WEEKLY MARKET UPDATE. A New Regime. Performance. Asset Allocation. 21 November Improving US and Europe data

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1 WEEKLY MARKET UPDATE 21 November 2016 A New Regime After the US election, the macro backdrop appears to be one of firmer growth in the US and higher inflation, but with amplified uncertainty about politics in Europe and policy in the US. In the Congressional testimony on 17 November, Fed Chair Yellen said the economy remained in good health and indicated that the FOMC was on track to raise rates at its December meeting. A combination of better US economic data and Yellen comments resulted in a return of the postelection themes including higher bond yields as well as steeper yield curves, a stronger US dollar, and sector leadership changes in the equity markets with the financial and cyclical sectors outperforming. Can these moves extend? Directionally, Citi analysts believe they can, but probably not at the current speed. Citi analysts expect a gradual rise in core yields with their 2017-end forecast for 10yr US treasury yield standing at 2.6%. They also believe that the US dollar s broad gains can continue until there is clarity around the magnitude of fiscal stimulus as well as the pace of US rate hikes. Performance Global equity markets finished the week mixed with Developed Markets outperforming EM equities. The S&P 500 finished the week higher at 2,182, leaving the equity benchmark less than 1% below its August record. The Dow Jones Industrial Average edged up 0.11%, while the Nasdaq Composite jumped 1.61%. European equities measured by the Stoxx Europe 600 Index were slightly higher, rising 0.56% on the week. Japanese equities posted strong weekly gains with the Nikkei 225 and the Topix advancing 3.41% and 3.64% respectively. In contrast, EM equities finished the week in negative territory with the MSCI EM index losing 0.54% led by MSCI Asia ex Japan (-1.22%). Finally, the MSCI Latin America (+2.76%) and MSCI EMEA (+0.05%) rebounded from the losses in the previous week. Asset Allocation Equities Potential political hurdles in the coming year led Citi to reduce our equity allocation to underweight in Europe despite central bank support and reasonable valuations. Credit With the rising probability of further strength in the USD and concurrent global interest rate pressures, Citi has lowered the duration of US investment grade corporate debt. Rates Citi remains underweight on develop sovereign bonds largely because of spillover effects from US treasury bonds but also inflation concerns. Commodities Citi analysts continue to maintain that gold remains a key instrument to manage portfolio risk. Improving US and Europe data Citi Economic Surprise Index CESIUSD Index CESIEUR Index CESICNY Index Trump Tantrum not yet over for EM Accumulated 3-month Bond Index Returns World Govt Bonds Index Global EMD Index HY Index EM Equities hardest hit Accumulated 3-month Equity Index Returns MSCI World MSCI EM MSCI Asia Week Ahead Key Data and Event % 2.0% 1.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% 4% 2% 0% -2% -4% -6% -8% -10% Date Country Data & Event Period Survey Prior Citi Fct 21-Nov JN Exports YoY Oct -8.5% -6.9% -8.2% 21-Nov JN All Industry Activity Index MoM Sep 0.2% 0.1% 22-Nov EC Consumer Confidence Nov Nov US Existing Home Sales Oct 5.43M 5.47M 5.43M 23-Nov MA BNM Overnight Policy Rate 23-Nov 3.0% 3.0% 3.0% 23-Nov US Durable Goods Orders Oct 1.2% -0.3% 5.1% 23-Nov EC Markit Eurozone Services PMI Nov Nov EC Markit Eurozone Manufacturing PMI Nov Nov US U. of Mich. Sentiment Nov Nov US New Home Sales Oct 590M 593M 597M 24-Nov US FOMC Meeting Minutes 2-Nov Nov JN Natl CPI YoY Oct -0.5% 0.2% INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.

