2 OCTOBER 2017 Emerging Markets Shrug Off Hawkish Fed The recent Federal Open Market Committee (FOMC) meeting has indicated a high probability of a December rate hike as the Fed prepares to unwind its US$4.5trn quantitative easing (QE) programme. Citi analysts anticipate that this move will likely drive US rates higher but still expect Emerging Market currencies on average to appreciate modestly against the USD over the next 6-12 months, driven by the stronger EUR, higher oil prices and potential inflows into EM equities. China s S&P rating downgrade from A+ to AA- was also largely priced in. According to Citi analysts, this is likely to have minimum impact on EM corporate bond spreads. Read more on page 2 > Market Performance IN THIS ISSUE Emerging Markets Shrug Off Hawkish Fed Page 1 2 China: Reshaping Global Capital Flows (Part 3 of 5) Page 3 Japan s Snap Election: What are the Market Implications? In the US, the Dow Jones Industrial Average jumped 2.08%, the S&P 500 rose 1.93% while the Nasdaq Composite gained 1.05%. For the month of September, the European Stoxx 600 also rallied, up by 3.82% alongside Nikkei 225 and the Topix (3.61% and 3.55% respectively). In contrast, the MSCI Emerging Markets underperformed, down 0.55% in September. While MSCI Emerging Europe and MSCI Latin America gained 1.32% and 1.52% respectively, MSCI Asia ex Japan fell 0.27%. This was led by Hang Seng China Enterprises Index which dropped 3.41% for the month. Page 4 Bearish USD over the Longer Term Page 5 MARKET OUTLOOK PAGE 1 INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.
Emerging Markets Shrug Off Hawkish Fed (continued) Citi analysts remain positive on EM corporate bonds despite a hawkish Fed. The higher yields offered by EM bonds remain attractive as the growth outlook for the region continues to improve. Currency gains can also add to the returns of local currency bonds. MYR Appreciation Source: Citi Research, Bloomberg as of 24 September 2017. Within EM currencies, Citi is positive on: RMB: Further unwinding of long USD position by Chinese corporates are likely to continue. The RMB is expected to appreciate, but at a slower pace. KRW: With growth expectations continuously upgraded and global equities stabilised, it is likely to be able to outperform. However, Citi analysts caution of risks to the currency from potential escalation of geopolitical concerns. MYR: Low volatility, steady energy prices and impressive growth outperformance continue to offer investors opportunities to take advantage of MYR s extremely cheap valuations. THB: The strength of the currency is largely based on Thailand s large current account surplus. The current low level of foreign shareholding of Thai assets also makes the THB less sensitive to shifts in global investor sentiment. MARKET OUTLOOK PAGE 2
China: Reshaping Global Capital Flows (Part 3 of 5) This article is the third of a series of five articles focused on the potential implications for investors as China opens up its domestic capital markets to greater foreign participation. Investors may recall the decision by MSCI in June this year to include A-shares into the MSCI China, MSCI EM, and MSCI AC World indices. MSCI had assigned an initial 5% inclusion factor, for qualified 222 A-share listed companies with eligible A-share market cap of US$0.7 trillion. The 5% inclusion meant that A shares will account for 0.7% of MSCI EM, while China will account for 29% of MSCI EM and 3.3% of MSCI AC World. But Citi analysts expect the inclusion factor to rise to 100% by 2025. This will eventually bring the weighting of A- shares up to 13% of MSCI EM and China to account for 38% of MSCI EM and 4.8% of MSCI AC World. Source: Citi Research as of 17 July 2017. With a 100% inclusion, the industrials, financials, consumer staples and materials sectors would increase their weighting in the index while the IT, telecoms and energy sectors would lose prominence. Given the expected rise in A-share weighing in the MSCI and non-msci indices, Citi analysts estimate an incremental US$200bn inflow into China A-shares from now until 2025. Still, the inflow is not expected to be a game changer for A-shares as the benchmarking process could be gradual and the flow represents only 3 days of A-shares daily turnover. In the medium term, Citi analysts also see limited upside for the CSI300 given expectations of tighter liquidity conditions. MARKET OUTLOOK PAGE 3
