PHILLIP SECURITIES RESEARCH

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1 Prepare for January 2015 Model portfolio summary Model portfolios performance (since inception) Aggressive Balanced Conservative +11.4% +10.8% +5.5% Please see individual fact sheets for details Factsheets can be retrieve by the following link: website: Patrick Woo, CFA Portfolio Manager Patrick obtained a Master degree in Electrical and Electronic Engineering with Management from Imperial College London in He joined Phillip Group in 2006 and was then promoted as a branch manager in Through continue learning during the period, Patrick became a CFA charter holder in 2011 and was internally transferred to Capital Management department. Patrick is an advocate of asset allocation theory and believe by adopting can improve the risk-adjusted return patrickwoo@phillip.com.hk Dir:

2 Suggested asset allocation strategy US asset remained our core holding. The Dow index remained flat during as corporate earnings news was offset my sharp decline in oil prices that in turns have negative impact on oil companies share prices. The drastic fall in oil prices came as a surprise most of us. For the short-term, oil companies prices has already reflected on the expectation of the bad results. However, for the long term, this should benefit the overall US economy greatly as people would spend significant less on fuel and increase disposable income which should then help consumer spending. We watch closely on the time when the Fed hike interest rate but said it would not considering doing so before April. For European markets, the ECB confirmed it was getting closer to a full-blown quantitative easing as the inflation figure remained weak. Deflation risk looked more and more likely. Also, countries like Russia (sanction, politics and oil price crash) and Greece (concerns over new president may support leaving Euro zone) did not help the area. Now, Europe only contributes small portion of portfolio In China/ Hong Kong, the Bull Run continues for China, making it the best performing market in More policy easing as policy focus shifted to attainment of announced growth targets. This area would remain our core holdings. South East Asia did not perform as good as expected but fundamentals have not changed during the month. Remained our core holding. Global Market Summary () Dow Jones Index ended little changed, -0.03% Shanghai Composite continued its Bull Run % reached a 6 year-high, HK Hang Seng contrarily -1.59%. Japan Nikkei -0.05%. Asian Emerging markets were mixed: India SENSEX Index -4.16%, Malaysia KLCI -3.28%, Thailand SET -6.04%, Indonesia JCI +1.5%, Philippines PSEI -0.87%. In Europe, markets retreated DAX -1.76%, FTSE -2.33%, CAC-2.67% Yield of 10 years Treasuries traded between 2.16% to 2.4%.

3 Largest 3 economies in Details US higher disposal income anticipated in was about upward revisions to US growth after weather effects messed with 1Q 14 numbers. Revisions put 3Q 14 US growths at 5% QoQ annualized (chart 1), its fastest pace since 3Q 03 when it grew 6.9%. Consumption recovered smartly, growing 3.2%. Business investment also contributed attractively. Chart 1, US quarterly GDP growth Source: tradingeconomics.com Strong US jobs data helped redirect market attention away from the plunge in oil prices, though the threat of deflation remained a concern The price of US crude oil fell to the $50 range (chart 2), less than half its June price and down about 35% since late November, when OPEC decided not to cut output despite oversupply. In, the Dow Jones Index steadily ended the month little changed (Chart 3) after breaking the mark late of the month. Chart 2, US crude oil price Source: data.cnbc.com Chart 3, Dow Jones Index, Jun Dec 2014 Source: Bloomberg The US economy added 252,000 jobs in and the unemployment rate fell 0.2 percentage points to 5.6% (chart 4 & 5), the lowest since June October

