French Presidential Race Heats Up

1 MARCH 2017 French Presidential Race Heats Up By Florence Tan, Tae Hyon Ahn, Celestee Tan The first round of the 2017 French presidential election will be held on 23 April 2017. If no candidate wins a majority, a run-off election between the top two candidates will be held on 7 May 2017. The top four candidates are, in alphabetical order: Francois Fillon (Republicans), Benoit Hamon (Socialists), Marine Le Pen (Front National) and Emmanual Macron (Independent). IN THIS ISSUE French Presidential Race Heats Up Page 1 2 Has the Game Changed for Russian Equities? Page 3 Read more on page 2 > Is There Still Value in Emerging Market Debt? Market Performance In the US, the Dow Jones Industrial Average jumped 4.77%, the S&P 500 advanced 3.72%, while the Nasdaq Composite soared 3.75%. The Stoxx Europe 600 rose 2.81% while Japanese stocks saw mild gains with the Nikkei 225 and the Topix up 0.41% and 0.90% respectively in February. MSCI Emerging Markets also saw stellar performance in February, rising 2.98%, led by MSCI Latin America and MSCI Asia ex Japan (both up 3.33%). MSCI Emerging Europe in contrast fell 3.59%. Within Emerging Markets, Chinese H-shares jumped 5.04% in February for its best monthly performance since August. Page 4 Copper Prices Stage a Comeback Page 5 MARKET OUTLOOK PAGE 1 INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.

French Presidential Race Heats Up (continued) Voters are focusing on how candidates propose to tackle unemployment, security and how they intend to preserve the French model of social security. Citi analysts maintain our baseline scenario that Fillon may be the next President. This assumption is built into Citi s forecast of faster real GDP growth in 2017 (1.4%) and 2018 (1.7%) after an average growth of 1.1% in 2015-16. Yet, news of an investigation of financial misconduct involving Fillon may affect public opinion. The tail risk is a Le Pen victory. Polls continue to suggest that Marine Le Pen may finish in first or second position in the first round and qualify for the run-off two weeks later. Her anti-euro, anti-eu, anti-immigration and anti-establishment rhetoric suggest that if she won, France s membership of the euro would be questioned, and Frexit (France s departure from the European Union) could become possible. A Conservative Party Citi s GDP Growth Forecast (%) candidate win is the assumption for Citi s forecast of faster real GDP growth in 2017 (1.4%) and 2018 (1.7%). Source: Citi Research as of 27 January 2017. Prepare for volatility. Brexit and the US Presidential election in 2016 have undermined confidence in election forecasting, suggesting that investors will need to prepare for surprise outcomes. The heavy political calendar in Europe leads Citi analysts to be underweight European equities despite the improving macro fundamentals in the eurozone. MARKET OUTLOOK PAGE 2

Has the Game Changed for Russian Equities? Following two consecutive years of recessions, the Russian economy is expected to grow 2% in 2017 on the back of higher oil prices. Citi analysts also identify a number of potential positive developments that may work in favour of Russian equities. FX intervention. The Russian central bank has been buying foreign currency on the domestic market since February 7. In Citi s view, the plan aims to 1) weaken the Ruble; 2) increase domestic liquidity; 3) lower domestic interest and interbank rates but not necessarily policy rates; 4) modestly boost economic growth. Inflation and rate cuts. The central bank kept the REPO rate unchanged at 10.00% at its February meeting. However, with inflation falling to 5.4% YoY in December and possibly 5.1% YoY in January, Citi s view is that the central bank may cut the REPO rate to 8.0% by December. Tax stability. There have been numerous tax changes over the past decade and there continues to be discussions to alter key tax frameworks in the oil and gas sector as well as for general businesses. If the government recommits to keeping taxes stable, this could support business confidence and boost the economic outlook in 2017. All eyes will remain Citi Russia Political Risk Measure focused on political developments, with attention particularly tuned to any signs that sanctions relief could be nearing. Source: Citi Research as of 31 January 2017. Citi analysts have revised our end-2017 MSCI Russia target to 668 (previously 638). Within exporters, Citi continues to prefer the Oil & Gas sector on expectations that commodity prices remain stable. The sector also looks attractively priced compared to global companies within the same sector. MARKET OUTLOOK PAGE 3

