MONTHLY MORNING MEETING AUGUST 2016 PRESENTED BY IFAST FINANCIAL (HK) LTD

Transcription

1 MONTHLY MORNING MEETING AUGUST 2016 PRESENTED BY IFAST FINANCIAL (HK) LTD PAGE 2 INDICES 3 MARKET INFORMATION 5 14 BOND MARKET REVIEW p13. Russia p5. USA p6. Europe P12. China p7. South Korea p7. Japan p11. India P12. Taiwan P12. Hong Kong p13. Brazil p8. Singapore p9. Malaysia p10. Indonesia p10. Thailand

2 2 INDICES Index US Market & Market PE (x) Index Europe Market & Market PE (x) Index Japan Market & Market PE (x) Index Technology & Market PE (x) Index Singapore Market & Market PE (x) Index China H-Share Market & Market PE (x) Index India Market & PE Market PE (x) Index Asia ex-japan Market & Market PE (x)

3 3 MARKET INFORMATION MARKET INFORMATION (AS AT 27 JUL 2016) INDEX AS AT 27 JUL 2016 CHANGE SINCE 30 Jun RETURN YTD (%) 2015 RETURN (%) 5 YEAR BOND YIELD (%) USA (S&P 500) % 6.1% -0.7% 1.1% Europe (Stoxx 600) % -6.7% 6.8% -0.5% Japan (Nikkei 225) % -13.9% 9.1% -0.3% Emerging Markets (MSCI EM) % 9.6% -17.0% 4.0% Asia ex Japan (MSCI Asia ex Japan) % 5.7% -11.3% 2.1% Singapore (STI) % 1.8% -14.3% 1.4% Hong Kong (HSI) % 1.0% -7.2% 0.7% Taiwan (Taiwan Weighted) % 8.2% -10.4% 1.0% South Korea (KOSPI) % 3.4% 2.4% 1.2% China (HS Mainland 100) % -2.0% -10.6% 2.6% Malaysia (KLCI) % -1.8% -3.9% 3.2% Thailand (SET Index) % 16.8% -14.0% 1.7% India (SENSEX) % 7.1% -5.0% 7.1% Indonesia (JCI) % 13.7% -12.1% 6.9% Russia (RTSI$) % 22.2% -4.3% 8.6% Brazil (IBOV) % 31.0% -13.3% 12.2% Australia (S&P/ASX 200) % 4.6% -2.1% 1.6% Technology (NASDAQ 100) % 1.7% 8.4% - P/E Yr 2016 P/E Yr 2017 P/E Yr 2018 Earnings Growth 2016 (%) Earnings Growth 2017 (%) USA (S&P 500) % 13.2% Europe (DJ Stoxx 600) % 13.3% Japan (Nikkei 225)* % 10.8% Emerging Markets (MSCI EM) % 13.6% Asia ex Japan (MSCI Asia ex Japan) % 11.7% Singapore (STI) % 4.5% Hong Kong (HSI) % 10.8% Taiwan (Taiwan Weighted) % 9.3% South Korea (KOSPI) % 9.4% China (HS Mainland 100) % 12.6% Malaysia (KLCI) % 7.4% Thailand (SET Index) % 14.2% India (SENSEX) % 19.2% Indonesia (JCI) % 15.6% Russia (RTSI$) % 16.6% Brazil (IBOV) % 21.6% Australia (S&P/ASX 200) % 9.7% NASDAQ 100 (Technology Heavy) % 14.1% SOURCE: IFAST COMPILATIONS, BLOOMBERG ESTIMATES ALL EARNINGS GROWTH FIGURES WERE UPDATED AS AT DATE SPECIFIED RETURNS ARE IN THE RESPECTIVE LOCAL CURRENCY TERMS AND MSCI INDEX RETURNS ARE IN USD TERMS

4 4 MARKET INFORMATION EARNINGS YIELD EARNINGS YIELD 2016 (%) 5 YEAR BOND YIELD (%) EXCESS YIELD (%) USA (S&P 500) 5.4% 1.1% 4.3% Europe (Stoxx 600) 6.2% -0.5% 6.7% Japan (Nikkei 225)* 6.0% -0.3% 6.3% Emerging Markets (MSCI EM) 7.6% 4.0% 3.6% Asia ex Japan (MSCI Asia ex Japan) 7.3% 2.1% 5.2% Singapore (STI) 7.4% 1.4% 6.0% Hong Kong (HSI) 8.1% 0.7% 7.5% Taiwan (Taiwan Weighted) 6.9% 1.0% 5.9% South Korea (KOSPI) 9.0% 1.2% 7.7% China (HS Mainland 100)+ 10.1% 2.6% 7.5% Malaysia (KLCI) 6.2% 3.2% 3.0% Thailand (SET Index) 6.2% 1.7% 4.4% India (SENSEX)* 5.7% 7.1% -1.4% Indonesia (JCI) 5.9% 6.9% -1.0% Russia (RTSI$) 13.9% 8.6% 5.3% Brazil (IBOV) 7.0% 12.2% -5.3% Australia (S&P/ASX 200)^ 6.4% 1.6% 4.8% MARKET STAR RATINGS OUR 3 YEAR VIEW Asia ex-japan 5.0 Very Attractive Emerging Markets 5.0 Very Attractive Europe 2.5 Neutral US 2.0 Not Attractive Japan 3.5 Attractive MARKET STAR RATINGS OUR 3 YEAR VIEW Singapore 4.0 Very Attractive China A 3.5 Attractive China 5.0 Very Attractive Hong Kong 5.0 Very Attractive Technology 3.0 Attractive South Korea 4.5 Very Attractive Indonesia 2.5 Neutral India 3.5 Attractive Thailand 2.5 Neutral Malaysia 3.0 Attractive Taiwan 4.0 Very Attractive Brazil 3.0 Attractive Russia 4.5 Very Attractive SOURCE: IFAST FINANCIAL COMPILATIONS, BLOOMBERG ESTIMATES. EARNINGS YIELD IS THE RECIPROCAL OF THE PRICE-EARNINGS RATIO. IT IS BASICALLY THE AMOUNT OF EARNINGS YOU PURCHASE FOR EVERY DOLLAR WORTH OF THE STOCK (I.E. IF A MARKET HAS AN ESTIMATED PE OF 12X, THE EARNINGS YIELD IS 8.3%) *JAPAN AND INDIA PE FORECASTS ARE BASED ON FISCAL YEAR ENDED MARCH AND 2016 RESPECTIVELY ^AUSTRALIA PE FORECASTS ARE BASED ON FISCAL YEAR ENDED JUNE 2013, 2014 AND 2015 AND ALL RETURNS ARE IN THEIR RESPECTIVE LOCAL CURRENCY TERMS. +THE HANG SENG MAINLAND 100 INDEX (HSML100) COMPRISES BOTH H-SHARE COMPANIES AND RED-CHIP STOCKS AS WELL AS SHARES OF OTHER HONG KONG LISTED MAINLAND COMPANIES. HSML100 INDEX DERIVES A MAJORITY OF THEIR SALES REVENUE FROM MAINLAND CHINA. THIS SUMMARY IS NOT TO BE CONSTRUED AS AN OFFER OR SOLICITATION FOR THE SUBSCRIPTION, PURCHASE OR SALE OF ANY FUND. NO INVESTMENT DECISION SHOULD BE TAKEN WITHOUT FIRST VIEWING A FUND'S PROSPECTUS. ANY ADVICE HEREIN IS MADE ON A GENERAL BASIS AND DOES NOT TAKE INTO ACCOUNT THE SPECIFIC INVESTMENT OBJECTIVES OF THE SPECIFIC PERSON OR GROUP OF PERSONS. PAST PERFORMANCE AND ANY FORECAST IS NOT NECESSARILY INDICATIVE OF THE FUTURE OR LIKELY PERFORMANCE OF THE FUND. THE VALUE OF UNITS AND THE INCOME FROM THEM MAY FALL AS WELL AS RISE. OPINIONS EXPRESSED HEREIN ARE SUBJECT TO CHANGE WITHOUT NOTICE. PLEASE READ OUR DISCLAIMER

