2018 Market Outlook. Citibank Wealth Management Investment Strategy & Portfolio Management. January 2, 2018

Transcription

1 INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE Market Outlook Citibank Wealth Management Investment Strategy & Portfolio Management January 2, 2018

2 Asset Performance S&P 500 Index 19.4% Equities STOXX Europe 600 Nikkei 225 CSI % 19.1% 21.8% Hang Seng Index 36.0% HSCEI 24.6% Bonds US Gov't Bond Index ^ World IG Corp Bond Index ^ US HY Bond Index ^ 2.3% 4.9% 7.0% Others US Dollar Index COMEX Gold Futures WTI Crude Oil Futures -9.9% 13.7% 12.5% Source: Bloomberg L.P., as of Dec 29, 2017 ^Reference Indices: Citigroup Fixed Income Indices

3 Macro Global Economic Growth Forecast 3 Global Economic Growth Forecast (YoY %) Global Economic Growth Forecast Source: Citi, as of Dec 2017 Source: Citi, as of Dec 2017 We forecast global real GDP growth of 3.4% in 2018, from 3.2% in 2017, the highest since 2010 and with a pickup in both AEs and EMs. We forecast global inflation to be steady and relatively subdued at 2.4% in 2018 (same as 2017). Downside risks include a sharper-than-expected slowdown in China, a tightening in global financial conditions, including monetary policy tightening and central bank asset purchases fade.

4 Macro Inflation remains moderate for major economies 4 CPI YoY (%) 聯儲局一如所料加息 8 US 0.25 厘 6 Japan 當局認為, 開始時每月縮減規模為 100 億美元 之後每三個月增加規模, 直至於 12 個月後 4, 規模達每月縮減 Asia Ex-Japan 500 億美元 % 2 花旗的觀點 : 我們預期, 聯儲局或於 9 月份宣布縮減資產負債表, 並於 12 月可能再次加息 Euro Area 01/ / / / / / /2017 Source:Bloomberg L.P., as of Nov 2017

5 Macro Balance Sheets for major central banks 5 Asset Holdings (Unit:USD billion), 聯儲局一如所料加息 0.25 厘 當局認為, 開始時每月縮減規模為 100 億美元 之後每三個月增加規模, 直至於 12 個月後, 規模達每月縮減 500 億美元 花旗的觀點 : 我們預期, 聯儲局或於 9 月份宣布縮減資產負債表, 並於 12 月可能再次加息 Source: Central banks, Citi, as of Dec 2017

6 Macro Synchronized Global GDP and EPS Growth 6 Global EPS Growth (YoY) % Source: Citi, as of Nov 2017

7 Macro Share Price and EPS 7 Global Equities and EPS 聯儲局一如所料加息 0.25 厘 當局認為, 開始時每月縮減規模為 100 億美元 之後每三個月增加規模, 直至於 12 個月後, 規模達每月縮減 500 億美元 花旗的觀點 : 我們預期, 聯儲局或於 9 月份宣布縮減資產負債表, 並於 12 月可能再次加息 Source: Haver, as of Nov 27, 2017

8 Asset Allocation 8 Citi Analysts Latest Asset Allocation Core equities Developed Markets Emerging Markets Core Fixed Income Developed Sovereign Developed IG Corporate Developed Corporate HY EM Sovereign Other Assets US Equities European Equities Asia ex Japan Equities Japanese Equities = Very underweight -1 = Underweight 0 = Neutral +1 = Overweight +2 = Very overweight Source: Citi, as of Dec 14, 2017

9 9 Exploiting opportunities from synchronized growth 1. Go Global 2. Emerging opportunities 3. Diversify income strategy

10 Go Global Non-US Markets 10 Global ex-us vs US CAPE Source: Factset, as of Nov 27, 2017

11 Go Global European Equities Outlook 11 STOXX 600 Index 400 Dividend Yield European Equities /17 03/17 05/17 07/17 09/17 11/17 Source: Bloomberg. L.P., as of Dec 18, 2017 Source: Citi, as of Dec 6, 2017 Within DM Equities, we are overweight European equities. With robust recovery in Eurozone economies, we target 10-15% EPS growth in Europe in European equities may see inflow with dividend yield nearly at 3 times local corporate bond yield. Valuation remains undemanding PE at 16x (which is near historical average).

