1 FEBRUARY 2018 Weak USD: What Does It Mean? Following US Treasury Secretary Steven Mnuchin s (seeming) endorsement for the weak USD at Davos last week, USD sentiment continues to deteriorate reaching lows not seen since late 2014. However, the USD s decline was temporarily stemmed as he attempted to back-pedal on his comment. This was supported by US President Donald Trump, who said that he ultimately wants to see a strong USD and that Mnuchin s comments were just taken out of context. According to Citi analysts, a weaker US dollar could mean a few things: significantly stronger US export growth, slightly higher US inflation and probably no change to 2018 Fed policy. Read more on page 2 > Market Performance In the US, the Dow Jones Industrial Average jumped 5.79%, the S&P 500 rose 5.62% while the Nasdaq Composite rallied 7.36%. The European Stoxx 600 also gained by 1.61% while the Nikkei 225 and the Topix rose by 1.46% and 1.05% respectively. The MSCI Emerging Markets also saw a stellar month, up 8.30%, led by MSCI 13.08%. Latin America gaining Meanwhile, the MSCI Emerging Europe and MSCI AsiaXJapan gained 11.11% and 7.54% respectively. IN THIS ISSUE Weak USD: What Does It Mean? Page 1 2 Emerging Markets: Going for Growth or Value? Page 3 Can Crude Oil Prices Stay Up? Page 4 How is ASEAN Benefitting from China s Belt and Road Initiative? Page 5 Model Portfolios Page 6 MARKET OUTLOOK PAGE 1 INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.
Weak USD: What Does It Mean? (continued) Citi analysts emphasize that the weakening dollar is a multi-year trend related to the outperformance of global economies and view the movements based on Davos comments as noise around this fundamental macro trend. Citi expects the USD s decline to continue. A weaker dollar makes US exports more attractive and foreign imports more expensive, which could boost US growth in the short term. In the Federal Reserve s (Fed) macro model, a 10% depreciation of the US dollar (assuming no fiscal or monetary policy response) raises US GDP by 1.5% over three years. A weaker dollar should raise the cost of imports, thus boosting inflation, although modestly. Citi analysts found that a 10% depreciation of the US dollar boosts year-onyear inflation by 0.1-0.3 percentage points. The dollar weakness does not change Citi s forecast for three rate hikes in 2018 and Citi analysts think the Fed can expect to hit its 2% inflation target earlier if the dollar continues to weaken. For US stocks, a weaker dollar benefits earnings of companies that generate a significant share of their revenues overseas. Apart from that, dollar weakness is associated with flows into emerging markets (see chart). MSCI Asia relative to the US Dollar Index Source: Citi Research. As of 18 January 2018. MARKET OUTLOOK PAGE 2
Emerging Markets: Going for Growth or Value? Investor sentiment towards emerging market (EM) equities is still far from euphoric levels, despite its attractive value and earnings per share (EPS) growth. EM equities are attractively valued and remain at a discount compared to developed market (DM) equities with Asia as the cheapest, followed by EMEA and Latin America. Citi expects EM equities to be supported by stronger global growth and healthy earnings. Consensus EPS growth forecast for EM in 2018 is at 14% with Asia at 14%, followed by EMEA and Latin America both at 12%. Citi analysts are overweight Emerging Asia, Latin America and EMEA. As for sectors, Citi analysts are overweight on information technology, consumer discretionary, financials and materials while underweight on consumer staples, telecommunications and industrials. EM value versus growth long-term performance Source: Citi Research. As of 8 January 2018. Investors looking to gain exposure to EM may want to adopt a value bias over growth. In EM, growth stocks are currently trading at their highest premium in 20 years versus value stocks. Value stocks also tend to perform better when interest rates rise and during periods of US dollar weakness. Over the longer term, value stocks have shown a stronger and more consistent track record than growth stocks. See chart. MARKET OUTLOOK PAGE 3