5 5 REGIONAL MARKETS UPDATE US MARKET (2.0 STARS NOT ATTRACTIVE) ISM Manufacturing PMI came in at 53.2 in Jun 16, up from 51.3 in May 16 ISM Non-Manufacturing composite came in at 56.5 in Jun 16, up from a 52.9 reading in May 16 Nonfarm payrolls rose by 287,000 in Jun 16, after a downward-revised 11,000 increase in May 16 Private payrolls rose by 265,000 in Jun 16, after a downward-revised -6,000 decrease in May 16 Unemployment rate rose to 4.9% in Jun 16, up from 4.7% in May 16 Factory orders fell -1.0% m-o-m in May 16, after a downward-revised 1.8% increase in Apr 16 Advance retail sales rose 0.6% m-o-m in Jun 16, after a downward revised 0.2% m-o-m increase in May 16 Excluding autos and gas, retail sales rose 0.7% m-o-m in Jun 16, after a downward revised 0.2% m-o-m increase in May 16 Industrial production rose 0.6% m-o-m in Jun 16, after an upward-revised -0.3% m-o-m decrease in May 16 Leading index posted a 0.3% m-o-m increase in Jun 16, after a -0.2% decrease in May 16 Housing starts registered a million annual rate in Jun 16, after a downward-revised million annual rate in May 16 Building permits registered a million annual rate in Jun 16, after a downward-revised million rate in May 16 Existing home sales rose 1.1% m-o-m in Jun 16 to a 5.57 million annual rate, after a downward-revised 1.5% m-o-m increase in May 16 Consumer confidence index at 97.3 in Jul 16, down from a downward-revised 97.4 reading in Jun 16 Based on the S&P/Case-Shiller Composite 20, US home prices rose 5.24% y-o-y in May 16, after a 5.44% increase in Apr 16 Earnings estimates for American companies (as represented by the S&P 500 Index) on aggregate saw little changes over the month with 2016 s estimated earnings revised 0.25% higher alongside 2017 s upward revision of 0.11% month-to-date (as of 25 July 2016). Year-to-date, 2016 s estimated earnings have been revised -5.3% lower, while 2017 s and 2018 s estimated earnings were lowered by -4.9% and -3.7% respectively. Over the month, US energy companies saw the most earnings upgrades, with the sector s estimated earnings for 2016 revised 3.1% higher while 2017 s earnings got upgraded by 4.4%. Consumer staples and IT companies on aggregate also saw upgrades for their estimated earnings for both 2016 and 2017 month-to-date, while US financials and industrials saw slight earnings downgrades. 2Q 2016 earnings season is underway in the US, with 179 out of 500 companies having reported earnings. Thus far, results have been mixed, although 143 out of 179 companies have reported posting positive earnings surprises, earnings growth has recorded a -4.28% contraction thus far. With regards to recent economic data from the US, the ISM manufacturing PMI came in at a 53.2 reading in June, well above consensus expectations of 51.3 and increasing from May s A breakdown of the data revealed that readings of new export orders and new orders rebounded strongly from May although employment growth slowed. Services, represented by the ISM Non-Manufacturing PMI reading, came in at 56.5 in June, above consensus estimates of 53.3 and rising from a prior 52.9 level. In terms of employment data, nonfarm payrolls in June came in significantly above expectations of 180,000 jobs, with a reading of 265,000 that followed a downward-revised 11,000 increase in May as reported by the US Labor Department. Average hourly earnings rose 0.1% month-on-month, missing consensus estimates while average hourly earnings rose 2.6% year-onyear. Economic data on a whole continues to look stable in the US and is thus far indicative of a continuation in its trend-like growth. As of 25 July 2016, the US equity market (as represented by the benchmark S&P 500 Index) trades at 18.4X and 16.3X 2016 s and 2017 s estimated earnings respectively, as compared to its fair PE ratio of 15.0X. US companies are now expected to post flat earnings growth (+0.1%) for the year, before growing 13.3% in Post Brexit, global equity markets have continued to post gains, with the US recording a new all-time high closing level on 22 July 2016 while returning 3.3% for the month as of 25 July Valuations of the US equity market still remain relatively stretched as compared to the other markets under our coverage at this current juncture. Thus, we maintain a 2.0 Stars Unattractive rating on the US market, and suggest investors adopt defensive strategies like equity long short funds in their US equity exposure.