12 Emerging opportunities 12 MSCI Emerging Market Index 1500 MSCI 新興市場指數 EM index 美元指數 Dollar index 1300 (Left) (Right) ( 右 ) Source: Bloomberg. L.P., as of Dec 18, Most Global funds are still underweight EM Source: EPFR Global, MSCI, Citi, as of Dec 14, 2017 EM equities and USD tend to move in opposite direction. EM equities EPS may grow 12-15% in Market analysts are upgrading EPS forecast, most notably in Asia. Most Global funds are still underweight EM but may increase the holdings gradually with improving fundamentals.

13 China Equities Outlook 13 MSCI China Index /17 03/17 05/17 07/17 09/17 11/17 Source: Bloomberg. L.P., as of Dec 29, 2017 China equity Sector Allocation Overweight Neutral Underweight Insurance Materials Consumer Staple I.T. Industrial Utilities Consumer Discretionary Telecoms Healthcare Property Banks Energy Source: Citi, as of Dec 11, 2017 We forecast EPS may grow 16% in Concerns over RMB depreciation, capital outflow and economical hard landing may have been overdone. Forward PE may rise to 14.2x (up from current 13x). As such, we upgrade MSCI China forecast level to 108 for 2018 year-end.

14 Diversify income strategy HY and IG 14 Default rate for US High Yield (HY) Bonds US investment grade (IG) corporate spread 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 5.5% 3.1% 2016 Dec 年 月 2017 Nov 年 月 Source: Yield Book, as of Nov 27, 2017 Source: Bloomberg. L.P., as of Nov, 2017 We have kept our call for Fed rate hikes in 2018 at three. Within bonds, higher yielding US investment grades, high yields and emerging market debt are expected to provide more buffer against rising interest rates. For HY, while yields have fallen, a decrease in default rate reflects improvement in fundamentals.

15 Diversify income strategy EM Bonds 15 Basket of emerging local yields less developed local yields 聯儲局一如所料加息 0.25 厘 當局認為, 開始時每月縮減規模為 100 億美元 之後每三個月增加規模, 直至於 12 個月後, 規模達每月縮減 500 億美元 花旗的觀點 : 我們預期, 聯儲局或於 9 月份宣布縮減資產負債表, 並於 12 月可能再次加息 Source: Bloomberg. L.P., as of Nov 28, 2017

16 HK Equities Outlook 16 Hang Seng Index vs Daily Turnover (HK$ million) Daily 每日成交恆生指數 Hang Seng Turnover ( 左 ) Index ( 右 (Right) (Left) ) /4/2016 4/4/2016 7/4/ /4/2016 1/4/2017 4/4/2017 7/4/ /4/2017 Source: Bloomberg. L.P., as of Dec 19, HK Equities may be supported by increasing Southbound inflows from China. EPS may growth 14% in 2018, the highest since Hang Seng Index may reach 29,500 in 2018 year-end. Prefer HK banks and Macau gaming stocks.

17 US Equities Outlook 17 S&P 500 Index Real GDP Growth: Citi Tax Reform Estimates (YoY%) /12 12/13 12/14 12/15 12/16 12/17 Source: Bloomberg. L.P., as of Dec 19, 2017 Source: Citi, as of Dec 19, 2017 The tax reform points to a cumulative additional 1½ percentage points of GDP growth over the span. But this may come at the cost of larger deficits and debt. A 21% tax rate may add another $8 of EPS. We raise our S&P 500 year-end 2018 objective to 2,800 from 2,675 (25,000 for the DJIA).

18 Commodities 18 Citi 2H 18 Commodities Market Outlook Citi s forecast for oil supply-demand balance (million barrel / day) Bullish Neutral Neutral-tobullish Neutral-tobearish Bearish Energy US Gas Crude Oil Base Metals Precious Metals Bulks Aluminum, Copper Palladium Coffee, Agriculture Sugar Ethanol Source:Citi, as of Dec 2017 Nickel Platinum Zinc Gold, Silver Iron ore Corn, Wheat Soy beans Coking coal Source:Citi, as of Dec 2017 The slow pace of monetary tightening suggests volatility in commodities may be moderate. Non-OPEC exporters may fulfill the additional oil demand, which may pressure oil prices. We forecast Brent crude at US$54 a barrel and WTI crude oil at US$44 a barrel in Geopolitical events have supported the tactical use of gold for being used by investors as a policy and tail risk hedge. Gold may be traded around US$1,270 an ounce.

