaways The recent rally in USD since mid-april may be losing momentum. Citi Analysts expect USD weakness to resume as focus shifts back to the worsening twin deficits in the US. The main beneficiaries are likely to be EUR and JPY as real growth rates in the Euro zone and Japan begin to converge with the US. Commodity currencies such as AUD and NZD are likely to be better supported on improving fundamentals against a weaker USD but likely less so than EUR as their central banks retain a neutral stance for longer until early to mid Asia EM may remain broadly stable, anchored by a range bound RMB and weighed down by the risk of capital outflows due to rising interest rates in the US. Citi Analysts expect THB and KRW to outperform given the robust current account balances in Thailand and Korea which provides cushions against higher US rates. The sudden and rather unexpected strong rally in USD since mid-april may to be due to 2 reasons: A number of central banks (ECB, BoE, BoC, BoJ etc) which seemed to be leaning more hawkish earlier in the year, changed their stance to more cautious as their economic recovery faded. This resulted in lower rates and weaker currencies (EUR, JPY & GBP) versus USD. An unusually high demand for USD from offshore to participate in the large US Treasury debt auctions. This demand stemmed from attractive yields on offer in US Treasuries relative to their home currencies that fell when central banks reverted to a more cautious stance. Citi Analysts forecast the structural elements driving USD weaker remain: The US late cycle fiscal stimulus could lead to a deterioration of its twin deficits and may likely require the US to offer investors a discount on its assets via higher yields, a weaker currency or both. The combination of a flatter (or inverted) US yield curve / higher yields / higher oil prices may slow US growth. This could lead the Fed to weigh its current policy tightening stance and negatively impact USD. Rising political headwinds in the US as tensions grow between the White House and Congress ahead of mid-term elections in early November. Escalating US-China/Europe trade tensions where the risk is for either side to weaken its currency as a reaction to further escalation. Medium-term USD headwinds Fed $ Index Narrow Nominal 5y % Chg. Lagged 2y, lha US General Government Balance + Current Account (5y Chg. % GDP). rha Source: Citi Research. As of May Past performance is no guarantee of future results. Real results may vary CAPITALIZING ON VOLATILITY 14 CAPITALIZING ON VOLATILITY 15

10 CURRENCIES STILL BEARISH ON USD LONGER TERM / 5 JPY: Benefiting from reduced capital outflows and heightened geopolitical tensions The yen typically benefits from: Investors seeking a safe haven asset in times of heightened risk aversion including US-China trade tensions or if political tensions within the US escalate. Taking a longer term view into 2019, the underlying broad balance of payments deterioration in the US as a result of worsening twin deficits is in contrast to an improvement in Japan s current account surplus. Euro Bloc: EUR likely to strengthen; GBP faces Brexit test The Q slowdown in the euro zone economy that has been largely weather related is now showing signs of rebounding. More importantly, the ECB announced the end of its Quantitative Easing (QE) program, leaving markets to re-price a less accommodative ECB stance via higher euro zone rates and a stronger EUR. Sterling faces heightened Brexit uncertainty as negotiations with the EU on the Irish border and customs union enter a critical phase at the EU-UK summit. With no solution in sight, time is running out for a Brexit deal. AUD NZD CAD Commodity Bloc: Better supported on improving fundamentals AUD has been the worst-performing G10 currency versus USD in the first half of The RBA is unlikely to commence raising rates until Q1 2019, given the underwhelming inflation and consumer spending outlook in Australia. Other indicators including business investment, employment and retail sales activity are gathering momentum and together with an improving external picture due to higher commodity prices, AUD is now starting to resist further downside pressure and is poised to gain against USD. NZD has suffered a similar fate to AUD as new RBNZ Governor Adrian Orr surprised markets with his more dovish first official cash rate (OCR) statement. Citi economists do not expect RBNZ to cut rates given the backdrop of a positive NZ output gap and accelerating GDP forecast though rate hikes are equally unlikely until Q1 Q CAD was the outperformer within the commodity bloc until the Bank of Canada raised rates earlier in While BoC is poised to hike twice more this year, delays on a new NAFTA deal have undermined current sentiment. CAD remains significantly below levels implied by its medium- to longerterm fundamental drivers but NAFTA negotiations hold the key to its near-term direction. Asia EM: Selectively stronger EM FX also sold-off against USD in the first half of 2018 but the outlook is relatively neutral based on prospects for a stronger EUR, range bound RMB, higher equities and broadly stable oil prices which are offset by rising US interest rates. THB and KRW are potential outperformers given the robust current account balances in Thailand and Korea which could provide a cushion against higher US rates. CAPITALIZING ON VOLATILITY 16 CAPITALIZING ON VOLATILITY 17

