*INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE Citibank Wealth Management Dec 11, 2017 with data as of Dec 8 Weekly Market Review Citi analysts forecasts Market Overview 02 Equity 03 Bond & Commodities 04 Weekly Commentary Hong Kong Stocks Update & Sector Outlook 05 06 Equity Index 07 Commodities 08 Foreign Exchange 09
Market Review Forecasts Weekly Market Review Market Overview Chart 1: Weekly Performance S&P 500 Index Nikkei 225 Hang Seng Index HSCEI Shanghai Comp. STOXX Europe 600 US Gov't Bond Index ^ World IG Corp Bond Index ^ EM Gov't Bond Index ^ US HY Bond Index ^ US Dollar Index COMEX Gold Futures WTI Crude Oil Futures Source: Bloomberg L.P., as of Dec 8, 2017 ^Reference Indices: Citigroup Bond Indices Series Market Overview 0.0% -1.5% -1.4% -0.8% -2.6% -1.7% -0.1% 0.0% 0.4% 1.4% 0.2% 0.0% 1.1% HK equities saw profit taking and posted their second consecutive weekly loss, following the strong rally YTD. Passage of US tax cuts this year has become very likely. Interest rates and equity prices were little changed on the week, but the US dollar appreciated significantly. Key Economic Releases / Events over the Week US Tax Reform After the Senate passed it tax reform bill, we now see 90% odds of a final bill be signed into law by President Trump by year-end (original forecast: 65%). We anticipate US economic growth will accelerate to 2.7% in 2018 and 2.4% 2019 due to stimulus from tax cuts and immediate expensing of capital investment, as well as from hurricane-related government spending. US Non-farm payroll The US economy added 228K jobs in Nov (consensus: 195K). The major surprise was weaker-than-expected wage growth of just 0.2% MoM and 2.5% relative to median forecasts of 0.3% and 2.7%. Citi s view: 228K new jobs but just 2.5% YoY wage growth in November reinforces soft inflation despite solid growth. A rate hike at this week s FOMC meeting is widely anticipated. We expect median dots will continue to indicate three rate hikes in 2018. 2
Potential Beneficiaries of US Tax Reform Beneficiary - US Small Cap Revenue source by region for US listed companies Source: FactSet as of 30 Sep, 2016 Small cap has been starved for earnings growth through much of this cycle, as EPS growth peaked in mid-2010. Tax reform and other fiscal stimulus were positive for small cap and were best viewed as cycle extenders. Tax Reform - Potential Impact At a price tag in the neighborhood of $1.5 trillion over ten years, we believe tax reform would provide some late-cycle stimulus to the US and global economies. US corporate earnings: A 20% statutory tax rate for corporations (all things being equal) could add another $9-$10 to S&P 500 EPS estimates on top of our $141 forecast. US stock market: Tax-related incremental earnings would add 100 points to our current 2,675 target for December next year.
Beneficiary - US stocks with higher domestic exposure Retailing, Financials, Healthcare, Telecom Services and Utilities are among the sectors that have highest exposure in the US (>80% of revenue) Beneficiary - US Pharmaceuticals and Chemicals The bill is a net positive for those US-based multinationals, particularly those with accumulated offshore earnings that will be deemed repatriated upon implementation of US corporate tax reform Some US Chemicals companies have more than 75% of its cash and equivalents held abroad. US Pharmaceuticals Large Caps also saw accumulated offshore earnings. Beneficiary - European stocks We remain bullish on European equities and expect 10-15% EPS growth in 2018. Collectively, lower US corporate taxes imply 0-6% upside for European EPS. Source: Citi, as of Nov 29, 2017 Source: Citi, as of Nov 21, 2016
