Citigold. Citigold. FINANCIAL MARKET ANALYSIS 24 November PBoC easing and dovish ECB give markets a boost. Performance.

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1 Citigold FINANCIAL MARKET ANALYSIS 24 November 2014 PBoC easing and dovish ECB give markets a boost As expected, policy tailwinds came from Europe and China on Friday supporting a case for a year-end equity rally. After the markets closed on Friday, the PBoC announced a 25bp cut in the 1-year deposit rate and a 40bp cut in the lending rate while widening the deposit ceiling from currently 10% to 20% up effective Nov 22. These cuts clearly send a powerful signal to markets and are in line with our expectation. We have expected three policy rate cuts before mid The ECB chief Draghi strengthened the case for additional action with a much stronger emphasis on direct asset purchases. He said that we will do what we must to raise inflation and inflation expectations as fast as possible sending European equities and peripheral debt higher and the euro sharply lower. Performance Global equities continued to grind higher with the MSCI World index gaining 1.19%. The US equity markets posted their fifth-straight weekly gain with the DJIA and S&P adding 0.99% and 1.16% respectively while Europe also finished the week much higher with the Stoxx Europe 600 up 2.86%. Meanwhile, Japanese equities finished the week lower with the Nikkei and Topix losing 0.76% and 0.02% respectively. Asian stocks finished the week lower as the MSCI Asia ex Japan index slid 0.91% dragged by Hong Kong, offshore Chinese equities (Hang Seng: - 2.7% and HSCEI: 2.92%) and Australia (S&P/ASX 200: -2.75%). Meanwhile, Korea s Kospi and Taiwan s Taiex gained 1.01% and 1.21% respectively. Asset Allocation Equities While remaining constructive on global equities, we highlight four strategy themes: (1) de-equitisation (e.g. buy-back and M&A), (2) search for yield/income, (3) size (mega/large-cap stocks likely to outperform in the maturing bull phase of the cycle), and (4) restructuring. Credit We remain more constructive about Euro High Yield issuers vs. US, and still favour Single-B rated credits. Rates Despite low inflation risks, US labour data support the view that the Fed may start hiking rates late next year and leading to higher bond yields. We maintain a bearish view on US rates while preferring bonds in Euro area. Commodities Declines in oil prices are partly due to problems on the supply side, with significant challenges from the US and OPEC countries. Markets are likely to focus on the OPEC meeting on 27 Nov. Data out of China gradually improving Citi Economic Surprise Index CESIUSD Index CESIEUR Index CESICNY Index Global EM debts continue to outperform Accumulated 3-month Bond Index Returns World Govt Bonds Index HY Index Global EMD Index 1% 0% -1% -2% -3% -4% -5% DM continues to outperform Accumulated 3-month Equity Index Returns MSCI World MSCI EM MSCI Asia Week Ahead Key Data and Event 4% 2% 0% -2% -4% -6% -8% -10% -12% Date Country Data & Event Period Survey Prior Citi Fct 25-Nov US GDP Annualized QoQ 3Q 3.3% 3.5% 3.5% 25-Nov US Consumer Confidence Index Nov Nov US Durable Goods Orders Oct -0.7% -1.3% -2.1% 26-Nov US Initial Jobless Claims Nov K 291K 290K 26-Nov US Personal Income Oct 0.4% 0.2% 0.4% 27-Nov EC M3 Money Supply YoY Oct 2.6% 2.5% 2.7% 28-Nov JN Natl CPI YoY Oct 3.0% 3.2% 2.9% 28-Nov JN Retail Trade YoY Oct 1.5% 2.4% 0.7% 28-Nov JN Industrial Production YoY Oct -1.7% 0.8% -2.8% 28-Nov EC CPI Estimate YoY Nov 0.3% 0.4% 0.3% Page 1

2 Drivers and Risks By Market United States Driver: We are delaying the timing the first policy rate increase from Sep15 to the Dec15 FOMC meeting. With inflation prospects expected to remain tepid through 2017, we project a more moderate pace of rate increases that slow further beyond We do not expect policy rate normalization until after Risk: Citi s Panic/Euphoria Model is now edging near euphoria territory while intra-stock correlation has collapsed once again to below 25%, reversing meaningfully from near 70% in mid-october. In the past, such readings signalled the need for investor caution, not chasing the tape. Implication: Although we believe the secular run has more upside in 2015 and beyond, bulls appear to be running out of stream in the near term. We overweight Household & Personal Products, Banks, Software & Services, Tech, Hardware & Equipment, Real Estate, and Utilities End-2014 Target: 2000 Mid-2015 Target: 2100 S&P 500 Europe Driver: The combination of more supportive fiscal policy, high confidence levels, an improving labour market, and less tight financial conditions, is now allowing a stronger economic recovery in Spain. We expect real GDP to rise by around 2% YY in coming years, making Spain the outperformer within the Euro Area (EA). Risk: Next year's national elections in Spain could produce a fragmented political environment. This could lead to a scenario of political inaction, in terms of structural reform and fiscal consolidation, further capping potential economic growth in Spain in the medium-term End-2014 Target: 370 Mid-2015 Target: 385 DJ Stoxx TMI Implication: We maintain that incremental ECB liquidity support may continue to drive a search for dividend yield (DY) in Europe. We prefer companies that have: 1) high DY with strong balance sheets, 2) high DY with high surplus free cashflow; and 3) surplus free cashflow with strong balance sheets. Japan Driver: Prime Minister Abe called an early election and delayed the second salestax hike for 18 months to Apr17, on the heels of the recent 3Q GDP report, which showed the nation's economy unexpectedly fell into recession. Risk: Japanese equities may be under downward pressure in 2H16 through 2017 at the earliest given 1) end to yen weakening versus the dollar, 2) the Abe administration s awareness of share price is likely to weaken after the Upper House election in July 2016, and 3) if the 2016 inflation rate does rise to around 2%, there is no or little, if any, room for additional monetary easing by the BoJ End-2014 Target: 1390 Mid-2015 Target: 1470 Japan Topix Implication: We expect relatively strong performances from financials, which readily benefit from rising asset prices, and transport equipment names, which have considerable overseas exposure. As the deferral of the consumption tax hike also boosts purchasing power, we see positive implications for the retail sector too. Asia Driver: The PBOC announced a cut in the 1-year deposit rate by 25bps and widened the deposit ceiling from currently 10% to 20% up from the base deposit rates, in line with our expectation of three policy rate cuts before mid Risk: The preliminary HSBC China Manufacturing PMI Index declined to 50.0 for November, from 50.4 in October, and compared to the 50.2 level that economists had anticipated, suggesting that growth is still weak. Implication: We reiterate our positive stance, with MXCN/ CSI300 index target at 76/ 2,750 following the friendly policy reaction, and expect Property, Utilities, Insurance, Selective Industrials and Materials could be key beneficiaries End-2014 Target: 610 Mid-2015 Target: 680 MSCI Asia ex JP Page 2