11 POLITICS 6RISKS FROM UNCERTAINTY RISKS FROM UNCERTAINTY / 6 Key Takeaways Political risks look likely to remain in the second half of 2018 although recent geopolitical tensions have had limited effects on markets in Historically, geopolitical events have not caused a synchronized and sustained sell-off in financial markets. In fact, attractively priced financial markets still perform, benefiting investors with diversified portfolios. Regional economic crises rarely reach a global threshold. In the case of either a real economic contraction (such as the Eurozone crisis of ) or merely a feared one (Brexit), these events usually remain contained within the local region. Some of the main political signposts and geopolitical risks that could move markets in the second half of 2018 include: US US US-China trade tensions continue. Though not Citi s base case, Citi Analysts believe a trade war may cause significant damage to both economies especially as China is willing to take significant measures to narrow the trade deficit. Citi continues to anticipate NAFTA may be ratified this year, but acknowledge rising risks to completion. NAFTA 2.0 ratification may be impacted by: tight legislative calendars, elections in the US and Mexico, business scepticism, and even walkouts during the negotiations. UK The UK may run an early election or could fail to agree a Brexit transition deal for the time when it exits the EU in Spring Citi Analysts suspect that a hard Brexit may not only be a concern of the UK, but would also hurt the EU more than currently expected. A new UK election could also have significant implications for the UK and Brexit outlook. ITALY Having a government in place is a step forward for Italy, however, the government s structural and fiscal policy platform could undermine the cohesion of the euro. UK MIDDLE EAST ITALY Tensions could escalate in Syria, between Turkey and Iraq, Iran and Saudi Arabia, in Egypt, Yemen, or around Israel. Citi believes that if the turmoil includes major oil producers, oil prices could spike. Otherwise, the geopolitical risk premium would rise further, but the initial effects may be fairly localized. MIDDLE EAST CHINA CHINA Tensions with China may arise in the South China Sea with Japan over Taiwan or even with US assets in the region. Citi expects further US sector-specific trade negotiations and the effects of rising protectionism can be significant for small open economies. However, China s trade connections to the world and domestic economic strength suggest it could endure through US trade threats. NORTH KOREA NORTH KOREA Citi continues to expect positive economic impact to be limited in the short term as the US-North Korea summit produced an agreement that lacked details North Korea pledged to work towards denuclearization but without details or a timeline. The US may not lift economic sanctions quickly. Economic transition in North Korea will require foreign governmentbacked investments, which take time to flow in. CAPITALIZING ON VOLATILITY 18 CAPITALIZING ON VOLATILITY 19

12 ECONOMIC GROWTH & INFLATION FORECASTS 6 / RISKS FROM UNCERTAINTY Regional economic crises very rarely reach a global threshold. In the case of either a real economic contraction (such as the Eurozone crisis of ) or merely a feared one (Brexit), these events usually remain contained within the local region. Two European Shocks and Outcome for Various Markets 12 Months Later Event Eurozone crisis Date 7/1/2011 Regional Equity Returns Eurozone UK US Asia Latin America -26.1% -5.2% 3.6% -10.9% -19.3% -6.8% Global Asset Class Returns Global Equities Global Fixed Income (Hedged USD) 6.73% GDP Inflation 2017F 2018F 2019F 2017F 2018F 2019F Global 3.3% 3.4% 3.4% 2.4% 2.4% 2.5% US 2.3% 2.9% 2.9% 1.7% 1.7% 1.8% Europe 2.5% 2.2% 2.2% 1.5% 1.5% 1.5% Japan 1.7% 0.9% 0.9% 0.5% 0.5% 0.9% Latin America 1.8% 2.3% 2.3% 6.5% 6.5% 6.2% Emerging Europe 4.1% 3.2% 3.2% 5.3% 5.3% 5.1% Middle East & North Africa 1.5% 2.8% 2.8% 6.2% 6.2% 4.9% Asia 6.1% 6.0% 6.0% 2.0% 2.0% 2.5% China 6.9% 6.7% 6.7% 1.6% 1.6% 2.1% Hong Kong 3.8% 3.6% 3.6% 1.5% 1.5% 2.3% India 6.6% 7.0% 7.0% 3.6% 3.6% 4.3% Malaysia 5.9% 5.2% 5.2% 3.8% 3.8% 1.9% Philippines 6.7% 6.8% 6.8% 2.9% 2.9% 3.1% Singapore 3.6% 3.3% 3.3% 0.6% 0.6% 1.1% South Korea 3.1% 2.9% 2.9% 1.9% 1.9% 2.2% Taiwan 2.9% 2.6% 2.6% 0.6% 0.6% 1.3% Thailand 3.9% 4.2% 4.2% 0.7% 0.7% 1.8% Vietnam 6.8% 7.0% 7.0% 3.5% 3.5% 4.9% Source: Forecasts from Citi Research. As of 23 May Brexit 6/23/ % 4.7% 17.9% 23.7% 15.6% 17.5% Source: Citi Research. As of 30 May Past performance is no guarantee of future results. Real results may vary. 2.12% EXCHANGE RATE FORECASTS (VS. USD) 3Q18 4Q18 1Q19 2Q19 Europe Japan UK Australia China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Source: Forecasts from Citi Research. As of 23 May INTEREST RATE FORECASTS Current 3Q18 4Q18 1Q19 2Q19 US 2.00% 2.25% 2.25% 2. 50% 2.75% Europe 0.00% 0.00% 0.00% 0.00% 0.00% Japan -0.10% -0.10% -0.10% -0.10% -0.10% Australia 1.50% 1.50% 1.50% 1.75% 2.00% UK 0.50% 0.75% 0.75% 0.75% 0.75% Source: Forecasts from Citi Research. As of 23 May Current rates as of 18 June CAPITALIZING ON VOLATILITY 20 CAPITALIZING ON VOLATILITY 21

