WEEKLY MARKET UPDATE. Tough start to performance. Asset Allocation. Weekly Market Update 11 January January 2016

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WEEKLY MARKET UPDATE 11 January 2016 Tough start to 2016 Stocks closed solidly lower to end the dismal first week of 2016 as renewed declines in Chinese stocks, Renminbi, and oil prices re-ignited fears over slow global growth. Chinese authorities suspended a circuit breaker system, which was finalized last month to smooth market movements, after the mechanism halted trading for two days and created the opposite effect as investors rushed to sell whenever the benchmark index fell close to the 7%. In the US, December payroll employment posted a solid 292K gain, with substantial historical revisions totaling 50K. Mirroring developments in the rapidly-growing sectors of the overall economy, payroll gains in December were largest in the service sectors, although manufacturing was surprisingly robust. Against this backdrop of strong US growth, Citi economists believe the next rate increase may likely occur at the March FOMC meeting, and a subsequent pair of increases could occur in the second half of 2016. Thus, our end-2016 forecast for the federal funds rate is 1.25% and end-2017 target is 1.75%. Performance Global equity finished the first week sharply lower with the MSCI World index losing 6.16%. In the US, the S&P 500 and the Dow Jones Industrial Average declined 6.16% and 6.19% respectively while the Nasdaq was down 7.26%. Europe also posted a negative weekly return as the benchmark Stoxx Europe 600 Index lost 6.69%. Meanwhile, Japan's Nikkei 225 and Topix finished lower 7.02% and 6.46% respectively. Finally, the MSCI Emerging Markets index plunged 6.82% dragged by the MSCI Latin America (-8.49%), the MSCI Asia Pacific (-6.31%) and the MSCI Emerging Europe (-4.78%). Chinese equities were among the weakest with the Shanghai Composite index and HSCEI indices correcting 9.97% and 8.44% respectively. In contrast, equities in Indonesia (JCI: - 1.02%) and Malaysia (KLCI: -2.06%) held relatively better. Asset Allocation Equities Decent EPS momentum and continued central bank support mean that we prefer Europe ex UK and Japan equities to US equities. Credit Citi analysts expect HY markets to outperform IG in both US and Europe. Rates Citi s strategists forecast divergent yield paths for the major government bond markets to end-2016. EMU bonds are expected to outperform; Japan and US likely to underperform. Commodities Rising geopolitical tensions would seemingly warrant a higher oil premium, yet this is unlikely so long as oil markets remain materially oversupplied and inventories at extreme highs. Improving data out of US Citi Economic Surprise Index CESIUSD Index CESIEUR Index CESICNY Index Low confidence in spread direction Accumulated 3-month Bond Index Returns World Govt Bonds Index Global EMD Index HY Index Negative narrative gains traction Accumulated 3-month Equity Index Returns MSCI World MSCI EM MSCI Asia Week Ahead Key Data and Event 60 30 0-30 -60 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -7.0% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% -16% Date Country Data & Event Period Survey Prior Citi Fct 11-Jan CH New Yuan Loans CNY Dec 700B 709B 642B 12-Jan IN CPI YoY Dec -- 5.4% 5.2% 13-Jan EC Industrial Production SA MoM Nov 0.6% -0.4% 13-Jan CH Exports YoY Dec -7.5% -6.8% 9.9% 14-Jan JN PPI YoY Dec -3.5% -3.6% -3.3% 14-Jan US Import Price Index MoM Dec -1.4% -0.4% -1.1% 14-Jan SK BoK 7-Day Repo Rate 14 Jan 1.5% 1.5% 1.5% 14-Jan US Initial Jobless Claims 9 Jan 275K 277K 293K 15-Jan US Retail Sales Advance MoM Dec -0.1% 0.2% -0.2% 15-Jan US Industrial Production MoM Dec -0.2% -0.6% -0.1% 15-Jan US Business Inventories Nov -0.1% 0.0% -0.1% 15-Jan US U. of Mich. Sentiment Jan P 92.6 92.6 93.0 Past Past performance performance is is no no guarantee guarantee of of future future results. results. Real Real results results may may vary. vary. Page 1