Chart 3: Weekly Equity Market Performance Chart 4: Weekly Bond and Commodities Performance Market Review Forecasts Equity 8-Dec Close Weekly Change Change (%) Weekly 1-Month 3-Month 6-Month YTD Global / US MSCI AC World Index (Local) 582 2.6 0.5% 0.4% 6.4% 7.3% 16.4% S&P 500 Index 2,652 9.3 0.4% 2.2% 7.7% 8.9% 18.4% DJ Industrial Average 24,329 97.6 0.4% 3.2% 11.6% 14.9% 23.1% Russell 2000 Index 1,522-15.3-1.0% 2.7% 8.7% 7.5% 12.1% Europe STOXX Europe 600 389 5.3 1.4% -1.3% 3.7% 0.0% 7.7% FTSE 100 Index 7,394 93.5 1.3% -1.8% 0.2% -0.8% 3.5% DAX Index 13,154 292.2 2.3% -1.7% 6.9% 3.5% 14.6% CAC 40 Index 5,399 82.2 1.5% -1.3% 5.6% 2.6% 11.0% Japan Topix 1,804 7.2 0.4% -0.8% 13.2% 13.4% 18.8% Nikkei 225 22,811-7.9 0.0% -0.4% 18.3% 14.6% 19.3% Emerging Market MSCI EM Index 1,111-5.2-0.5% -2.1% 1.8% 9.0% 28.8% Asia MSCI Asia ex Japan 691-3.0-0.4% -1.8% 4.1% 9.6% 34.3% Shanghai Composite 3,290-27.6-0.8% -3.7% -2.2% 4.4% 6.0% CSI 300 4,003 5.2 0.1% -1.1% 4.6% 12.4% 20.9% Hang Seng Index 28,640-434.4-1.5% -0.9% 3.5% 9.9% 30.2% HS China Enterprise Index 11,290-159.9-1.4% -2.5% 1.3% 6.0% 20.2% MSCI China Index 87-0.3-0.3% -2.4% 5.7% 16.5% 47.6% S&P/ASX 200 5,994 4.6 0.1% -0.4% 5.7% 5.6% 5.8% Taiwan TAIEX Index 10,399-201.8-1.9% -3.9% -2.0% 1.7% 12.4% Kospi Index 2,464-11.4-0.5% -3.5% 5.1% 4.2% 21.6% BSE Sensex 30 Index 33,250 417.4 1.3% 0.1% 4.9% 6.5% 24.9% Jakarta Composite Index 6,031 78.8 1.3% -0.3% 3.0% 5.8% 13.9% Straits Times Index 3,425-24.9-0.7% 0.1% 6.1% 5.8% 18.9% FTSE Bursa Malaysia KLCI 1,721 3.4 0.2% -1.3% -3.3% -3.6% 4.8% SET Index 1,707 6.9 0.4% -0.5% 4.3% 8.7% 10.6% Latin America Brazil Ibovespa Index 72,732 467.4 0.6% -2.2% -0.5% 15.9% 20.8% Mexico IPC Index 47,573 307.6 0.7% -2.6% -5.0% -3.1% 4.2% Emerging Europe Russia RTS Index $ 1,120-13.8-1.2% -2.7% 0.0% 7.8% -2.8% Fixed Income Bond Indices 8-Dec Close Weekly Weekly 1-Month 3-Month 6-Month Change YTD Citigroup US Gov't Bond Index 819-0.8-0.1% -0.2% -1.2% 0.2% 2.2% Citigroup WBIG - Corporate Index 273 0.0 0.0% 0.0% 0.3% 1.7% 4.7% Citigroup High Yield Market Index 991 0.5 0.0% 0.4% 1.0% 2.2% 6.8% JPM HY Bond Spread-to-Worst Glbl 405 0.0 0.0% -1.0% -9.4% -9.4% -16.0% US Treasury Yields 3-Month - Yield (%) 1.27 1 5 23 28 77 2-Year - Yield (%) 1.79 2 15 53 48 61 5-Year - Yield (%) 2.14 3 13 51 39 21 10-Year - Yield (%) 2.38 1 4 33 19-7 30-Year - Yield (%) 2.77 1-2 10-8 -30 Change (%) Commodity Energy 8-Dec Weekly Weekly 1-Month 3-Month 6-Month Close Change YTD WTI Crude Futures ($/barrel) 57.4-1.0-1.7% 1.0% 20.8% 25.7% 6.8% Brent Crude Futures ($/barrel) 63.4-0.3-0.5% -0.1% 17.9% 32.5% 11.6% Natural Gas Futures (MMBtu) 2.8-0.3-9.4% -12.7% -4.1% -8.5% -25.6% Base Metals LME Aluminum Futures ($/MT) 2010.5-64.0-3.1% -4.7% -4.2% 5.7% 18.8% LME Copper Futures ($/MT) 6571.0-262.0-3.8% -4.1% -1.8% 14.7% 18.7% Precious Metals Change (%) Change in Yield (in bps) Comex Gold Futures ($/oz.) 1248.4-33.9-2.6% -2.7% -7.3% -2.4% 8.4% Comex Silver Futures ($/oz.) 15.8-0.6-3.4% -7.7% -12.7% -9.1% -1.0% Source: Bloomberg L.P., as of Dec 8, 2017 5