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This document is distributed in South Korea by Citibank Korea Inc. Investors should be aware that investment products are not guaranteed by the Korea Deposit Insurance Corporation and are subject to investment risk including the possible loss of the principal amount invested. Investment products are not available to US persons. Investment products are not deposits and are not obligations of, not guaranteed by, and not insured by, Citibank Berhad, Citibank N.A., Citigroup Inc. or any of their affiliates or subsidiaries, or by any government or insurance agency. Investment products are subject to investment risks, including the possible loss of the principal amount invested. These are provided for general information only and are not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or currency or other investment products. Citibank Berhad does not represent the information herein as accurate, true or complete, makes no warranty express or implied regarding it and no liability whatsoever will be accepted by Citibank Berhad, whether in contract, tort or otherwise, for the accuracy or completeness of such information including any error of fact or omission herein which may lead to any direct or consequential loss, damages, costs or expenses arising from any reliance upon or use of the information in the material. This document is distributed by Citibank (China) Co., Ltd in the People's Republic of China (excluding the Special Administrative Regions of Hong Kong and Macau, and Taiwan). This document is made available in Philippines by Citicorp Financial Services and Insurance Brokerage Phils. Inc, and Citibank N.A. Philippine Branch. Investors should be aware that Investment products are not insured by the Philippine Deposit Insurance Corporation or Federal Deposit Insurance Corporation or any other government entity. This report is distributed in Singapore by Citibank Singapore Limited ( CSL ). Investment products are not insured under the provisions of the Deposit Insurance and Policy Owners Protection Schemes Act of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme. This document contains general information and insights distributed in Thailand by Citigroup and is made available in English language only. Citi does not dictate or solicit investment in any specific securities and similar products. Investment contains certain risk, please study prospectus before investing. Not an obligation of, or guaranteed by, Citibank. Not bank deposits. Subject to investment risks, including possible loss of the principal amount invested. Subject to price fluctuation. Past performance does not guarantee future performance. Not offered to US persons. This document is distributed in Vietnam by Citibank, N.A., - Ho Chi Minh City Branch and Citibank, N.A. - Hanoi Branch, licensed foreign bank s branches regulated by the State Bank of Vietnam. Investment contains certain risk, please study product s prospectus, relevant disclosures and disclaimers and the terms and conditions for details before investing. Investment products are not offered to US persons. This document is distributed in the U.K. by Citibank N.A., London Branch and Citibank Europe plc, UK Branch. Citibank N.A., London Branch is authorised and regulated by the Office of the Comptroller of the Currency (USA) and authorised by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. Our firm reference number with our UK regulators is Citibank N.A., London Branch is registered as a branch in the UK at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. Registered number BR Citibank N.A. is incorporated with limited liability in the USA. Head office: 399 Park Avenue, New York, NY 10043, USA. Citibank Europe plc is authorised by the Central Bank of Ireland and by the Prudential Regulation Authority. It is subject to supervision by the Central Bank of Ireland, and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request. Citibank Europe plc, UK Branch is registered as a branch (registration number FC032763) in the register of companies for England and Wales. The registered address in the UK is Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. Citibank Europe plc is registered in Ireland with number , with its registered office at 1 North Wall Quay, Dublin 1. Citibank Europe plc is regulated by the Central Bank of Ireland. Ultimately owned by Citigroup Inc., New York, USA. Citibank N.A CITI, CITI and Arc Design are registered service marks of Citigroup Inc. CAPITALIZING ON VOLATILITY 22 CAPITALIZING ON VOLATILITY 23

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