Japan s Snap Election: What are the Market Implications? As Japan readies itself for a 22 October snap election, Citi takes a look at how potential outcomes could affect markets. Japanese Prime Minister Shinzo Abe has called for a snap election on 22 October, having dissolved the lower house of parliament on 28 September. Citi analysts believe that the ruling coalition may lose a couple of seats but should easily retain a majority, with the main opposition party in turmoil. Citi analysts also believe that Abe will reappoint Bank of Japan Governor Haruhiko Kuroda, whose term ends in April 2018. Abe will reportedly present a plan to direct tax revenues from the proposed October 2019 consumption tax hike to free education. If these reports are to be believed (that around 1trn will be directed towards free education), Citi estimates it would reduce the core CPI by 0.3% - partly offsetting the impact from the tax hike. The effect of free schooling on GDP and CPI Source: Citi Research as of 21 September 2017. In view of the increased prospects for the Abe administration extending its rule, Citi analysts believe is that this is positive for equities. The combination of a loose monetary policy, flexible decisions on both fiscal policy and tax hikes as well as a steady (if slow) pursuit of growth strategies contributes to this. Citi analysts are currently neutral Japanese equities within a diversified portfolio. Citi s view is that a change in leadership resulting in a move away from Abenomics would likely lead to a negative outcome for the market. MARKET OUTLOOK PAGE 4
Bearish USD over the Longer Term Citi analysts: USD to move lower on net debt dynamics. Globally, the USD weakened a further 1.2% from last month and is now around 6-7% below January 2017 cyclical peaks. Citi analysts expect the dollar to move lower over the longer term. This call is not based on low inflation readings or disappointment over US policy although both have played a part in the move so far but due to the persistent twin deficits in the economy and rising net external debt. Citi analysts see medium-term upside in EURUSD as the EUR is bolstered by a still-low Real Effective Exchange Rate (REER) level, large current account surplus, equity market inflows, an above-expectation Euro Area cyclical recovery and the European Central Bank s (ECB) less accommodative policy stance. Citi analysts say the USD is now in a bear market, making it less attractive over the longer term. DM & EM Forecasts Path Source: Citi Research as of 18 September 2017. US yields are a critical driver for USDJPY, which is mainly range-bound this year between 108-114. Higher US yields in the near term may keep it relatively elevated as Citi analysts expect no change in Bank of Japan policy for some time, given stilllow/below-consensus inflation expectations. A majority vote in favour of the European Union Withdrawal Bill will likely strengthen UK Prime Minister Theresa May s leadership ahead of the Conservative Party Conference from 1-4 October. The GBP remains very cheap in a world where valuations are starting to drive currency movements. This can be seen from the recent strength in the EUR, JPY as well as from the weakness in the CHF. However, Brexit uncertainty is likely to be an overriding drag on the GBP as it potentially causes the Bank of England to raise rates more slowly. MARKET OUTLOOK PAGE 5