6 6 REGIONAL MARKETS UPDATE EUROPE (2.5 STARS NEUTRAL) EUROZONE AGGREGATE Advance Eurozone PMI composite dipped to 52.9 in Jul 16, from a finalised 53.1 reading in Jun 16 Adv Consumer Confidence fell to -7.9 in Jul 16 from an upward revised -7.2 reading in Jun 16 Retail sales rose 1.6% y-o-y in May 16, up from a 1.4% growth rate in Apr 16 ZEW survey (expectations) fell to in Jul 16, down from 20.2 in Jun 16 Sentix Investor Confidence fell to 1.7 in Jul 16, down from 9.9 in Jun 16 GERMANY Advance composite PMI rose to 55.3 in Jul 16, up from an upward finalised 54.4 level in Jun 16 Factory orders fell -0.2% y-o-y in May 16, after an upward revised -0.4% decline in Apr 16 ZEW survey fell for both the expectations survey and the current situation reading IFO surveys recorded a rise across the board for the business climate, current assessment and expectations surveys FRANCE Preliminary PMI composite rose to 50.0 in Jul 16, up from an upward finalised 49.6 level in Jun 16 Industrial production rose 0.5% y-o-y in May 16, down from a downward finalised 1.8% rate in Apr 16 Bank of France business sentiment unchanged in Jun 16, INSEE business confidence rose in Jul 16 UNITED KINGDOM Preliminary PMI Composite fell to 47.7 in Jul 16, down from 52.4 in Jun 16 Retail sales ex auto fuel rose 3.9% y-o-y in Jun 16, down from a downward revised 5.2% rate in May 16 Retail sales ex auto fuel fell -0.9% m-o-m in Jun 16, down from a downward revised 0.9% rate in May 16 Since our previous update last month, we ve seen earnings estimates for the basic resources sector continue to be heavily upgraded, with the sector seeing a 16.75% upgrade after a 4.8% upward revision last month. The oil & gas sector has also seen earnings upgrades in July, with the sector s estimated earnings raised by 2.85%. The oil & gas sector has seen its earnings estimates revised upwards by 22.56% since its lows in April. Banks on the other hand continued to see earnings estimated revised downwards, with the sector s earnings revised down by a further -2.16%. The Travel & Leisure sector has been amongst the casualties of Brexit, with the sector seeing earnings estimates revised down by -2.56% over the month given London s air transport hub with terrorism not helping matters. As a whole as of 22 July 2016, the index is now looking at posting a headline loss of -5.6% in Estimated earnings for 2017 are expected to post a strong growth rate of 12.9%, however, given the uncertainty caused by the UK referendum result and its negative impact on the European continent, it is now likely to see downward revisions to the number. The strain of Brexit has started to show in the UK, with a preliminary reading of the UK Purchasing Manager Indices tumbling heavily. The UK PMI Composite fell to 47.7 in July, down from a 52.4 reading in June, with both the services (47.4 in July from 52.3 in June) and manufacturing (49.1 in July from 52.1 in June) surveys in contraction territory with orders and confidence declining across both readings. The magnitude of the decline was the largest in the reading s 20 year history and points to an economic contraction in 3Q 2016 and possibly 4Q 2016 should the deterioration continue. With business activity seemingly derailed by the referendum s results, the likelihood of stimulus from the Bank of England as well as fiscal stimulus from the government has increased significantly. While the UK bore the brunt of the referendum s results, the Eurozone s PMI Composite reading held up significantly better, with the reading falling to 52.9 from a previous reading of 53.1 in June, beating forecasts of a decline to While the PMI held up significantly better and remained in territory indicating continued expansion of business activity, the German ZEW indicator of economic sentiment took a severe hit as it fell to -6.8 in July from a prior reading of 19.2 in June. The decline of -26 points represents its largest drop since June 2012, with the reading currently at its lowest since November A similar large fall could be seen for the Eurozone ZEW Survey Expectations which fell to from 20.2 in June. While the surveys have fallen steeply due to the Brexit shock, similar to the ECB, we will wait for further data to further assess the health of the Eurozone economy. For the month of June, the Stoxx 600 Index rose 3.17% over the course of the month to bring year-to-date losses to -6.97% (in local currency terms as of 22 July 2016) as compared to a year-to-date low of -17.0% on 11 February. At current levels, the market trades at 16.1X and 14.2X based on 2016 and 2017 estimated earnings, as compared to its fair PE ratio of 13.5X. The index trades at just 12.7X 2018 s earnings. At current valuations, investors will be paying close to fair value for European equities based on 2017 s estimated earnings. We maintain our 2.5 Stars Neutral rating on the market at this juncture.

7 7 REGIONAL MARKETS UPDATE NORTH ASIA JAPAN (3.5 STARS ATTRACTIVE) Eco Watcher s Outlook Index worsens significantly from 47.3 in May to 41.5 in Jun 16 Japan s Machine Orders continues its previous month s downward trend; fell -11.7% y-o-y in May, worse than previous month s -8.2% decline, also lower than the market s expectation of -8.7% Consumer Confidence Index further rose to 41.8 in Jun, after increasing from 40.8 to 40.9 in May HSBC Manufacturing PMI rebounded in Jul 16 to 49.0 from 48.1, improving from the record low of 47.7 in May 16 Japan s exports fell -7.4% y-o-y in Jun 16, better than the -11.3% market consensus and is the ninth consecutive month that Japan records a decline in export Imports slumped by -18.8% y-o-y in Jun 16 The Japanese Yen (JPY) appreciated sharply against USD by 15.22% YTD with increase in demand for safer assets, yet the currency has seen a sharp depreciation of -3.66% starting from 8 Jul SOUTH KOREA: 4.5 STARS-VERY ATTRACTIVE Korean Won (KRW) appreciated against USD by 3.54% HSBC Manufacturing PMI continues its rebound with a 4-month consecutive improvement to 50.5 in Jun 16 Exports continued its downward spiral as it fell -2.7% y-o-y in Jun 16, although the export figure marked the 18 consecutive months that exports has recorded a contraction y-o-y, this month s figure provides some hope that the decline is losing its momentum Imports decreased by -8.0% y-o-y in Jun 16 As at 28 July 2016, both the estimated earnings of Japanese equities for FY 2017 (ended March 2017) and FY 2018 (ended March 2018) have been revised downwards by -9.81% and -7.47% year-to-date (in terms of fiscal year, ranging from 1 April 2016 to 25 July 2016) respectively. Earnings of Japanese equities are expected to increase by 3.7% in FY 2017 and 10.7% in FY On the other hand, earnings of the South Korean equity market are expected to increase by 17.9% in 2016, 9.4% in 2017 and 8.6% for Same as our belief, consensus is now expecting the Bank of Japan to further loosen their monetary policy and ease more during the July Meeting. On one hand, they are under overwhelming market expectation to do something in order to show their support to the economy, bear in mind that they already disappointed the market in April and June meeting, further missing expectations would likely empty the market s confidence towards the central bank s support and would be a fatal blow to the already cliff-hanging company sentiment, Yen may see a land-slide like appreciation as a result, which is definitely something the central bank is trying to avoid. On the other hand, the sluggish CPI growth, low wage and capital investment growth are all worsening the pressure on the bank s shoulder, forcing it to collaborate with the already announced, and increasing expected size of, fiscal policy to do a "double-barrelled" stimulus to give the market a strong positive shock. For Korea, we maintain our optimism towards the consumer staple industry, particularly for the cosmetic producers. With Korean drama and game show continuing to be favoured by the Chinese market, the number of Chinese tourists heading to Korea is increasing continuously for the first 5 months of the year, with an average of 15.1% y-o-y growth. With 70% of tourists heading there for shopping, especially for their cosmetic products within duty-free shops. With the trend expected to be continued, such optimism has been translated to the cosmetic companies earnings and estimated earnings. The two largest cosmetic sellers, Amorepacific Corp. and LG Household & Health Care, saw their revenue grow by 21.2% and 14.4% respectively on a q- o-q basis, with their revenues expected to grow by 24.4% and 15.5% respectively in 2016, together with a 18.3% and 11.5% respective y-o-y growth in Amorepacific Corp. in particular, now enjoys a lower PE compared to year 2014 and 2015, when the company is in the early stage of a high-speed expansion, making it a great buy in terms of fundamentals. As at 25 July 2016, the estimated PE ratio of Nikkei 225 Index is at 17.0X for FY 2017 and 15.4X for FY 2018; the estimated PE ratio for the KOSPI index was at 11.1X and 10.1X for 2016 and 9.3X for Valuations remain rather attractive compared with other countries. Thus, we maintain our star ratings of the Japanese and the South Korean market at an Attractive rating of 3.5 stars and at a Very Attractive rating of 4.5 stars respectively. **Japan s fiscal year ended in March (e.g FY 2016 ends in March 2016)

