Market Performance MONTHLY MARKET OUTLOOK. Countdown to the UK Election. India: Poised to Benefit from Significant Reforms

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1 1 JUNE 2017 Countdown to the UK Election By Florence Tan, Tae Hyon Ahn, Celestee Tan On 18 April, Prime Minister Theresa May surprised many by announcing early elections for 8 June. While polls suggest that Theresa May could be confirmed as Prime Minister by a significant majority and her manifesto does not contain radical economic policies or Brexit strategy changes, the outcome has important consequences for the Brexit process. A larger majority for Theresa May would make her version of Brexit hard-but-smooth less prone to political accidents in the UK and would give her more time to convince voters of the benefits of compromises before the next election in Read more on page 2 > Market Performance In the US, the Dow Jones MSCI Emerging Markets also Industrial Average advanced outperformed in May, rising 0.33%, the S&P 500 gained 2.80%, led by MSCI Asia ex 1.16%, while the Nasdaq Japan (4.08%). In contrast, MSCI Composite jumped 2.50%. Latin America and MSCI European Stoxx 600 posted its fourth straight month of gains (0.75%) in May while both the Nikkei 225 and the Topix surged 2.36% and 2.39% respectively. Emerging Europe fell 2.63% and 3.66% respectively. Within Asia, the Korean composite stock price index, jumped 6.44% in May, its sixth straight month of gains. IN THIS ISSUE Countdown to the UK Election Page 1 2 India: Poised to Benefit from Significant Reforms Page 3 Regulatory Concerns Linger for China Page 4 Political Tensions in Brazil: Contagion Risk Limited Page 5 Model Portfolios Page 6 MARKET OUTLOOK PAGE 1 INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.

2 Countdown to the UK Election (continued) Citi s trailing 5-poll average currently puts the Conservatives on 48%, 11pp higher than in Labour at 31% is roughly unchanged, the pro-eu Liberal Democrats unchanged at 8%, UKIP 8pp lower at 5% and the smaller parties all down a little bit. Base case: Citi analysts expect the Conservative Party to grow its majority from 17 seats to seats. This would strengthen Theresa May s mandate to pursue her 12 Brexit objectives. She seeks an exit from the EU s Single Market and the Customs Union, but in a controlled way with an implementation (or transition) phase to allow businesses and households to adjust to a bold new free trade agreement with the EU. Citi s base case has been that she succeeds with this, but that the implementation phase will last several years. UK Voting (intentions) (%), 2015 and 2017 Source: Citi Research as of 19 May Market implications FX: Sterling has depreciated around 13% following the UK referendum on 23 June 2016, but is unlikely to rebound to pre-brexit highs during the UK s negotiations. Nevertheless, Citi analysts think that abating uncertainty risks could see GBP/USD head towards in the near term. Equities: UK equities have also performed strongly since the second half of 2016 following the lows after the Brexit vote, rallying 20%. The large-cap FTSE 100 is expected to continue to outperform the mid-cap FTSE 250, supported by weaker sterling, as nearly 70% of FTSE 100 companies generate revenues overseas. Citi analysts mid forecast for the FTSE 100 stands at 8000 while maintaining a neutral allocation to UK equities within a diversified portfolio. Bonds: Citi analysts believe that the impending election has little impact on gilts as the central bank is likely to keep policy rates unchanged at 0.25%. For 10yr gilts, Citi is sticking to the view of a range-trade of %. MARKET OUTLOOK PAGE 2

3 India: Poised to Benefit from Significant Reforms India is Citi s preferred Asian market, as its economy is poised to benefit from significant reforms. One of the key reforms is the Goods and Services Tax (GST), which is expected to be rolled out on July 1. The government released details of the incoming GST tax, which includes more than 1,200 items - ranging from sugar to steel pipes and motorcycles - into five tax brackets between 0% and 28% This GST tax reform is intended to unify India s tax system, which currently has more than a dozen separate levies, effectively into a single market to reduce compliance costs for firms and other unnecessary costs or duplicate taxation. Growth impact substantially positive for the medium term. The positive medium-term growth impact of GST could work through two different channels: 1) lower tax rates likely to boost consumption and GDP, 2) efficiency/productivity increase through simplification/removing barriers. Short term growth disruption should be manageable. Some near-term disruption to growth could be caused by this massive overhauling of the indirect tax system. Citi analysts, however, are not overly concerned and do not expect more than 20-30bps negative impact on GDP. The proportion of items in each tax slab indicates that most of the products will have less than 18% tax. GST rate at or below 18% for bulk of the items Source: Citi Research as of 21 May Citi analysts expect such a move to be positive for consumer, capital goods, thermal power producers (new GST rate on a broader scale is marginally less than old rate); and negative for telecom, one). quick-service restaurants, paints (new GST rate is higher than old MARKET OUTLOOK PAGE 3 expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future res ults.