Can Crude Oil Prices Stay Up? Rising from $45 in June 2017, Brent crude oil has breached $70 per barrel over the last month does this indicate that the petroleum cycle is entering a new phase of higher prices? A decline in capital spending on new upstream investments to find and develop more oil could support oil prices as this could curb oil production. Numerous oil market analysts indicate that the decline of oil production is likely to accelerate in the years ahead as upstream capital spending fell to $495 billion last year from a peak of $915 billion in 2014. At the same time, demand could also support oil prices as it looks to be rising at a rate of around two million barrels per day in 2018 versus 2017. WTI Crude Oil Prices Source: Citi Research, Bloomberg. As of 26 January 2018. Citi analysts have pushed their 2018 first- and second-quarter oil price forecasts higher partly as a result of these two factors the ICE Brent forecast for the first quarter is now $65 per barrel and $58 per barrel for the second quarter, pushing Citi s estimate for 2018 as a whole to $57 per barrel (up from $54 per barrel). Citi analysts caution that the current high oil price is likely to encourage shale output, potentially depressing oil prices going forward. They expect oil prices to trend lower in the second half of 2018 and for wide trading ranges to persist, even though recent price action has triggered the perception that oil s new narrow range of $60-70 per barrel is here to stay. MARKET OUTLOOK PAGE 4
How is ASEAN Benefitting from China s Belt and Road Initiative? As China increases its influence beyond its borders through programs such as the Belt and Road Initiative (BRI), its economic linkages with the rest of the world especially those with ASEAN will evolve. For instance, China has stepped up from being a trading partner to becoming a direct investor and builder in ASEAN since the launch of BRI in September 2013. ASEAN now accounts for one-third of China s investment commitments and construction contracts in the BRI regions. China s projects in ASEAN heavily emphasize energy, transport and real estate as compared to other BRI regions, with a greater willingness on China s part to acquire equity stakes. See chart. Source: AEI, Citi Research. As of 11 January 2018. Compared to 2010-2013, the share of Chinese foreign direct investment in ASEAN-4 s basic balance surplus has doubled to 13.9% in 2014 2016. Beyond the cyclical cushion from Chinese foreign direct investment, Chinese companies may have met 17% of ASEAN s infrastructure needs in 2014-17. Among the ASEAN countries, Malaysia and Vietnam stand out as leading beneficiaries as China s investment and construction footprints in both countries are large relative to their respective GDPs. Indonesia also benefits from construction projects financed by Chinese loans despite smaller greenfield investments. Singapore s large greenfield investments are largely in real estate while Thailand and the Philippines have received smaller investment commitments to date. In terms of market implications, Citi analysts expect the banking and construction sectors in Indonesia to benefit from the BRI. The added growth impulse from BRI has also aided the recent outperformance of the Malaysian Ringgit. MARKET OUTLOOK PAGE 5
1Q18 Model Portfolios Risk Level 2: Conservative Weight Change (QoQ) Global Investment Grade Bonds 43% -1% APAC ex JP / Emerging Market Bonds 48% 0% Cash 9% 1% Risk Level 3: Moderate Weight Change (QoQ) Global Investment Grade Bonds 21% -1% Global High Yield Bonds 2% 0% APAC ex JP / Emerging Market Bonds 12% 0% US Equities 26% 0% Europe Equities 10% 1% Japan Equities 4% 0% Asia ex Japan Equities 21% 2% Cash 4% -2% Risk Level 4: Aggressive Weight Change (QoQ) Global Investment Grade Bonds 8% 0% Global High Yield Bonds 1% 0% APAC ex JP / Emerging Market Bonds 5% 0% US Equities 30% -1% Europe Equities 11% 1% Japan Equities 5% 0% Asia ex Japan Equities 24% 2% GEM ex-asia 2% -1% Commodities 0% -1% Hedge Funds 14% 0% Risk Level 5/6: Very Aggressive / Specialized Weight Change (QoQ) US Equities 34% -2% Europe Equities 14% 1% Japan Equities 6% 0% Asia ex Japan Equities 29% 2% GEM ex-asia 2% -1% Hedge Funds 15% 0% MARKET OUTLOOK PAGE 6