4 and November payrolls were revised up by a total of 50,000. This caps off the best year for US employment since 1999, with 2.95 million jobs added in However, labor force participation and wages remain lackluster, with average hourly earnings at -0.2% for the month and only 1.7% higher than a year earlier. Chart 4, US nonfarm payroll Source: Bureau of Labor Statistics Chart 5, US unemployment rate Source: Bureau of Labor Statistics Initial claims for US unemployment benefits fell by 4,000 to 294,000 for the week ended 3 January. The four-week moving average fell by 250 to 290,500, the 17th straight week below 300,000. Continuing claims rose 101,000 to 2.45 million for the week ended 27. Minutes from the meeting of the Fed s policy committee confirmed that being patient on interest rates meant no rate hike before late April. Fed officials were concerned about global economic turbulence, but remained confident that other central banks would respond with new stimulus actions as appropriate. This could add pressure on the European Central Bank to act at its 22 January meeting. The US trade gap narrowed by 7.7% in November to $39 billion, its narrowest since Declining crude oil prices lowered the import tally, leading economists to sharply raise estimates for fourth-quarter US GDP growth. A larger-than-expected rise in November wholesale inventories could also boost US economic growth in the fourth quarter. The US dollar (chart 6) hit a nine-year high versus a basket of six major currencies, propelled by US economic strength, Fed confidence and weakness in other economies.

5 Two gauges of US service sector activity fell in. The Institute for Supply Management s nonmanufacturing purchasing managers index (PMI) dropped to 56.2 from 59.3 in November, while the Markit services PMI fell to 53.3 from Having said that, the manufacturing PMI figures of the US was still far better that the rest of the world (chart 7). The yield on 10-year US Treasury notes hovered around 2%. Europe further QE expected Chart 7, World PMI indexes Source: Bloomberg Chart 6, USD index Source: Bloomberg Chart 8, Euro area inflation and its components Source: Eurostat

6 Eurozone consumer prices (Chart 8, purple line) fell more than expected to -0.2% year over year in from 0.3% in November, pulled down by lower energy prices (Chart 8, gold dashed line). The last time eurozone prices were deflationary was in October 2009, during the global financial crisis. Core inflation excluding food and energy prices stood at 0.7%. Energy prices tumbled 6.3% in from a year earlier. The unemployment rate (Chart 9) for the 18-country eurozone held steady at 11.5% in November, down from 11.9% in November Though the number without jobs rose 34,000 from October, there were 522,000 fewer unemployed workers than a year earlier. Jobless rates varied from 4.9% in Austria and 5.0% in Germany to 25.7% in Greece and 23.9% in Spain. Chart 9, Euro area unemployment rate Source: Eurostat Chart 10, Euro area members unemployment rate Source: Eurostat

7 Germany s GDP grew by about 0.25% in the fourth quarter of 2014, accelerating from a 0.1% third-quarter expansion and a second-quarter contraction. For the year, the German economy grew 1.5%, up from the 0.1% expansion in 2013 and its strongest growth rate since Chart 12, EUR vs CHF cross rate Source: Bloomberg The Swiss franc soared versus the dollar and euro (chart 11 & 12) after its three-year-old cap was lifted by the central bank, feeding fears that Switzerland s export-driven economy could suffer. Yields on 10-year government bonds from Japan, Germany, France and Switzerland fell to all-time lows. The yield on the 10-year US Treasury note fell to 1.7% same day before rebounding slightly. An unexpected bright spot appeared at the periphery: Greece returned to growth after six years of recession, buoyed by a bumper tourist arrivals. However, political uncertainty has risen with the far left a potential threat if parliamentary election follows a failure by the prime minister to gain enough parliamentary support on a vote to replace the president. Overall, forward-looking manufacturing and services indicators signaled that the regional economy could cool further and that a significant pick-up was unlikely over the coming months. There are at least two events in the next two weeks or so that markets are watching: the ECB meeting on January 22nd, and Greek elections on January 25th. The ECJ ruling could affect the scope of any asset purchase program from the ECB.

8 China/ HK China monetary policy set to loosen Chinese equity market (chart 13) continued its upward trend in and outperformed the Hong Kong stockmarket and overall emerging market. Chinese financials rallied on the expectation of further monetary easing by the Chinese government, as well as a long-awaited deposit insurance scheme announced on 30 November. China s official manufacturing purchasing managers index (PMI) (chart 14) eased further in to 50.1 from 50.3 in November, registering the lowest reading since June The final reading for HSBC/Markit manufacturing PMI (chart 15) came in at 49.6, also lower when compared to 50.0 in November. China s consumer price index (chart 16) rose 1.5% year over year in, up slightly from 1.4% in November. For 2014, China s CPI of 2% was far below the government s target of 3.5%. The producer price index came in at -3.3% in, the 34th consecutive month of declines, and -1.9% for the year, with the National Bureau of Statistics citing falling global oil prices as the main factor. Chart 13, Shanghai Composite index Source: Bloomberg Chart 14, China PMI Source: National Statistic of China Chart 15,HSBC China PMI Source: Markit, HSBC Chart 16, China CPI Source: National Statistic of China