4 Regulatory Concerns Linger for China The Chinese authorities push toward tighter financial regulations that started in late March has unnerved China s financial markets. Citi analysts believe that the economic impact may only be modest, as the central bank has enough ammunition to counter any disruption. A major financial crisis is likely to be averted: The small and medium banks are most at risk given that their balance sheets have ballooned in the past two years. Unwinding of their shadow banking business will mean prolonged turbulence. However, lessons learned from the Jun-2013 cash crunch, new policy tools and the policy priorities ahead of the 19th Party Congress suggest that a 2015-like crisis could be averted. The central bank could lower the reserve requirement ratio (RRR) to ensure the economy does not lose steam in Citi s view. Regulatory tightening, if left unchecked, could potentially shave 0.265pt off economic growth for the rest of Risk Scenario For GDP Growth Source: Citi Research as of 24 May Market implications Bonds & FX: Citi analysts believe the bond market may continue to see stress, but the current inverted yield curve looks to be more technical than a looming sign of a recession. Meanwhile, the RMB/USD rate may remain steady as capital outflows have slowed and the dollar remains soft. Commodities: Industrial commodities sold off initially, but the price rebound suggests that the risk-off trade may have run its course. Continued tightening in regulation may lower the appetite to hold inventories and any marginal slowdown in Chinese growth momentum could dampen demand further. Equity: Citi is sticking to its end-17 MSCI China target of 75 given that earnings (15% forecasted in 2017E) may still be able to drive further returns until yearend. Relatively, A- share index performance is likely to be more muted given fear of liquidity tightening. In terms of sectors, IT, Health Care, Insurance and Banks are Citi s key overweights. MARKET OUTLOOK PAGE 4

5 Political Tensions in Brazil: Contagion Risk Limited Brazilian assets remain under pressure amid increased political uncertainty and S&P placing BB credit ratings on downgrade watch. However, risks are relatively Brazil specific and direct contagion risks are likely to be limited. Judicial investigations into the conduct of President Temer have raised the risk that significant structural reforms (notably a major pension reform, which is supposed to help safeguard public finances and labour market, educational and tax reform) could be watered down or even scrapped, which in turn could shorten the monetary easing cycle. For now, Citi s base case is that a pension reform could still be approved under President Temer, or a possible replacement, and that the central bank may cut the Selic rate (shortterm interest rate) to 8.50% (175bp from the current 10.25%) by October But the downside risks to this expectation have clearly risen substantially. Risks are relatively Brazil specific and direct contagion risks are likely to be Brazil Exchange Rate (BRL per USD) and Equity Market (Index), 2017 limited. Source: Citi Research as of 24 May While it is very difficult to predict the consequences, it is reasonable to expect short term negative impacts to consumer and industrial confidence. Within Brazilian equities, Citi analysts think exporters could outperform due to lower exposure to the Brazilian economy and USD revenue. They outperformed in 2015, when the political situation was complicated and uncertainty levels high. From a broader perspective, Citi analysts believe that the risks are relatively Brazil specific and direct contagion risks are likely to be limited. They remain positive on Emerging Market equities and bonds. MARKET OUTLOOK PAGE 5