8 8 SOUTH EAST ASIA SINGAPORE 4.0 STARS (VERY ATTRACTIVE) GDP grew by 2.2% y-o-y in 2Q 16, up from an upward-revised 2.1% y-o-y increase in 1Q 16 Purchasing Managers Index was at 49.6 in Jun 16, dipping slightly from 49.8 in May 16 Electronics sector PMI fell to 49.0 in Jun 16 from 49.1 in May 16 Retail sales rose 3.0% y-o-y in May 16, after an downward-revised 3.2% y-o-y increase in Apr 16 Retail sales ex-autos fell -3.3% y-o-y in May 16, after a revised -3.8% y-o-y decrease in Apr 16 Non-oil domestic exports declined -2.3% y-o-y in Jun 16, after a 11.6% y-o-y spike in May 16 Electronic exports fell -1.7% y-o-y in Jun 16, slowing from a -6.0% y-o-y decline in May 16 CPI fell -0.7% y-o-y in Jun 16, up from a -1.6% y-o-y decline in May 16 Core CPI rose 1.1% y-o-y in Jun 16, up from a 1.0% y-o-y increase in May 16 Industrial production fell -0.3% y-o-y in Jun 16, after a downward-revised 0.8% rise in May 16 The earnings outlook for the STI saw some downward revisions in the month of July (as of 25 July 2016), as the estimated earnings for 2016 and 2017 were revised by -0.9% and -1.0% respectively. Companies in the real estate sector saw slight upward revisions in their estimated 2016 EPS in July, some of which include: City Developments, which reported resilient quarterly results bolstered by good rental revenues and proactive diversification overseas (2.0% upward revision); Global Logistic Properties (0.1% upward revision); and CapitaLand Commercial Trust (0.1% upward revision). Meanwhile, the banking sector, which comprises about 34% of the STI Index, saw slight estimated 2016 EPS downgrades in July, as the benchmark 3-month SIBOR extended its fall in July, leading banks interest income to likely come under greater pressure in the near future. Amongst Singapore s 3 largest banks, UOB and OCBC saw EPS downgrades of -0.8% and -0.3% respectively, while DBS saw estimated EPS unchanged month-to-date. As a whole, the earnings of the Singapore equity market is expected to decline by -4.4% in 2016, before growing 4.5% in Singapore s GDP grew 2.2% in 2Q 2016 on a year-on-year basis, a pace slightly faster than the upward-revised 2.1% growth rate (yearon-year basis) in 1Q This may signal good news, given that trend analysis indicates an increasing GDP growth rate since 2Q Mainly driving growth in 2Q 2016 is the manufacturing industry, which ceased shrinking for the first time in 7 quarters. Year-on-year, the manufacturing industry grew 0.8% in 2Q 2016, largely supported by the increase in output from the electronics cluster and biomedical cluster, which can be expected to see continued growth in the near term in light of the introduction of new active pharmaceutical ingredients. Furthermore, both pharmaceuticals and medical technology segments under the biomedical cluster are anticipating higher export demand for the period April-September In contrast to the manufacturing sector, a slowdown in services-related industries weighed on 2Q 2016 growth, as the sector grew a mere 1.7%, significantly below the % growth rates from 2Q 4Q Consumer price inflation in Singapore fell -0.7% in June, up from May s 30-month low -1.6% inflation rate, largely due to the easing of disbursement of Service & Conservancy Charges (S&CC) rebates that has lowered the cost of housing maintenance and repairs in May. The MAS and MTI has maintained their headline inflation forecast for 2016 at %, while core inflation is likely to average around 1%. With regards to retail sales, a 3.0% year-on-year increase was witnessed in May 2016, driven once again by motor vehicle sales, while NODX slumped back into contraction in June, registering a -2.3% decline year-on-year. Industrial production also saw a decline of -0.3% year-on-year in June, due to the % year-on-year decline in the volatile pharmaceuticals segment, which in turn weighed on biomedical manufacturing output. On a side note, it is worth noting that the impact of the Brexit vote in end June has yet to fully materialise in the NODX and industrial production numbers, and that it can be expected to provide a drag on those figures given that the EU is a notable export destination for Singapore. The STI index, which represents the Singapore equity market, recorded relatively strong performance with a 3.13% increase month-to-date (as of 25 July 2016). The share prices of Singapore s 3 largest banks, DBS, UOB, and OCBC, rose 3.0%, 2.3% and 1.8% respectively month-to-date, signalling that some confidence in the sector was regained despite talks of a challenging operating environment ahead. Meanwhile, losses continued to be witnessed in the oil & gas sector, with Keppel Corp and Sembcorp Marine seeing a -0.5% and -5.8% decline month-to-date as of 25 July 2016 respectively. While an increasing GDP growth rate has been witnessed since 2Q 2015, growth is expected to be tepid this year. On current estimates (as of 25 July 2016), the Singapore equity market trades at estimated PE ratios of 13.5X and 12.9X for 2016 and 2017 respectively, representing a significant discount to our fair PE estimate of 16.0X for the Singapore market. We think a 4.0 Stars Very Attractive rating on the Singapore equity market continues to be warranted at this juncture.