Is There Still Value in Emerging Market Debt? Citi analysts remain overweight EM debt (both local currency and USD denominated) given the improvements in fundamentals, politics and relatively attractive valuations. Driven by stable oil prices and recent USD weakness, EM debt (EMD) gained 3% year to date, following a 9% rise in 2016. However, Citi s base case for a stronger USD and higher US yields could create periods of volatility for EMD. Nevertheless, Citi analysts believe EM countries are now better positioned to navigate these market trends given improvements in fundamentals, politics and relatively attractive valuations. As such, investors can take advantage of periods of weakness to gain some exposure to EMD. Latin America: Citi analysts continue to find value in Brazilian USD corporates, specifically in energy/basic materials sectors and selective opportunities in financials. In Argentina, USD sovereigns gained 19.0% since re-entering the global capital markets in late 2015. Though valuations are less cheap, opportunities still exist in quasi-sovereigns and corporate markets, where yields on select issuers still exceed 7.0%. Relative value LatAm has outperformed other EM debt remains compelling, especially in Latin American and Asian debt. Source: Citi Research as of 9 February 2017. Asia: Local Asia sovereign bond performance (on an unhedged basis) has been driven by gains in FX vs USD thus far this year. However, the risk of reversals has risen, along with volatility. Longer term, Citi analysts favour local Indonesia bonds, with 10-year yield around 7.5%. Moody s recently raised Indonesia s outlook to positive, citing the country s reduction in external vulnerabilities, macro stability and fiscal discipline. Though already rated Baa3 at Moody s, an upgrade by S&P (currently rated BB), could support inflows. EMEA: While USD denominated Russian sovereigns appear fairly priced, local yields are roughly 8.0%. That said, the ruble is at a 19-month high and the central bank recently implied future rate cuts may be less likely. Nevertheless, Citi expects further easing, with short rates reaching 8.0% by end 2017. Moreover, a more favourable commodity outlook could push local yields lower. Citi analysts are overall neutral on EMEA debt. MARKET OUTLOOK PAGE 4

Copper Prices Stage a Comeback Copper prices underwent a 5 year correction between 2011 and 2016, reaching a 7 year low of $4,330/t in January 2015. Now, it appears the red metal is staging a comeback. Citi analysts expect the copper market to see supply shortage in 2017 for the first time in six years, due to a combination of tightening supply and recovering developed world demand. This is likely to push copper prices above $6,000/t in 2H17, with peaks of close to $7,000/t expected before year end in Citi s view. Copper demand Copper Demand vs Supply looks set to exceed supply for most of the next 5 years. Source: Citi Research as of 20 February 2017. Demand: For 2017, Citi analysts expect Chinese copper demand growth to slightly moderate to between 3%-4% yoy compared to around 5% yoy in 2016. Citi believes that housing related demand, principally in construction and home appliances, may be at risk as central government steer the policy direction away from being accommodative towards preventing over-heat. On the positive side, power and transportation demand may support overall copper consumption this year. Supply: Unlike bulk commodities, new copper ore discoveries can take decades to come to production. Citi analysts expect mine supply growth to move into negative territory by 2020 due to low levels of investment capital expenditure spend. Investors can consider copper miners for exposure to copper price upside. Copper equities offer greater leverage to higher copper prices than investing in the commodity itself. For every 5% increase in copper prices, Citi calculates that the Earnings-Per-Share (EPS) of copper miners under our research coverage rises by 14-28%. Citi analysts also believe that pure and concentrated copper players may benefit more from the potential price upside compared to diversified or integrated commodity players. MARKET OUTLOOK PAGE 5

World Market at a Glance Source: Citi Research as of 28 February 2017. MARKET OUTLOOK PAGE 6

Currency Forecasts Source: Citi Research as of 28 February 2017. MARKET OUTLOOK PAGE 7

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