Market Review Forecasts HK Stocks Update Chart 5: Top/Bottom Five HSI Constituents TENCENT PING AN WHARF HLDG HENGAN INTL WH GROUP LTD Top 5 performers 2.34% 3.84% 3.92% 5.00% 7.03% Source: Bloomberg L.P., as of Dec 8, 2017 Sunny Optical Technology Group slid 12.1%, the worst performer on the index. The Apple supplier was admitted to the Hang Seng Index on Monday. SUNNY OPTICAL -12.12% CHINA UNICOM GEELY AUTOMOBILE HENDERSON LAND D Bottom 5 Performers SINO LAND Heavyweight stock Tencent Holdings, jumped 4.2% on Friday to erase losses recorded earlier in the week. Also wiping out declines from earlier in the week, Ping An Insurance Group climbed 4.9% on Friday. -6.84% -6.55% -4.55% -4.54% Remain Bullish on China Equities Premium market in the making China s time-tested resilience deserves a premium. It is well positioned to capture the growth opportunities ahead. A more stable and sustainable economy Citi estimates that new economy now accounts for 21% of China s GDP and makes up ~45% of China s equity market cap. We expect the new economy to increasingly serve as a growth stabilizer for China. Consolidation has been a trend, especially among old economy sectors. Industry leaders are set to benefit, with rising market shares and profitability. The government s long-term housing mechanism should help smooth out volatility in the property market. Strong earnings growth ahead Citi expects MSCI China to deliver high-teen EPS growth in 2018/2019, and ROE is likely to improve from 15.3% in 2017 to 16.1%/16.4% in 2018/19. Upward earnings revisions continue, and cross-border trade flows have become an increasingly important market driver. Citi sets the end-2018 MSCI China target at 110, implying ~20% upside. Overweight IT, Consumer Discretionary, Healthcare and Property and underweight Consumer Staples, Telecom and Utilities. 6
Market Review Forecasts Citi analysts Forecasts: Global Equity Index Forecasts (Remarks: Forecasts as of Dec 8, 2017) Citi forecasts Valuation Past Performance 8-Dec END-2018 Expected Forecast P/E ratio Forecast P/B ratio Region / Index 1-Week 3-Month YTD Close Change 2017 2018 2017 2018 Global MSCI AC World Index (Local) 0.5% 6.4% 16.4% 582 615 5.6% 17.5 16.0 2.3 2.1 MSCI EM Index -0.5% 1.8% 28.8% 1,111 1,275 14.8% 13.8 12.1 1.7 1.5 US S&P 500 Index 0.4% 7.7% 18.4% 2,652 2,675 0.9% 19.8 18.0 3.2 3.0 DJ Industrial Average 0.4% 11.6% 23.1% 24,329 19.4 17.7 3.8 3.6 Russell 2000 Index -1.0% 8.7% 12.1% 1,522 - - 33.5 24.9 2.1 2.0 Europe STOXX Europe 600 1.4% 3.7% 7.7% 389 460 18.2% 16.2 14.9 1.9 1.8 FTSE 100 Index 1.3% 0.2% 3.5% 7,394 8,200 10.9% 15.0 14.1 1.9 1.8 DAX Index 2.3% 6.9% 14.6% 13,154 - - 14.9 13.5 1.8 1.7 CAC 40 Index 1.5% 5.6% 11.0% 5,399 - - 15.9 14.8 1.6 1.5 Japan Topix 0.4% 13.2% 18.8% 1,804 1,825 1.2% 15.8 14.6 1.4 1.3 Nikkei 225 0.0% 18.3% 19.3% 22,811 - - 19.2 17.1 1.9 1.7 Asia MSCI Asia ex Japan -0.4% 4.1% 34.3% 691 800 15.8% 14.4 12.7 1.7 1.5 Shanghai Composite -0.8% -2.2% 6.0% 3,290 14.5 12.8 1.6 1.5 CSI 300 0.1% 4.6% 20.9% 4,003 5,000 24.9% 15.3 13.3 1.9 1.7 Hang Seng Index -1.5% 3.5% 30.2% 28,640 29,500 3.0% 12.8 11.7 1.3 1.2 HS China Enterprise Index -1.4% 1.3% 20.2% 11,290 13,000 15.2% 8.4 7.7 1.0 0.9 MSCI China -0.3% 5.7% 47.6% 87 110 27.1% 15.0 13.0 1.9 1.7 S&P/ASX 200 0.1% 5.7% 5.8% 5,994 16.3 15.6 2.0 1.9 Taiwan TAIEX Index -1.9% -2.0% 12.4% 10,399 14.7 13.4 1.8 1.7 Kospi Index -0.5% 5.1% 21.6% 2,464 10.6 9.2 1.1 1.0 BSE Sensex 30 Index 1.3% 4.9% 24.9% 33,250 21.8 17.0 2.9 2.6 Jakarta Composite Index 1.3% 3.0% 13.9% 6,031 17.6 15.7 2.6 2.4 Straits Times Index -0.7% 6.1% 18.9% 3,425 15.7 14.2 1.3 1.2 FTSE Bursa Malaysia KLCI 0.2% -3.3% 4.8% 1,721 15.9 14.9 1.6 1.5 SET Index 0.4% 4.3% 10.6% 1,707 17.0 15.3 2.0 1.9 Latin America Brazil Ibovespa Index 0.6% -0.5% 20.8% 72,732 13.9 12.0 1.6 1.5 Mexico IPC Index 0.7% -5.0% 4.2% 47,573 17.8 16.0 2.4 2.2 Emerging Europe Russia RTS Index $ -1.2% 0.0% -2.8% 1,120 7.1 6.4 0.7 0.7 Source: Bloomberg L.P. and Citi Forecasts, performance and market data as of Dec 8, 2017 7
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