World Market at a Glance Last price 52-Week 52-Week Historical Returns (%) 30-Sep-17 High Low 1 week 1 month 1 year Year-to-date US / Global Dow Jones Industrial Average 22405.09 22419.51 17883.56 0.25% 2.08% 22.38% 13.37% S&P 500 2519.36 2519.44 2083.79 0.68% 1.93% 16.19% 12.53% NASDAQ 6495.96 6497.98 5034.41 1.07% 1.05% 22.29% 20.67% Europe MSCI Europe 478.31 479.00 374.45 0.02% 3.06% 19.07% 19.56% Stoxx Europe 600 388.16 396.55 327.02 1.29% 3.82% 13.19% 7.40% FTSE100 7372.76 7598.99 6676.56 0.85% -0.78% 6.86% 3.22% CAC40 5329.81 5442.10 4342.64 0.92% 4.80% 19.82% 9.61% DAX 12828.86 12951.54 10174.92 1.88% 6.41% 22.05% 11.74% Japan NIKKEI225 20356.28 20481.27 16111.81 0.29% 3.61% 23.75% 6.50% Topix 1674.75 1679.83 1287.39 0.61% 3.55% 26.61% 10.28% Emerging Markets MSCI Emerging Market 1081.72 1114.09 837.12-1.86% -0.55% 19.73% 25.45% MSCI Latin America 2916.69 3012.06 2194.50-2.23% 1.52% 22.51% 24.61% MSCI Emerging Europe 158.88 160.30 125.76 0.03% 1.32% 23.03% 8.28% MSCI EM Middle East & Africa 266.07 278.93 219.78-2.08% -4.21% 10.22% 8.70% Brazil Bovespa 74293.51 76419.58 56828.55-1.45% 4.88% 27.29% 23.36% Russia RTS 1136.75 1196.99 956.36 1.20% 3.73% 14.72% -1.35% Asia MSCI Asia ex-japan 660.98 681.23 505.03-1.62% -0.27% 19.98% 28.51% Australia S&P/ASX 200 5681.61 5956.52 5052.10-0.01% -0.58% 4.52% 0.28% China HSCEI (H-shares) 10910.04 11461.57 9117.27-1.79% -3.41% 13.86% 16.13% China Shanghai Composite 3348.94 3391.64 2993.06-0.11% -0.35% 11.46% 7.90% Hong Kong Hang Seng 27554.30 28248.12 21488.82-1.17% -1.49% 18.27% 25.24% India Sensex30 31283.72 32686.48 25717.93-2.00% -1.41% 12.27% 17.49% Indonesia JCI 5900.85 5936.14 5022.85-0.18% 0.63% 9.99% 11.41% Malaysia KLCI 1755.58 1796.75 1614.11-0.87% -0.99% 6.23% 6.93% Korea KOSPI 2394.47 2453.17 1931.07 0.24% 1.32% 17.17% 18.16% Philippines PSE 8171.43 8321.81 6499.00-1.33% 2.67% 7.10% 19.45% Singapore STI 3219.91 3354.71 2760.97-0.01% -1.75% 12.21% 11.77% Taiwan TAIEX 10383.94 10664.18 8879.69-0.63% -1.91% 13.28% 12.22% Thailand SET 1673.16 1678.23 1343.13 0.85% 3.53% 12.81% 8.44% Commodity Oil 51.67 55.24 42.05 1.99% 9.40% 7.11% -3.82% Gold spot 1280.15 1357.64 1121.03-1.33% -3.12% -2.71% 11.10% Source: Citi Research as of 30 September 2017. MARKET OUTLOOK PAGE 6
Currency Forecasts Last price Forecasts Currency 30-Sep-17 Sep-17 Dec-17 Mar-18 Jun-18 G10-US Dollar Euro EURUSD 1.18 1.20 1.20 1.19 1.20 Japanese yen USDJPY 113 108 111 113 113 British Pound GBPUSD 1.34 1.30 1.29 1.28 1.29 Swiss Franc USDCHF 0.97 0.97 0.97 0.97 0.96 Australian Dollar AUDUSD 0.78 0.79 0.79 0.80 0.80 New Zealand NZDUSD 0.72 0.74 0.74 0.75 0.75 Canadian Dollar USDCAD 1.25 1.29 1.29 1.28 1.28 EM Asia Chinese Renminbi USDCNY 6.65 6.75 6.79 6.83 6.84 Hong Kong USDHKD 7.81 7.82 7.82 7.83 7.83 Indonesian Rupiah USDIDR 13,472 13,305 13,343 13,380 13,409 Indian Rupee USDINR 65.3 64.5 64.9 65.3 65.6 Korean Won USDKRW 1,145 1,126 1,134 1,141 1,141 Malaysian Ringgit USDMYR 4.22 4.15 4.17 4.19 4.16 Philippine Peso USDPHP 50.8 51.3 51.2 51.1 51.1 Singapore Dollar USDSGD 1.36 1.35 1.35 1.35 1.35 Thai Baht USDTHB 33.3 32.7 33.0 33.2 33.4 Taiwan Dollar USDTWD 30.3 30.1 30.4 30.7 30.9 EM Europe Czech Koruna USDCZK 22.00 21.65 21.56 21.48 21.29 Hungarian Forint USDHUF 264 254 256 258 259 Polish Zloty USDPLN 3.65 3.54 3.52 3.50 3.47 Israeli Shekel USDILS 3.54 3.60 3.59 3.58 3.57 Russian Ruble USDRUB 57.5 55.9 57.5 59.0 59.7 Turkish Lira USDTRY 3.56 3.51 3.59 3.66 3.74 South African Rand USDZAR 13.56 13.02 13.21 13.40 13.55 EM Latam Brazilian Real USDBRL 3.16 3.13 3.20 3.26 3.31 Chilean Peso USDCLP 639 627 637 646 653 Mexican Peso USDMXN 18.3 17.7 18.0 18.2 18.1 Colombian Peso USDCOP 2939 3005 3043 3080 3072 Source: Citi Research as of 30 September 2017. MARKET OUTLOOK PAGE 7
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