19 Bearish on USD in Citi FX Forecasts 0-3M 6-12M Dollar Index EUR/USD GBP/USD USD/JPY USD/CHF AUD/USD NZD/USD USD/CAD USD/CNY Source: Citi, forecast as of Dec 21, 2017 DM & EM Currencies Citi Forecasts Paths Source: Citi, forecast as of Dec 21, 2017 Cyclical convergence replacing divergence as Europe, Japan and EM real growth rates pick up and converge on the US may be bearish to USD. A timeline in which 5-6 year USD rallies are followed by 10 year USD bear markets. Thus, we believe that USD may be in its down cycle. We forecast around 5% USD depreciation vs G10 currencies for the coming 6-12 months.

20 EUR Outlook 20 Dollar Index Basket % CHF, 3.60% SEK, 4.20% CAD, 9.10% GBP, 11.90% JPY, 13.60% EUR, 57.60% Citi s EUR Forecasts 6-12M Forecast: M Forecast: 1.19 Source: Bloomberg L.P., as of Dec 27, 2017 As the biggest weighting within USD Index is EUR, one of the keys for USD movement may be EUR. For monetary policy, we expect the ECB not to extend purchases of public sector assets beyond Sep-18, which may be bullish to the EUR. EUR/USD s 0-3M forecast: 1.19, 6-12M forecast: Source: Citi, forecast as of Dec 21, 2017

21 Foreign Exchange Forecasts months 6-12 months Outlook USD Index Europe, Japan and EM real growth rates pick up may be bearish to USD. EUR/USD EUR may be supported from a much less accommodative ECB policy stance. GBP/USD The BOE may start hiking rates in 2018, which may underpin the GBP. USD/JPY The widening US and Japan government bond yield spread may be bearish to JPY USD/CHF The SNB still believed that CHF is over-valued, which may restrain the CHF. AUD/USD The RBA may begin to raise rate in Dec. A late start may restrain the AUD. NZD/USD Strong NZ economic and employment growth may underpin NZD s sentiment. USD/CAD As the BOC may hike rates 3 times in 2018, CAD may be supported. USD/CNY Funds outflow from China may persist, which may undermine the RMB. Gold (per ounce) Upside may be limited as the Fed started its rate-hike cycle. Source: Citi, as of Dec 21, 2017

22 22 INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE Appendix

23 Appendix:Economic Forecasts 23 GDP Growth (%) CPI Inflation (%) Current Balance Fiscal Balance (% of GDP) (% of GDP) 2017F 2018F 2019F 2017F 2018F 2019F 2017F 2018F 2019F 2017F 2018F 2019F Global U.S Japan Euro Area U.K Canada Australia New Zealand EM Asia Latin America EM Europe China Hong Kong South Korea India Indonesia Brazil Russia Source: Citi, as of Nov 27, 2017

24 Appendix:Interest Rate Forecasts 24 Citi analysts forecasts - Interest Rate (%) 1Q18F 2Q18F 3Q18F 4Q18F 1Q19F 2Q19F Developed Market U.S Japan Euro Area U.K Canada Australia New Zealand Emerging Market China (1-year deposit rate) Hong Kong (3-month Hibor) India Indonesia Brazil Russia Source: Citi, as of Nov 27, 2017

25 Appendix:Bond Market Forecasts 25 Citi analysts forecasts - Bond Yield (%) 1Q18F 2Q18F 3Q18F 4Q18F 1Q19F 2Q19F U.S. 5 Year Treasury U.S. 10 Year Treasury U.S. 30 Year Treasury Germany 5 Year Bobl Germany 10 Year Bund Germany 30 Year Bund Japan 5 Year JGB Japan 10 Year JGB Japan 30 Year JGB U.K. 5 Year Gilt U.K. 10 Year Gilt U.K. 30 Year Gilt Australia 5 Year Treasury Australia 10 Year Treasury Source: Citi, as of Nov 27, 2017