9 China s annual Central Economic Work Conference ( CEWC ) was concluded in Beijing on 11. New normal were the key words in this year s CEWC, meaning that economic growth is shifting from high-speed to medium-to-high and from quantity-driven to quality- and efficiency-driven. For the first time, policymakers have elaborated on the term of new normal by summarizing changes in nine areas, including consumption, investment, trade, industry organization, comparative advantage, market competition, resources, economic risks and policy framework. Growth stabilization also topped the policy agenda, and a new expression of forcefully proactive fiscal policy and appropriate adjustment in monetary policy tightness was adopted. In addition, policymakers pledged to speed up the implementation of its reforms so that reform dividend will add fuel to growth. Reform priorities include further deregulation in government approval procedures, investment, pricing mechanism and capital markets. The key issues with state-owned enterprise (SOE) reforms will be addressed so as to improve efficiency and competitiveness. Against the backdrop of the weaker growth momentum and low inflation, we expect the government to keep monetary policy accommodative to ensure stable liquidity, especially in weeks preceding the Chinese New Year. Asia an alternative area of growth in 2015 Despite signs of strengthening activities in the US, macro condition in Asia remains soft reflected by tepid data from trade, industrial production and manufacturing activities. Inflation continued to ease while current account outlook slightly improved in selective countries. The sustained weakness in oil and commodity prices, albeit expected as positive to demand recovery, is raising concerns over the strength of global economy and the prospects of deflation. Against such a backdrop, Asian central banks largely kept monetary policies unchanged and would likely to remain accommodative for growth as well as vigilant against financial market volatility. Asian equities continued to drift downward with volatility in the month. Market selloff was triggered by further slump in oil prices which exacerbated global growth concerns. Selling pressure intensified as tumbling Ruble added to fears of contagion to other emerging markets. However, sentiment was boosted into

10 month-end by Fed's pledge to remain patient on normalization policy. In the near term, while the dovish shift in major central banks policies would continue to lend support to investment sentiments. Conclusion In 2015, the stance of central banks are clearly diverging with the Fed and the Bank of England showed their intention of raising interest rate while on the other hand, the ECB, Bank of Japan and PBoC may do the opposite to spur growth. While analysts are expecting yield of fixed income should increase this year, but fear of slow global growth and currency instability (Swiss Franc, Russian Ruble) caused investors looked for safer investment tools and pushed Yen and government bond prices higher. The portfolios has not changed holdings in and we have maintained our view that the US, China and south east Asia should outperform other markets this year and prefer equity over fixed income because the yield is too low to justify for the downside risk when interest rate ultimately increase. The timing on the Fed rate increase is still uncertain but is more predictable in Fed officials expressed that they would not raise interest rate before April 2015, consensus expected it should occur around 2Q and 3Q this year. Switching may be needed when the Fed acts. Disclaimer The above is for informational purposes only and should not be interpreted as an offer or solicitation to buy or sell any investment products, and does not constitute any form of investment advice. Investment involves risks. The value of investments may be volatile and past performance is not indicative of future performance. Before making an decision to invest, investors should refer to the relevant offering documents to understand the risks associated with the investment products, fund characteristics and limitations, and pay attention to personal financial situation and risk tolerance. Research or analysis used in this article is based on sources that Phillip believes is reliable and for reference purposes only. Phillip doesn t make any representations or warranties as to the accuracy or completeness of the information. Any opinions, estimates or forecasts may be changed without notice. and its subsidiaries may provide investment advice or other services to the company described in the research (whether or not as owner or a principal) and may be hold the above company securities.