2 Drivers and Risks By Market United States Driver: Although the Dow Jones Industrial Average just hit an all-time peak, partially in response to expected pro-growth policies from the incoming Trump administration, investor sentiment remains depressed. Risk: The 8% move in the dollar index (since July) has generated unease around corporate earnings trends as powerful appreciation in the currency during created profit headwinds for many US multinationals. In addition, dollar levels are crucial for commodities such as oil and recovery in Energy sector profitability is anticipated for 4Q16 into 1H17 given relatively cheap valuations End-2016 Target: 2150 S&P 500 Implication: Citi analysts expect increased volatility in coming months due to geopolitical events such as the Italian referendum in December, as well as the French and German elections next year, plus plausible trade friction after Presidentelect Trump is sworn into office. Europe Driver: On 23 November, new UK Chancellor Philip Hammond will give his first formal update on fiscal policy since the EU referendum. As the UK has one of the highest public deficits among advanced economies, he has inherited by far the most ambitious austerity plan among advanced economies. Risk: Citi analysts expect that weaker projected growth in coming years may drive up borrowing estimates by 60-80bn until 2019/20. The Chancellor has dropped the goal of balancing the budget by 2020 and he is unlikely to try and compensate the cyclical borrowing overshoot with additional austerity End-2016 Target: 310 DJ Stoxx TMI Implication: The Brexit process may test economic resilience, but so far growth has defied projections and diminished the urgency of fiscal support. The Chancellor may probably broadly stick to his predecessor s austerity plans and merely introduce small changes. If the economy weakens further, a more decisive fiscal response could still follow. Japan Driver: Corporate earnings in Japan were down sharply through July-September, but Citi analysts believe the earnings environment is likely to bottom in October- December and then enter a phase of cyclical improvement in Citi analysts have revised our average dollar/yen FY17 assumption to 113/$ from 97/$, and based on that, Topix EPS growth rate forecast for FY17 has been revised to 10.3% from 3.8%. Citi has revised our Topix end-2016 target to Risk: Key downside risks are protectionist trade policies causing a global economic slowdown and heightening geopolitical risk reducing investor risk appetite End-2016 Target: 1500 Japan Topix Implication: Overall, Citi continues to prefer mainly cyclicals and exporters. Citi analysts upgrade banks & insurers from neutral to overweight, and downgrade telecom services from neutral to underweight. We also upgrade healthcare, which is likely to benefit from President Trump s policies, from underweight to neutral. Asia Driver: China s industrial production remained stable at 6.1% YoY in Oct, worse than Citi s forecast and market expectations of 6.2% YoY. Retail sales grew by 1 YoY in Oct vs 10.7% YoY in Sep, much lower than market expectations and Citi s forecast of 10.8% YoY. Risk: The real activity in Oct sends out a mixed signal, while Citi analysts still think China s economy continues to face headwinds in 4Q and next year as growth is mainly supported by old economy recovery and policy stimulus. Implication: To contain asset prices, PBoC has shunned policy easing so far, and maintained prudent monetary policy. As net capital outflow continues and housing market starts to cool, monetary policy may likely have to turn accommodative again to support growth. In addition, Citi analysts expect external risks may continue to rise on trade frictions, leading to continued sluggish private investment End-2016 Target: 530 MSCI Asia ex JP Page 2