9 9 SOUTH EAST ASIA MALAYSIA 3.0 STARS (ATTRACTIVE) Exports fell -0.9% y-o-y in May 16, after a 1.6% y-o-y growth in Apr 16 Imports rose 3.1% y-o-y in May 16 following -2.9% y-o-y decline in Apr 16 Trade balance declined to RM3.26billion in May 16, down from RM9.06billion in Apr 16 Industrial production expanded 2.7% y-o-y in May 16, decelerating from a 3.0% y-o-y growth in Apr 16 Unemployment rate was down from 3.6% to 3.4 in May 16 CPI eased to 1.6% in Jun 16, after a 2.0% y-o-y expansion in May 16 Bank Negara Malaysia (BNM) cuts Overnight Policy Rate from 3.25% to 3.00% As of 25 July 2016, KLCI companies are expected to post EPS of 103.0, and for 2016, 2017 and 2018 respectively, representing earnings growth of 1.0%, 7.4% and 5.1% for the three respective years. These translate into PE ratios of 16.2X, 15.1X and 14.4X for the three years. KLCI saw its 2016 estimated earnings revised up by 1.6% in July following a -0.6% downgrade in June, with most of the sectors seeing an upward revision in earnings, except for Healthcare, Materials and Telecommunications sectors. Among all sectors, the earnings upgrade for the Consumer Staples sector (1.98%) was mainly driven by the favourable news on the possible resolution of IOI Corp Bhd s RSPO suspension. Other than that, Hong Leong Bank Bhd & Hong Leong Financial Group Bhd also saw earning upgrades of 9.04% and 7.57% respectively on the sale of Hong Leong Assurance Bhd (HLA) and Hong Leong MSIG Takaful Bhd equity stakes, lifting the overall estimated earnings for the financial sector in The economic data releases for the month were mixed, as growth was weaker in exports and industry production while employment data was showing improvement. Although inflation has softened lately on weak fuel prices and waning GST effects, the likelihood of further downside is low given the recent non-power gas tariff hike and a rise in minimum wage starting July may translate into higher goods and services prices moving forward as cost being passed through. On the monetary policy front, Bank Negara Malaysia (BNM) unexpectedly cut its policy rate for the first time in seven years, bringing the benchmark rate down to 3.00% from a prior 3.25%. Subsequently, the ceiling and floor rates of the OPR s corridor have also been lowered to 3.25% and 2.75% respectively. The policy move was viewed to be pre-emptive, as the rate cut was meant to ensure growth remains on a steady growth path amid escalating external risks (eg. Brexit). While the market is now reassessing the possibility of a further rate cut, it is important to recognise that the room for further policy moves remains limited due to a relatively weak MYR, high household debt and upside risk for inflation moving forward. Hence, a further rate cut is just a small possibility for now. KLCI has gained 0.9% in tandem with the earnings upgrades over the month. The estimated PE ratio of the KLCI Index is trading at 16.2X estimated PE ratio for 2016, slightly higher than our fair PE of 16.0X. Earnings downgrades for the KLCI Index in 2016 should continue but at a less severe pace as seen in 2015 on our observation that earnings growth estimates are generally more reasonable now after six consecutive quarters of negative earnings surprises. Although we believe there will be earnings downgrades going forward, a low-single digit earnings growth is possible amid a moderate GDP growth in 2016 and a low base effect from With limited room for valuation expansion and prospects of moderating earnings growth, KLCI will likely provide only modest positive return in While the potential upsides for investing in Malaysia are expected to be less attractive than before, the market is still offering a rather reasonable return for an investment horizon over the next 3 years-on a relative basis. As such, we maintained the star ratings for Malaysia at 3.0 stars Attractive.

10 10 SOUTH EAST ASIA THAILAND 2.5 STARS (NEUTRAL) Consumer Price Index increased by 0.4% y-o-y in Jun 16, after a 0.5% y-o-y increase in May 16 Core CPI increased by 0.8% y-o-y in Jun 16, after a 0.8% y-o-y increase in May 16 Consumer economic confidence decreased to 60.6 in Jun 16, from a 61.1 reading in May 16 Consumer confidence decreased to 71.6 in Jun 16, from a 72.6 reading in May 16 INDONESIA 2.5 STARS (NEUTRAL) Exports contracted by -4.4% y-o-y in Jun 16, after an upward revised -9.8% y-o-y decrease in May 16 Imports contracted by -7.4% y-o-y in Jun 16, after an upward revised -4.1% y-o-y decrease in May 16 Indonesia posted a trade surplus of USD 900 million in Jun 16, compared to a downward-revised surplus of USD 374 million in May 16 CPI increased by 3.5% y-o-y in Jun 16, after a 3.3% y-o-y increase in May 16 Consumer Confidence Index increased to in Jun 16 from in May 16 Bank Indonesia maintained its benchmark interest rate at 6.5%; 7-day reverse repo rate was maintained at 5.25% Bank Indonesia kept its benchmark interest rate unchanged at 6.75% In July, Thai equities saw its earnings forecasts for 2016 and 2017 being upgraded slightly by 0.2%, bringing the earnings growth for the SET Index to be at 1.1% and 14.3% respectively for fiscal years 2016 and Main sectors that contributed the most to the upward earnings revisions in July were Energy (2.0%), Health Care (0.8%), and Consumer Staples (0.7%). Improved earnings estimates in the energy sector are mainly due to earnings re-rating for coal mining companies and oil and gas companies amid improvement in commodity prices. Heavyweight upstream oil and gas player, PTT Exploration & Production PCL (2.4% of the SET Index), saw a whopping 12.63% upward revision on its 2016 earnings. As for coal mining companies, they continued to enjoy earnings upgrades amid surge in coal price; coal future rose by 7.55% in USD terms over the month (as of 25 July 2016). Earnings for Indonesian equities, on the other hand, remained unchanged over the month. Similar to Thailand, coal mining companies in Indonesia enjoyed decent upgrades that led to an upward revision of 9.4% for the energy sector. Coal mining companies such as Adaro Energy Tbk PT, Indo Tambangraya Megah Tbk PT and Tambang Batubara Bukit Asam Persero Tbk saw their earnings being upgraded by 25.0%, 20.0% and 12.1% respectively. In the month of June, Thailand saw its headline inflation rate at 0.38% year-on-year increase, marking the third consecutive month that the kingdom s inflation rate is in the positive zone. Nevertheless, the data came in lower than consensus estimates of a 0.50% year-on-year increase as well as prior month s 0.46% year-on-year increase. Inflation remained strong within the food segment (2.80% year-on-year increase), while the non-food segment continued to see deflationary pressure (-0.94%), mainly due to the contractions in the energy and transportation prices. Stripping off the volatile food and energy prices, the kingdom s inflation rate seems to be ticking upward gradually, with the core inflation rate increasing by 0.80% on a year-on-year basis, which is in line with analysts expectations. Upcoming events in the Southeast Asia s kingdom will be the referendum on draft constitution for the formation of new government, which will take place on 7 August The successful approval of the draft constitution by the voters will put the nation in place for an election in July This will be a positive development for the political scene in the kingdom, witnessing the return of power to civilian government by the Thai junta after the military-backed government took over the nation in mid In Indonesia, inflation grew by 3.5% year-on-year in June, slightly higher than the consensus forecasts of a 3.4% growth and previous month s 3.3%. This is mainly contributed by higher food and clothing prices amid festive season (Ramadhan) in Indonesia, which typically falls on June. With the historically low inflationary environment in Indonesia, Bank Indonesia is likely to maintain an accommodative monetary stance in order to support the nation s economic growth going forward. July is also the month that the government kick-started the tax amnesty program. The tax amnesty program, which was approved by the House of Representatives in late June, is expected to induce tax evaders to repatriate their offshore assets back into Indonesia, serving as a measure to resolve Indonesia s low tax collection issue as well as to generate the much-needed monies for the structural development in Indonesia. Indonesia s tax to GDP ratio is very low, stands at merely 12%, largely due to corruption of government officials, weak law enforcement, lack of tax officials and evasion of tax obligations. While the nine-month-long program would be a success in serving the purpose of collecting more tax revenue, we opine that the effect will be short-lived. More positive news might be the initiative from the government to reform the nation s tax system in order to enhance tax collection and tax compliance, which might help the nation to achieve their goal of higher tax revenue collection over the long term. Based on consensus forecasts as of 25 July 2016, the estimated PE ratio for SET Index is at PE ratio of 16.4X for 2016, relatively higher as compared to our fair PE estimate of 12.5X. We remain cautious on the possible headwinds faced by the kingdom, such as weak exports growth and earnings deterioration. As such, we maintain Thailand s star rating at 2.5 stars (Neutral). As for Indonesia, various fiscal initiatives implemented by the Indonesian governments, along with the pro-growth monetary policy measures, are likely to be positive for economic growth and supportive for corporate earnings. However, one of the major concerns we have for this market is its valuation metric; the PE valuation of the Indonesian market is by no means attractive. As of 25 July 2016, the Indonesian equity market, as represented by the JCI Index, was trading at a PE ratio of 16.9X, significantly higher as compared to our fair PE estimate of 14.0X. As such, we maintain our Neutral rating of 2.5 stars for Indonesia equities.