26 Appendix:Equity Indices Forecasts 26 Region Global Global MSCI AC World Index EM MSCI Emerging Market 1,158 1, % Developed Countries U.S. S&P 500 Index 2,674 2, % Europe STOXX Europe % FTSE 100 7,688 8, % Japan TOPIX Index 1, Asia Asia ex Japan MSCI Asia ex Japan % China Shanghai Stock Exchange Composite Index 3, CSI 300 Index 4,031 4, % MSCI China Index % Hong Kong Hang Seng Index 29,919 29, % Hang Seng China Enterprise Index 11,709 13, % South Korea KOSPI Index 2, India SENSEX 30 Index 34, Singapore Straits Times Index 3, Indonesia Jakarta Composite Index 6, Thailand SET Index 1, Malaysia FTSE Bursa Malaysia KLCI 1, Source: Citi, as of Dec 19, 2017 and Bloomberg L.P., as of Dec 29, 2017 Dec 29, 2017 Close End-2018 Forecast Level 2018 Potential Return (%)

27 Appendix:Commodity Forecasts 27 Citi analysts' forecasts 1Q18F 2Q18F 3Q18F 4Q18F 1Q19F 2Q19F Energy NYMEX WTI Crude USD/bbl ICE Brent Crude USD/bbl NYMEX Natural Gas USD/MMBtu Base Metals Aluminum (LME) USD/MT 2,100 2,100 2,100 2,100 2,200 2,200 Copper (LME) USD/MT 7,000 7,200 7,200 7,000 7,000 7,000 Lead (LME) USD/MT 2,700 2,900 2,500 2,500 2,300 2,300 Nickel (LME) USD/MT 11,500 11,500 11,500 11,500 12,000 12,000 Zinc (LME) USD/MT 3,400 3,600 3,200 3,000 2,800 2,800 Precious Metals Gold (Comex) USD/oz 1,300 1,275 1,250 1,250 1,295 1,355 Silver (Comex) USD/oz Platinum (NYMEX) USD/oz ,000 Palladium (NYMEX) USD/oz Agriculture Corn (CBT) USD/bu Soybean (CBT) USD/bu ,015 Wheat (CBT) USD/bu Coffee (NYB-ICE) USD/lb Cocoa (NYB-ICE) USD/MT 2,070 2,150 2,200 2, Source: Citi, as of Nov 27, 2017

28 Important Disclosure Citi analysts refers to investment professionals within Citi Research (CR) and Citi Global Markets (CGM) and voting members of the Global Investment Committee of Global Wealth Management. Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. Investment products are not available to US persons and not all products and services are provided by all affiliates or are available at all locations. This document is for general informational purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security, currency, investment, service or to attract any funds or deposits. Save to the extent provided otherwise in the Terms and Conditions for Accounts and Services or other applicable terms and conditions, information in this document has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Therefore, investment products mentioned in this document may not be suitable for all investors. Any person considering an investment should seek independent advice on the suitability or otherwise of a particular investment. Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making an investment decision. Each investor should carefully consider the risks associated with the investment and make a determination based upon the investor s own particular circumstances, that the investment is consistent with the investor s investment objectives In any event, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Further, any projections of potential risk or return are illustrative and should not be taken as limitations of the maximum possible loss or gain. Investments are not deposits or other obligations of, guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Neither Citigroup nor its affiliates can accept responsibility for the tax treatment of any investment product, whether or not the investment is purchased by a trust or company administered by an affiliate of Citigroup. Citigroup assumes that, before making any commitment to invest, the investor and (where applicable, its beneficial owners) have taken whatever tax, legal or other advice the investor/beneficial owners consider necessary and have arranged to account for any tax lawfully due on the income or gains arising from any investment product provided by Citigroup. If an investor changes country of residence, citizenship, nationality, or place of work, it is his/her responsibility to understand how his/her investment transactions are affected by such change and comply with all applicable laws and regulations as and when such becomes applicable Citibank Citi and Citibank and Arc Design are registered service marks of Citibank, N.A. or Citigroup Inc. Citibank (Hong Kong) Limited 28