World Market at a Glance Last price 52-Week 52-Week Historical Returns (%) 31-Jan-18 High Low 1 week 1 month 1 year Year-to-date US / Global Dow Jones Industrial Average 26149.39 26616.71 19831.09-0.39% 5.79% 31.64% 5.79% S&P 500 2823.81 2872.87 2271.65-0.48% 5.62% 23.91% 5.62% NASDAQ 7411.48 7505.77 5616.41-0.05% 7.36% 32.00% 7.36% Europe MSCI Europe 514.78 523.74 404.54-0.75% 5.53% 26.12% 5.53% Stoxx Europe 600 395.46 403.72 361.19-1.33% 1.61% 9.81% 1.61% FTSE100 7533.55 7792.56 7093.57-1.44% -2.01% 6.12% -2.01% CAC40 5481.93 5567.03 4733.82-0.24% 3.19% 15.44% 3.19% DAX 13189.48 13596.89 11479.78-1.68% 2.10% 14.34% 2.10% Japan NIKKEI225 23098.29 24129.34 18224.68-3.52% 1.46% 21.31% 1.46% Topix 1836.71 1911.31 1452.15-3.39% 1.05% 20.70% 1.05% Emerging Markets MSCI Emerging Market 1254.59 1278.53 909.10-0.33% 8.30% 37.98% 8.30% MSCI Latin America 3197.96 3243.07 2423.52 0.88% 13.08% 27.09% 13.08% MSCI Emerging Europe 183.98 187.38 136.46-0.67% 11.11% 22.89% 11.11% MSCI EM Middle East & Africa 314.09 324.53 244.29-2.44% 6.08% 25.72% 6.08% Brazil Bovespa 84912.70 86212.82 60314.70 1.47% 11.14% 31.30% 11.14% Russia RTS 1282.36 1313.44 958.83-0.77% 11.08% 10.15% 11.08% Asia MSCI Asia ex-japan 767.21 780.56 545.60-0.20% 7.54% 40.47% 7.54% Australia S&P/ASX 200 6037.68 6150.00 5582.70-0.28% -0.45% 7.41% -0.45% China HSCEI (H-shares) 13561.65 13962.53 9632.86-0.44% 15.82% 38.33% 15.82% China Shanghai Composite 3480.83 3587.03 3016.53-2.21% 5.25% 10.18% 5.25% Hong Kong Hang Seng 32887.27 33484.08 22997.46-0.22% 9.92% 40.78% 9.92% India Sensex30 35965.02 36443.98 27590.10-0.54% 5.60% 30.04% 5.60% Indonesia JCI 6605.63 6686.35 5317.50-0.15% 3.93% 24.77% 3.93% Malaysia KLCI 1868.58 1872.70 1667.68 1.72% 3.99% 11.79% 3.99% Korea KOSPI 2566.46 2607.10 2052.29 1.12% 4.01% 24.13% 4.01% Philippines PSE 8764.01 9078.37 7146.27-1.75% 2.40% 21.22% 2.40% Singapore STI 3533.99 3611.69 3030.65-2.08% 3.85% 15.99% 3.85% Taiwan TAIEX 11103.79 11270.18 9413.77-0.43% 4.33% 17.53% 4.33% Thailand SET 1826.86 1848.07 1528.78-0.66% 4.17% 15.82% 4.17% Commodity Oil 64.73 66.66 42.05-1.34% 7.13% 22.57% 7.13% Gold spot 1345.15 1366.18 1194.93-0.98% 3.23% 11.11% 3.23% Source: Citi Research as of 31 January 2018. MARKET OUTLOOK PAGE 7
Currency Forecasts Last price Forecasts Currency 31-Jan-18 Mar-18 Jun-18 Sep-18 Dec-18 G10-US Dollar Euro EURUSD 1.24 1.24 1.26 1.28 1.28 Japanese yen USDJPY 109 110 109 108 108 British Pound GBPUSD 1.42 1.40 1.41 1.42 1.42 Swiss Franc USDCHF 0.93 0.96 0.95 0.95 0.95 Australian Dollar AUDUSD 0.81 0.81 0.82 0.82 0.82 New Zealand NZDUSD 0.74 0.73 0.74 0.74 0.74 Canadian Dollar USDCAD 1.23 1.23 1.21 1.20 1.20 EM Asia Chinese Renminbi USDCNY 6.29 6.48 6.45 6.41 6.35 Hong Kong USDHKD 7.82 7.81 7.82 7.83 7.83 Indonesian Rupiah USDIDR 13,389 13,083 13,271 13,461 13,500 Indian Rupee USDINR 63.6 64.7 65.3 65.9 66.0 Korean Won USDKRW 1,068 1,058 1,055 1,051 1,048 Malaysian Ringgit USDMYR 3.90 3.78 3.75 3.71 3.68 Philippine Peso USDPHP 51.3 50.7 50.5 50.3 50.3 Singapore Dollar USDSGD 1.31 1.32 1.31 1.30 1.30 Thai Baht USDTHB 31.3 31.4 31.2 31.0 31.3 Taiwan Dollar USDTWD 29.1 29.5 29.4 29.4 29.3 EM Europe Czech Koruna USDCZK 20.36 20.43 19.95 19.47 19.42 Hungarian Forint USDHUF 250 251 247 244 245 Polish Zloty USDPLN 3.34 3.36 3.31 3.25 3.24 Israeli Shekel USDILS 3.42 3.41 3.39 3.38 3.38 Russian Ruble USDRUB 56.2 55.9 55.2 54.6 55.0 Turkish Lira USDTRY 3.76 3.87 3.90 3.94 3.99 South African Rand USDZAR 11.85 12.23 12.17 12.11 12.08 EM Latam Brazilian Real USDBRL 3.19 3.18 3.16 3.15 3.16 Chilean Peso USDCLP 601 600 598 596 601 Mexican Peso USDMXN 18.6 18.9 18.6 18.4 17.9 Colombian Peso USDCOP 2827 2908 2927 2946 2958 Source: Citi Research as of 31 January 2018. MARKET OUTLOOK PAGE 8
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