6 2Q17 Model Portfolios Defensive Seeking primarily capital preservation over time and only willing to accept very minor portfolio value fluctuations from month to month. Income Oriented Seeking growth of wealth over time but unwilling to accept significant fluctuations in the value of portfolio from month to month. Cash 23% Developed Govt Bonds 46% Global IG Corp Bonds 21% Global Equities 10% Developed Govt Bonds 36% Global IG Corp Bonds 26% HY Bonds 6% US Equities 9% European Equities 3% Global Equities 13% Global REITs 5% Growth And Income Seeking long-term capital growth foremost but unwilling to accept significant losses on value of portfolio over the medium term. Developed Govt Bonds 21% Global IG Corp Bonds 19% HY Bonds 5% Emerging Market Debt 4% US Equities 19% European Equities 10% Pacific Equities 8% EM Equities 5% Global REITs 8% Growth Oriented Seeking long-term capital appreciation and willing to tolerate measured medium-term volatility in order to enhance longer-term performance. Aggressive Growth Seeking long-term capital appreciation and can accept potentially large losses on portfolio over the near-to-medium term in order to maximise long-term performance. Developed Govt Bonds 8% Global IG Corp Bonds 14% HY Bonds 6% Emerging Market Debt 6% US Equities 24% European Equities 13% Pacific Equities 10% EM Equities 8% Global REITs 10% Global IG Corp Bonds 5% HY Bonds 6% Emerging Market Debt 6% US Equities 29% European Equities 19% Pacific Equities 12% EM Equities 10% Global REITs 10% MARKET OUTLOOK PAGE 6

7 World Market at a Glance Source: Citi Research as of 31 May MARKET OUTLOOK PAGE 7 expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future res ults.

8 Currency Forecasts Source: Citi Research as of 31 May MARKET OUTLOOK PAGE 8

9 EMEA Model Portfolio This section shows the revisions to asset allocations decided by Citibank EMEA Model Portfolio Committee on 23 March Citibank s EMEA Model Portfolios provide a guide to possible diversification of investment portfolios and serve as an asset allocation reference tool both for periodic evaluation and prospective investments. Citibank Model Portfolios are developed by Citibank s inhouse Global and Regional investment specialists to cater to investors with various risk profiles (based on Citibank s risk assessment) and provide them with: Diversified asset allocations, made uniquely relevant for EMEA investors Up-to-date asset allocations which are reviewed and revised periodically by Citibank s Research teams to reflect changing market conditions in respect of relevant asset classes Access to our best-in-class research from the Global Investment Committee It is important to note that while Citibank Model Portfolios represent Citibank s best thinking in terms of asset allocation and diversification, they serve only as a guideline for investors based on certain risk profiles. Market movements, changing market views, time horizons and liquidity constraints (among others) may result in a portfolio s asset allocation deviating from the model allocation. Citibank does not monitor and/or manage individual customer portfolios. For a long term investor, it is advantageous to diversify his/her investment portfolio and consider using Citibank Model Portfolios as a reference in diversification reviews. The suggested allocations are intended to be general in nature and are not to be construed as specific investment advice. Investors are encouraged to consult with their Relationship Managers to determine their allocation needs based on their risk tolerance, suitability and goals. Model Portfolio Disclaimers Investment products are (a) not insured by any government agency; (b) not a deposit or other obligation of, or guaranteed by, the depository institution; and (c) subject to investment risks, including possible loss of the principal amount invested. Past performance is not indicative of future results: prices can go up or down. This is neither an offer nor solicitation to purchase or sell any security, other investment or service or to attract any funds or deposits. This document does not constitute the distribution of any information or the making of any offer or solicitation by any one in any jurisdiction in which such distribution or offer is not authorized or to any person to whom it is unlawful to distribute such document or make any offer or solicitation. Investors investing in investment products denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Investment products are not available to US Persons and may not be available in all jurisdictions. Portfolio diversification is an important element for an investor to consider when making investment decisions. Concentrated positions may entail greater risks than a diversified portfolio. Certain factors that affect the assessment of whether your overall investment portfolio is sufficiently diversified may not be evident from a review of only your account with Citibank. It therefore is important that you carefully review your entire investment portfolio to ensure that it meets your investment goals and is within your risk tolerance, including your objectives for asset and issuer diversification. To discuss your asset allocations and potential strategies to reduce the risk and/or volatility of a concentrated position, please contact your personal banker/relationship manager. Citibank s Model Portfolio is not a program or offering, but is a diversification tool that is meant for reference purposes only. Model Portfolios are: (i) not binding on the part of the customers; (ii) not monitored by Citibank with respect to customers individual investment holdings; and (iii) not personalized to the specific needs of any individual customer. Citibank s Model Portfolios are not available to US Persons and may not be available in all jurisdictions. MARKET OUTLOOK PAGE 9

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