29 Important Disclosure Although information in this document has been obtained from sources believed to be reliable, save to the extent provided otherwise in the Terms and Conditions for Accounts and Services or other applicable terms and conditions, Citigroup and its affiliates do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use. Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, and are not intended to be a forecast of future events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. The information contained herein is also not intended to be an exhaustive discussion of the strategies or concepts. At any time, Citigroup companies may compensate affiliates and their representatives for providing products and services to clients. This is not an official statement of Citigroup Inc. and may not reflect all of your investments with or made through Citibank. For an accurate record of your accounts and transactions, please consult your official statement. If this document shows information coming from Citi Research, please refer to the attached link: which contains the important disclosures regarding companies covered by Citi's Equity Research analysts, and please refer to the attached link: for details on the Citi Research ratings system. This document may not be reproduced or circulated without Citigroup written authority. The manner of circulation and distribution may be restricted by law or regulation in certain countries. Persons who come into possession of this document are required to inform themselves of, and to observe such restrictions. Any unauthorised use, duplication, or disclosure of this document is prohibited by law and may result in prosecution. This document is distributed in Hong Kong by Citibank (Hong Kong) Limited ( CHKL ). Prices and availability of financial instruments can be subject to change without notice. Certain high-volatility investments can be subject to sudden and large falls in value that could equal the amount invested Citibank Citi and Citibank and Arc Design are registered service marks of Citibank, N.A. or Citigroup Inc. Citibank (Hong Kong) Limited

30 Important Disclosure on High Yield Bonds Unrated or non investment grade Debt Securities typically offer a higher yield than investment grade Debt Securities, but also present greater risks with respect to liquidity, volatility, and non-payment of principal and interest. As a result of being classified as non investment grade Debt Securities, these Debt Securities present a greater degree of credit risk relative to many other fixed income Debt Securities. Higher Credit Risk Unrated or non investment grade Debt Securities generally have predominantly speculative characteristics with respect to the issuer s capacity to pay interest and repay principal. There is greater risk of non-payment of interest and loss of principal. Many issuers of these Debt Securities have experienced substantial difficulties in servicing their debt obligations, which has led to default and restructurings. The issuers of these Debt Securities generally have to pay a higher rate of interest than investment grade Debt Securities. Higher Liquidity and Secondary Market Risk The markets in which unrated or non investment grade Debt Securities are traded are generally more limited than those in which investment grade Debt Securities are traded. This lack of liquidity may make it more difficult to resell these Debt Securities and obtain market quotations. Downgrade Risk Downgrades in the credit rating of unrated or non investment grade Debt Securities by rating agencies are generally accompanied by declines in the market value of these Debt Securities. In some circumstances, investors in the unrated or non investment grade Debt Securities market may anticipate such downgrades as a result of these credits being placed on credit watch by rating agencies, causing volatility and speculation of further credit deterioration. Higher Vulnerability to economic cycles - During economic downturns, unrated or non investment grade Debt Securities are typically more susceptible to price volatility and fall more in value than investment grade Debt Securities as i) investors may reevaluate holdings in lower-quality bonds in favor of investment-grade corporate Debt Securities; ii) investors become more risk averse; and iii) default risk rises. This is often referred to a flight to quality. Event Risk This includes any of a variety of events that can adversely affect the issuer of unrated or non investment grade Debt Securities, and therefore the issuer s ability to meet debt service obligations to repay principal and interest to Debt Securities holders. Event risk may pertain to the issuer specifically, the industry or business sector of the issuer, or generally upon the overall economy. It could have a direct or indirect impact on the issuer and their outstanding debts Citibank Citi and Citibank and Arc Design are registered service marks of Citibank, N.A. or Citigroup Inc. Citibank (Hong Kong) Limited

31 Important Disclosure on RMB Risk relating to RMB If you choose RMB as the base currency or the alternate currency, you should also note the following: 31 RMB is currently not freely convertible through banks in Hong Kong. Due to exchange controls and/or restrictions imposed on the convertibility, utilisation or transferability of RMB (if any) which in turn is affected by, amongst other things, the PRC government's control, there is no guarantee that disruption in the transferability, convertibility or liquidity of RMB will not occur. There is thus a likelihood that you may not be able to convert RMB received into other freely convertible currencies. CNH exchange rates and CNY exchange rates are currently quoted in different markets with different exchange rates, whereby their exchange rate movements may not be in the same direction or magnitude. Therefore, the CNH exchange rate may be different from the CNY exchange rate Citibank Citi and Citibank and Arc Design are registered service marks of Citibank, N.A. or Citigroup Inc. Citibank (Hong Kong) Limited