11 11 SOUTH ASIA INDIA 3.5 STARS (ATTRACTIVE) Exports grew by 1.27% y-o-y to USD billion in Jun 16, while Imports were lower by -7.33% y-o-y to USD billion during the same month The Index of Industrial Production (IIP) grew by 1.2% in May 16, above the consensus estimate of -0.3% Consumer Price Index (CPI) grew by 5.77% y-o-y in Jun 16, up slightly from 5.76% y-o-y in May 16 WPI Inflation was at 1.62% y-o-y for Jun 16, above the consensus estimate of 1.20% Consensus estimated earnings growth for FY17 and FY18 are 16.40% and 20.88% respectively During the month of June 2016, Indian exports recorded a positive growth of 1.27% year-on-year to USD billion for the first time in 18 months. However, imports continued to contract by -7.33% to USD billion, as against USD billion in June Overall, the trade balance has improved. The trade balance for June 2016, which stood at USD billion, was higher than the USD billion in June Oil imports during June 2016 were valued at USD 7.25 billion, 16.42% lower than the USD 8.68 billion recorded in the same period last year. India s factory output, represented by the Index of Industrial Production (IIP), expanded by 1.2% year-on-year in May 2016, as compared to the downward-revised -1.3% in the month of May Growth rates in major sectors like mining, manufacturing and electricity were at 1.3%, 0.7% and 4.7% respectively on a year-on-year basis. On a use-based classification, basic goods, capital goods and intermediate goods grew by 3.9%, % and 3.6% respectively. India s Consumer Price Index (CPI) for June 2016 grew by 5.77% year-on-year, accelerating slightly from the 5.76% year-on-year increase in the previous month. A look into the numbers revealed that food inflation increased to 7.79%, as compared to a revised 7.47% in May 2016, mainly led by higher vegetable prices, which increased 14.74% from 10.77% in May 2016, while prices of sugar and confectionery accelerated to 16.79% from 13.96% in May However, there was some respite in service inflation, which decline to 3.85%, as compared to 3.96% in May Fuel and light inflation also moderated slightly to 2.92%, as compared to 2.94% in May The Indian Wholesale Price Index (WPI) increased by 1.62% year-on-year in June 2016, as against a 0.79% increase in May A detailed analysis of the components shows that inflation of primary articles was at 5.50% year-on-year in June 2016, as compared to 4.55% in the previous month. The index for minerals group fell by % in June 2016, as compared to % in May Fuel and power prices fell by -3.62% year-on-year in June 2016 as compared to -6.14% in the previous month. The inflation of manufactured products was at 1.17% year-on-year, as against 0.91% in the previous month. As of 25 July 2016, the SENSEX Index stood at 28, The estimated earnings growth for HDFC bank, the highest weighted stock in the index, stood at 15.47% and 22.57% for FY17 and FY18 respectively. Infosys, the next stock with the highest weightage, has an estimated earnings growth of 7.76% and 12.38% for FY17 and FY18 respectively. The top performers in the index during the month were Tata Steel (17%), Lupin (16%) and ICICI Bank (16%), while the top losers included Infosys (-7%) and Wipro (-1%). According to consensus estimates as of 25 July 2016, the estimated PE ratio of India s stock market (Sensex) are 18.05X, 14.97X and 13.37X for based on the earnings of FY17, FY18 and FY19 respectively. Estimated earnings growth is 13.57%, 20.59% and 11.98% for FY17, FY18 and FY19 respectively. We maintain an Attractive rating of 3.5 stars for the Indian market.