3 Currency Forecast Last price Forecasts Currency 18-Nov-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 G10-US Dollar Euro EURUSD Japanese yen USDJPY British Pound GBPUSD Swiss Franc USDCHF Australian Dollar AUDUSD New Zealand NZDUSD Canadian Dollar USDCAD EM Asia Chinese Renminbi USDCNY Hong Kong USDHKD Indonesian Rupiah USDIDR 13,428 13,511 13,585 13,660 13,681 13,641 13,602 Indian Rupee USDINR Korean Won USDKRW 1,183 1,190 1,200 1,209 1,203 1,180 1,158 Malaysian Ringgit USDMYR Philippine Peso USDPHP Singapore Dollar USDSGD Thai Baht USDTHB Taiwan Dollar USDTWD EM Europe Russian Ruble USDRUB South African Rand USDZAR EM Latam Brazilian Real USDBRL Mexican Peso USDMXN Weekly Market Performance (14 18 November 2016) -0.1% -0.3% -0.5% -0.7% -0.8% -0.9% -1.2% -1.6% -2.0% 0.8% 0.7% 0.6% 0.6% 3.6% 2.8% 5.3% -4% -2% 0% 2% 4% 6% 8% 10% Japan TPX Index US S&P 500 UK FTSE 100 Taiwan TAIEX MSCI AC World Citi High Yield Korea KOSPI HK Hang Seng China HSCEI MSCI AsiaXJapan Gold Oil MSCI Latin America Europe Stoxx Europe 600 MSCI Emerging Europe China Shanghai Composite Citi World Broad Inv Grade Citi Global Emerging Mkt Sovereigns Source: Citi Research and Bloomberg as of 18 November 2016 Market Performance (Year-To-Date) (As of 18 November 2016) Short Rates and 10-Year Yield Forecasts 23.9% 23.4% MSCI Latin America Oil 15.7% MSCI Emerging Europe Last price 14.6% Citi High Yield 18-Nov-16 1Q17F 2Q17F 3Q17F 4Q17F Short Rates (End of Period) US Japan Euro Area Year Yield (Period Average) 13.8% 8.5% 8.3% 8.0% 6.7% 3.1% 3.0% Gold UK FTSE 100 Citi Global Emerging Mkt Sovereigns Taiwan TAIEX US S&P 500 MSCI AsiaXJapan Citi World Broad Inv Grade US % MSCI AC World Japan Euro Area % 2.0% 0.7% HK Hang Seng Korea KOSPI China HSCEI -7.2% Europe Stoxx Europe 600 Source: Citi Research and Bloomberg as of 18 November % -9.8% Japan TPX Index China Shanghai Composite -40% -20% 0% 20% 40% Page 3

4 World Market At Glance US / Global Last price 52-Week 52-Week 18-Nov-16 High Low 1 week 1 month 1 year Year-to-date Year-to-date (USD) MSCI World % -0.98% 0.57% 2.49% 2.49% Dow Jones Industrial Average % 3.89% 6.38% 8.28% 8.28% S&P % 1.98% 4.72% 6.75% 6.75% NASDAQ % 1.48% 4.85% 6.27% 6.27% Europe MSCI Europe % -4.41% % -8.69% -8.69% Stoxx Europe % -0.90% % -7.22% -9.61% FTSE % -3.20% 7.91% 8.55% -9.09% CAC % -0.10% -8.20% -2.86% -5.37% DAX % 0.31% -2.70% -0.73% -3.69% Japan NIKKEI % 5.92% -8.56% -5.60% 2.78% Topix % 5.30% -9.96% -7.68% 0.52% Emerging Markets MSCI Emerging Market % -7.05% 2.64% 6.35% 6.35% MSCI Latin America % % 12.40% 23.88% 23.88% MSCI Emerging Europe % -1.39% 2.48% 15.67% 15.67% Brazil Bovespa % -5.99% 26.41% 38.32% 61.50% Russia RTS % 0.39% 13.03% 30.87% 30.87% Asia MSCI Asia ex-japan % -6.14% 2.42% 3.10% 3.10% Australia S&P/ASX % -0.95% 4.41% 1.20% 1.88% China HSCEI (H-shares) % -3.82% -7.02% -3.23% -3.32% China Shanghai Composite % 3.53% % -9.79% % Hong Kong Hang Seng % -4.49% 0.70% 1.96% 1.86% India Sensex % -6.78% 2.62% 0.13% -2.68% Indonesia JCI % -4.79% 14.94% 12.56% 16.79% Malaysia KLCI % -2.62% -1.97% -4.06% -6.35% Korea KOSPI % -3.23% 0.60% 0.68% 0.64% Philippines PSE % -6.65% 3.55% 1.66% -3.90% Singapore STI % 0.28% -1.64% -1.53% -2.15% Taiwan TAIEX % -2.32% 8.01% 8.04% 11.14% Thailand SET % -0.25% 7.05% 14.43% 16.07% Commodity Historical Returns (%) Oil % -9.15% 12.12% 23.35% 23.35% Gold spot % -4.32% 12.82% 13.80% 13.80% Page 4

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