3 Currency Forecast Last price Forecasts Currency 21-Nov-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 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 12,147 12,057 12,170 12,170 12,130 12,090 Indian Rupee USDINR Korean Won USDKRW ,055 1,059 1,054 1,046 1,038 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 (17 21 November 2014) 0.0% -0.4% -0.9% -2.7% -2.9% 7.3% 3.6% 2.9% 1.4% 1.1% 1.0% 0.9% 0.6% 0.3% 0.2% -10% 0% 10% Source: Bloomberg as of 21 November MSCI Latin America MSCI Emerging Europe Europe Stoxx Europe 600 UK FTSE 100 Taiwan TAIEX MSCI AC World US S&P 500 Gold Korea KOSPI Citi Global Emerging Mkt Sovereigns China Shanghai Composite Citi World Broad Inv Grade Japan TPX Index Citi High Yield MSCI AsiaXJapan HK Hang Seng China HSCEI Market Performance (Year-To-Date) (As of 21 November 2014) Oil Short Rates and 10-Year Yield Forecasts Last price Forecasts 21-Nov-14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Short Rates (End of Period) US Japan Euro Area Year Yield (Period Average) US Japan Euro Area % China Shanghai Composite 11.6% US S&P % Citi Global Emerging Mkt Sovereigns 7.5% Japan TPX Index 6.7% Citi World Broad Inv Grade 5.6% Taiwan TAIEX 5.2% Europe Stoxx Europe % MSCI AC World 3.6% Citi High Yield 2.7% MSCI AsiaXJapan 0.6% HK Hang Seng 0.0% UK FTSE % Gold -2.1% MSCI Latin America -2.3% Korea KOSPI -3.4% China HSCEI -22.2% MSCI Emerging Europe -22.3% Oil -30% -20% -10% 0% 10% 20% Source: Citi Research and Bloomberg as of 21 November 2014 Page 3

4 World Market At Glance Last price 52-Week 52-Week Historical Returns (%) 21-Nov-14 High Low 1 week 1 month 1 year Year-to-date US / Global MSCI World % 4.90% 6.65% 4.10% Dow Jones Industrial Averag % 7.19% 11.24% 7.44% S&P % 6.30% 14.90% 11.64% NASDAQ % 6.64% 18.74% 12.84% Europe MSCI Europe % 3.82% -2.28% -5.81% Stoxx Europe % 6.64% 7.08% 5.17% FTSE % 5.94% 1.04% 0.02% CAC % 6.52% 2.19% 1.19% DAX % 9.51% 5.83% 1.89% Japan NIKKEI % 17.25% 12.96% 6.54% Topix % 16.16% 12.35% 7.52% Emerging Markets MSCI Emerging Market % 2.30% 0.01% 0.17% MSCI Latin America % 2.54% -4.60% -2.11% MSCI Emerging Europe % -1.77% % % MSCI EM Middle East & Afric % 3.78% -6.26% -5.22% Brazil Bovespa % 6.96% 6.45% 8.89% Russia RTS % -0.48% % % Asia MSCI Asia ex-japan % 1.93% 3.43% 2.68% Australia S&P/ASX % -0.39% 0.30% -0.90% China HSCEI (H-shares) % 1.67% -7.82% -3.41% China Shanghai Composite % 6.29% 12.74% 17.52% Hong Kong Hang Seng % 1.51% -0.61% 0.56% India Sensex % 6.62% 40.07% 33.84% Indonesia JCI % 1.64% 18.16% 19.60% Malaysia KLCI % 0.72% 0.81% -3.10% Korea KOSPI % 2.59% -1.45% -2.31% Philippines PSE % 2.94% 18.84% 23.54% Singapore STI % 4.45% 5.45% 5.62% Taiwan TAIEX % 5.05% 12.25% 5.57% Thailand SET % 3.48% 14.78% 21.60% Commodity Oil % -7.61% % % Gold spot % -3.77% -3.34% -0.34% Page 4

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