12 12 GREATER CHINA China: Offshore (H) 5.0 Stars Very Attractive, Onshore (A) 3.5 Stars Attractive GDP in 2Q 16 increased by 6.7% y-o-y, same rate as 1Q 16 Caixin China Manufacturing PMI fell again to 48.6 in Jun 16, down from 49.2 in May 16 Manufacturing PMI fell slightly to 50.0 in Jun 16, when compared to 50.1 in May 16 Exports decreased by -4.8% y-o-y in Jun 16, compared with a -4.1% y-o-y in May 16 Industrial production rose to 6.2% in Jun 16, compared with 6.0% y-o-y in May 16 New loans increased to CNY billion in Jun 16, up from CNY billion in May 16 CPI slightly dropped to 1.9% y-o-y in Jun 16, when compared to 2.0% y-o-y in May 16 Taiwan: 4.0 Stars Very Attractive GDP in 1Q 16 fell -0.68% y-o-y, compared with a -0.89% y-o-y decrease in 4Q 15 CPI fell to 0.9% increase y-o-y in Jun16, compared with a 1.2% y-o-y increase in May 16 Exports decreased by -2.1% y-o-y in Jun 16, compared with a -9.6% y-o-y in May 16 Export orders decreased by -2.4% y-o-y in Jun 16, compared with a -5.8% y-o-y in May 16 Industrial production increased by 0.88% y-o-y in Jun 16 compared with 1.90% y-o-y in May 16 Nikkei Taiwan Manufacturing PMI in Jun16 was at 50.5, up from a reading of 48.5 in May 16 Unemployment rate (seasonally-adjusted) remained at 3.96% in Jun 16 Hong Kong: 5.0 Stars Very Attractive GDP in 1Q 16 only grew by 0.8% y-o-y, down from a 1.9% y-o-y increase in 4Q 15 CPI stood at 2.4% y-o-y in Jun 16, compared to a 2.6% y-o-y in May 16 Retail sales decreased by -8.4% y-o-y in May 16, as compared to -7.5% y-o-y in Apr 16 Seasonal-adjusted unemployment rate remained at 3.4% in Jun 16 Exports decreased by -1.0% y-o-y in Jun 16, as compared to a decrease of -0.1% y-o-y in May 16 Centa-City Leading Index, which tracks secondary residential property prices, increased 0.87% m-o-m to as of 25 Jul 2016 China reported their second quarter GDP growth at 6.7% year-on-yearly which slightly beat the market consensus of 6.6%. Despite the market remaining sceptical about the accuracy of the figure, we believe that the recent data released shows stabilisation. In terms of industrial contribution to the economy, primary, secondary and tertiary industries contributed 2.2 Trillion (6.5% of overall economy), Trillion (39.4%) and 18.4 Trillion (54.1%). Despite the quarterly growth rate decelerating to the slowest since March 2009, the rebalancing process is still in good progress with tertiary sector weighing more in the economy. The act of rebalancing can also be seen in various data as suggested by the slowdown in industrial production and resilience in retail sales. Furthermore, indicators in Li Ke Qiang Index such as power production and rail cargo volume continue to show its weaknesses. Whereas household income and retail sales continue to hold up more resiliently, reflecting a more realistic picture of the Chinese economy. Meanwhile, exports continued to disappoint as global demand remains weak. Despite the country s growth gradually slowing amid the transitional phrase, we do not expect further stimulus (i.e. rate cut) to be rolled out by the Chinese central bank. The strong rally in Chinese property sector driven from the previous easing in monetary policies has put the rate cut cycle on halt. A further board-based rate cut may not be the most appropriate tool to help the economy. Instead, we are expecting to see targeted measures and cuts in required-rate-for-reserve to aid overcapacity sectors and industrials to deleverage in the coming quarters. In earnings perspective, sectors such as consumer discretionary, materials and energy sector contributed to the earnings revision upward the most. On the other hand sectors such as telecommunication, financials and utility experienced earning downgrades. In Taiwan, the export-reliant economy is starting to see signals of rebounding. Export orders are rebounding from the lows, registering a contraction of -2. 4% y-o-y in June The rebounding of export orders was supported by the recovery in export demand for electronics and information technology related goods. Export orders from U.S. and Europe continues to contribute the most. Looking forward into the second half of 2016, we expect that export orders especially for semi-conductors and electric components for hand-held devices will be in favour as the festive season mostly concentrates in the second half of each year. As of 26 July 2016, the CSI 300 Index is currently trading at estimated PE ratios of 13.37X and 11.85X based on estimated earnings in 2016 and 2017 respectively, a discount to its fair value of 15.0X, while the HSML100 Index is trading at 9.82X and 8.76X (based on estimated earnings in 2016 and 2017 respectively) as compared to our fair PE of 13.0X as of 26 July We continue to favour H-shares relative to the onshore market. Therefore, we maintain our 5.0 Stars Very Attractive rating for the offshore Chinese equity market. Taiwan is trading at estimated PE ratios of and 13.12X based on 2016 and 2017 earnings estimates respectively, below our fair PE ratio of 15.0X. We maintain a 4.0 Stars Very Attractive rating for Taiwan. Lastly, the Hong Kong equity market is currently trading at 12.24X and 11.04X based on 2016 s and 2017 are estimated earnings. Therefore, we maintain our 5.0 Stars Very Attractive rating for Hong Kong.

13 13 EMERGING MARKETS BRAZIL (3.0 STARS ATTRACTIVE) Manufacturing PMI stood at 43.2 in Jun 16, up from 41.6 in May 16 Services PMI came in at 41.4 in Jun 16, up from 37.3 in May 16 Composite PMI at 42.3 in Jun 16, up from 38.3 in May 16 Retail sales plunged by -9.0% y-o-y in May 16, after a downward-revised -6.9% decline in Apr 16 Industrial production slumped -7.8% y-o-y in May 16, after an upward-revised -6.9% fall in Apr 16 IPCA inflation came in at 8.84% y-o-y in Jun 16, slowing from a 9.32% y-o-y increase in May 16 Selic rate remained unchanged at 14.25% in Jul 16 RUSSIA (4.5 STARS VERY ATTRACTIVE) Industrial production rose 1.7% y-o-y in Jun 16, up from a 0.7% increase in May 16 CPI increased by 7.5% y-o-y in Jun 16, up from a 7.3% increase in May 16 PPI increased by 5.1% y-o-y in Jun 16, up from a 3.2% increase in May 16 Retail sales fell -5.9% y-o-y in Jun 16, up from a -6.1% decline in May 16 In South America, there was greater optimism in the earnings outlook of the Bovespa Index over the month of July, with estimated earnings for 2016 revised upward by 3.0%. Meanwhile, earnings for 2017 remained largely unchanged, while earnings for 2018 was uplifted by 1.6% (as of 26 July 2016). There were notable revisions in the materials and energy sectors. The estimated earnings of troubled oil giant Petrobras saw a sharp increase in July, as the market grows increasingly positive over the company s prospects, due to their increased domestic oil production, as well as favourable regulatory conditions that could potentially improve the company s margins. Over in the materials sector, mining giant Vale also saw a 10.5% upward revision in its estimated earnings, as the prices of iron ore rallied 4.35% over the month to USD per tonne (as of 26 July 2016). The firm s profit prospects have been bolstered by improved business fundamentals arising from its cost cuttings and margin enhancement strategies. Bradespar, a holding company that has Vale as one of its main investments, also saw its estimated earnings revised upward over the course of the month. Across the Atlantic in Russia, estimated earnings of Russian companies (as represented by the RTSI$ Index) on aggregate saw minor changes over the month of July, with 2016 s estimated earnings revised -0.5% lower month-to-date, while 2017 s estimated earnings were revised 0.4% higher (as of 25 July 2016). Year-to-date, Russian companies have seen their estimated earnings for 2016 revised -5.1% lower, while 2017 s estimated earnings were revised -4.9% south. As a whole, the consensus expects Russian companies to see their earnings grow by 6.0% this year, before extending growth by another 16.5% in 2017 (as of 28 June 2016). Russian banking giant Sberbank continued to see estimated 2016 EPS upgrades on the back of improving cost control measures and asset quality. Meanwhile, over in the energy sector, although companies like Lukoil and Rosneft continued to see estimated 2016 EPS downgrades of -5.0% and -6.7% respectively, overall greater optimism regarding the sector was seen as Novatek and Gazprom saw estimated 2016 EPS upgrades of 10.4% and 2.3% respectively in July. Amongst the steel industry, steel producers like Novolipetsk and Severstal continued to see EPS upgrades month-to-date. Brazil's consumer price inflation came in at 0.35% month-on-month in June, slowing from the 0.78% inflation in May and was slightly below market expectations for a 0.37% increase in consumer prices. On a year-on-year basis, inflation in June was at 8.84%, a significant deceleration from the 9.32% seen in May. As Brazil's inflation remains stubbornly high above the government's 6.5% inflation ceiling, the central bank has held the country's benchmark Selic rate unchanged at 14.25% for the twelfth consecutive month in July, a decision that was widely anticipated. However, with policymakers placing a greater focus on the risks to economic growth in the country, the Copom is widely expected to start an easing cycle later this year, if inflation decelerates in the months ahead. Meanwhile, retail sales in Brazil declined for the fourteenth consecutive month by -9.0% year-on-year, while industrial production also extended its slump by -7.8% year-on-year in May. On a brighter note, June s composite PMI reading of 42.3 was an improvement from the previous month s 38.3 reading and is the highest in five months, indicative of a slowdown in the pace of economic activity contraction. With increasing optimism in the ability of the interim government to steer the economy out of recession, economists have made upward adjustments to their forecasts for Brazil s economic performance this year over the course of July, with GDP growth for 2016 expected to come in at -3.27, as compared to a -3.44% contraction forecasted in end June. With regards to the manufacturing sector, the Markit manufacturing PMI registered a 51.5 reading for the month of June, up from May s 49.6 reading and beating consensus estimates of a 50.0 reading for the month. This is the first time since December 2015 that the Markit PMI manufacturing has exceeded a 50.0 reading. The Markit services and composite PMI readings both recorded upbeat readings in June services PMI reading came in at 53.8, up from prior month s 51.8; while the composite PMI reading came in at 53.5, higher than prior month s 51.2 and is now the fifth-consecutive month to record a reading standing above May s upbeat PMI readings have already started to show in June s overall manufacturing momentum as industrial production had seen a marked pick-up of a 1.7% increase year-on-year compared to the 0.7% year-on-year increase in May. Given even more upbeat PMI readings in June, it would come as little surprise that July s industrial production sees an even quicker rate of expansion. Overall, the positive PMI readings in the past recent months suggest stabilization in the services sector and a pick-up in manufacturing momentum in Russia. Over to retail sales, sluggish performance was yet again recorded, as the decline in retail sales was extended into the month of June (-5.9% year-on-year decline, underperforming consensus estimates of a -5.4% decline). Looking forward, while consumer sentiment has seen recent improvements, weak income growth continues to weigh on domestic demand and the outlook for retail sales. When looking at Russia s trade balance, trade surplus in May had widened to USD 7.5 billion as compared to the expected USD 7.2 billion surplus, largely due to a -5.5% year-on-year drop in imports to USD 14.4 billion which comes in below consensus forecasts of USD 14.9 billion. Exports continued show lacklustre performance in May 2016, as merchandise exports were down -28.3% year-on-year. Looking ahead, it seems likely that it would take a while before meaningful, sustainable recovery in exports may be witnessed in view of subdued commodity prices and their seemingly slow recovery. On a more positive note though, the final estimates for GDP growth in 1Q 2016 came in at -1.2%, significantly up from 4Q 2015 s -3.8% decline. While the energy sector continues to be the major component of the economy, its better-than-expected GDP growth may signal some adjustment of the economy to new conditions. On current forecasts, the Bovespa Index trades at estimated PE ratios of 14.3X and 11.8X for 2016 and 2017 respectively (as of 26 July 2016), as compared to its fair PE ratio of 11.5X. With markets having priced in a change of government and looking beyond the political turmoil, the investment case for Brazil now hinges upon its economy, which is currently not showing signs of a quick recovery. We maintain a 3.0 Stars Attractive rating for the Brazilian market. On the other hand, Russian equities have posted a 22.9% gain year-to-date, with valuations rising as the market rebounded alongside the rally in crude oil prices. The Russian RTSI$ index currently trades at estimated PE ratios of 4.5X and 4.9X for 2016 and 2017 respectively as compared to its fair PE ratio of 7.0X (as of 25 July 2016), with better potential upside now than in June. Volatility is still expected in the near-term as investment and business sentiment is still weighed down over geopolitical tensions as well as the overall direction of crude oil prices. While we retain Russia s star ratings at 4.5 Stars Very Attractive, we are keeping an eye on overall valuations should there be continued gains in stock prices without overall improving fundamentals.

14 14 BOND MARKET REVIEW BONDS HKG BONDS BENCHMARK YEARS TO MATURITY OFFER INDICATIVE YIELD (%) AS AT 28 JUL 2016 OFFER INDICATIVE YIELD (%) AS AT 30 JUN 2016 HKGB, Coupon 1.61%; Maturity 12/10/ year HKGB, Coupon 1.19%, Maturity 12/06/ year HKGB, Coupon 1.94%, Maturity 12/04// year HKGB, Coupon 2.07%, Maturity 08/26/ year HKGB, Coupon 2.24%, Maturity 08/27/ year OFFER YIELDS INCLUDE SALES CHARGE OF 0.1% AND COMMISSION CHARGE OF 0.3% SOURCE: IFAST FINANCIAL HONG KONG INTERBANK RATES (HIBOR) OVERNIGHT 1-WEEK 1-MONTH 2-MONTH 3-MONTH 6-MONTH 12-MONTH 29-Feb Mar Apr May Jun Jul SOURCE: HKMA COUNTRY / REGION PARAMETER CPI VALUE ON 31-MAY-16 (YOY) CPI VALUE ON 30-JUN-16 (YOY) BENCHMARK INTEREST RATES AS AT 26-JUL-16 US CPI 1.00% 1.00% 0.50% Europe CPI -0.10% 0.10% 0.00% Japan CPI -0.30% -0.40% 0.10% Indonesia CPI 3.33% 3.45% 6.50% Malaysia CPI 2.00% 1.60% 3.00% South Korea CPI 0.80% 0.80% 1.25% Hong Kong CPI 2.60% 2.40% 0.75% Thailand CPI 0.46% 0.38% 1.50% China CPI 2.00% 1.90% 4.35% Taiwan CPI 1.23% 0.90% 1.38% India WPI 5.86% 6.59% 6.00% Singapore CPI -1.60% -0.70% 0.08% *BENCHMARK INTEREST RATE HAS BEEN CHANGED SINCE LAST MONTH

15 15 BOND MARKET REVIEW BOND CHART OF THE MONTH The rise in Chinese non-performing loans have begun to decelerate, with recent data suggesting that the trend might be beginning to change for the ratio. Since the People s Bank of China began easing monetary policy in late 2014 early 2015, the month-on-month net change in non-performing loans has started to decelerate after hitting a high in March As the government continues to rebalance its economy from one reliant on exports and manufacturing to one that is led by domestic consumption and services, the road ahead is likely to be bumpy. However, given the scope to further ease monetary policy, particularly via the easing of reserve requirement ratios for Chinese banks which would enable them to allow various struggling State Owned Enterprises to refinance their debt and potentially keep a lid on the non-performing loans ratio. Historical Yields of HKG Bonds Historical Yields of US Treasuries HKG Bond Yield Curve Corporate Bond Spreads Against US 10-Yr Treasury