Drivers and Risks By Market United States Driver: December payroll employment posted a solid 292K gain. The December data show evidence of ever-strengthening labour markets, and has caused us to reconsider the balance of risks to our outlook. We believe upside risks to the medium-term inflation trajectory may be increasing. Risk: The FOMC is unlikely to delay normalization just because of the recent bout of global market volatility. Indeed, based on implied volatility measures, the bond market reactions appear much less disruptive compared to those during 2013, and the China-based episode in August 2015. 2200 2100 2000 1900 1800 1700 1600 1500 End-2016 Target: 2200 S&P 500 Implication: Therefore, we believe the next rate increase may likely occur at the March FOMC meeting, and a subsequent pair of increases may be implemented in 2H16. This implies our trajectory for the federal funds rate may be 1.25% by end- 2016, 1.75% by end-2017, and 2.5% by end-2018. Europe Driver: We expect the euro area to experience slightly faster and above-trend growth in 2016-17, thanks to the continued support from three main tailwinds: lower oil prices, fiscal policy loosening and an accommodative ECB. Risk: The main downside risks to our slightly below-consensus GDP forecasts are likely to stem from a much more negative EM growth outlook and some unravelling of the EU framework, either due to Brexit and/or a poorly-managed migration crisis. Implication: Given additional stress in commodities and volatility in key FX markets, Citi analysts lower their top-down expectation for 2016-17E European earnings growth to 4-7% and lower their end-2016 target for Stoxx to 400 (from 440). Also their end-2016 FTSE 100 target is lowered to 6600 (from 7100). Nevertheless, we stick with our key investment themes align with: 1) fundamentals, 2) liquidity, 3) balance sheets. This means delivery strategies, eg earnings/dividend momentum, backing Planet QE, eg search for yield. Japan Driver: We think that from 2016 onwards the equity market may be influenced by the general election results and subsequent economic policy stance of the Abe government. Our upside scenario is the formation of a solid foundation for a longterm government and a commitment to accelerated structural reform by the Abe government, particularly labour market reform. Risk: The key downside risk is continued slowing global growth and we see relatively larger risk for EPS growth at export-related and cyclical names. Implication: We think investors may continue to favour domestic demand-related names, defensives, and financials. In these sectors, we suggest looking for stocks with 1) a unique growth story; 2) a proactive approach on governance reforms and shareholder returns; and 3) a likelihood of benefitting from economic policy moves. End-2016 Target: 400 430 410 390 370 350 330 310 290 DJ Stoxx TMI 270 End-2016 Target: 1850 1700 1600 1500 1400 1300 1200 1100 Japan Topix 1000 Asia Driver: China s new economy may continue to decouple from old economy malaise, showing continued vibrancy on a) diversified consumption-driven strength in key sectors, supported by rising labour income, and b) innovation-driven upgrades to manufacturing competitiveness in key sectors. SOE reforms and financial reforms are the most critical actions to facilitate the healing process. 700 650 600 End-2016 Target: 610 Risk: China s economy is sick, suffering from excess capacity of old economy. Given the ineffectiveness of credit easing, we view 2016 as the first year to see real supply-side surgery: de-capacity with rising defaults. Implication: We set an end-2016e MSCI China / CSI300 target at 69 / 3,300, both 0.5x st dev below 10-year average P/E, mainly given lower earnings growth (3% in 2016E vs. 10-year average 11%). Citi s preferred sectors include Consumer Discretionary, I.T., Health Care, Property, Insurance, Transportation and Utilities. 550 500 MSCI Asia ex JP 450 Page 2

Currency Forecast Last price Forecasts Currency 08-Jan-16 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 G10-US Dollar Euro EURUSD 1.09 1.09 1.06 1.03 1.03 1.04 Japanese yen USDJPY 117 120 122 124 124 124 British Pound GBPUSD 1.45 1.48 1.46 1.45 1.46 1.47 Swiss Franc USDCHF 0.99 0.98 1.01 1.03 1.03 1.04 Australian Dollar AUDUSD 0.70 0.72 0.70 0.69 0.69 0.69 New Zealand NZDUSD 0.65 0.68 0.66 0.65 0.65 0.65 Canadian Dollar USDCAD 1.42 1.41 1.39 1.38 1.36 1.35 EM Asia Chinese Renminbi USDCNY 6.59 6.66 6.73 6.80 6.76 6.72 Hong Kong USDHKD 7.76 7.76 7.78 7.79 7.78 7.78 Indonesian Rupiah USDIDR 13,923 14,141 14,328 14,500 14,500 14,500 Indian Rupee USDINR 66.64 67.3 67.7 68.0 68.0 68.0 Korean Won USDKRW 1,198 1,189 1,208 1,224 1,215 1,206 Malaysian Ringgit USDMYR 4.39 4.43 4.47 4.50 4.46 4.42 Philippine Peso USDPHP 47.20 47.8 48.2 48.5 48.2 47.9 Singapore Dollar USDSGD 1.44 1.45 1.46 1.47 1.47 1.46 Thai Baht USDTHB 36.33 36.7 37.0 37.3 37.1 37.0 Taiwan Dollar USDTWD 33.34 33.7 34.0 34.2 33.9 33.7 EM Europe Russian Ruble USDRUB 74.75 69.3 70.2 70.9 69.8 3.1 South African Rand USDZAR 16.30 15.64 15.83 15.98 15.78 0.00 EM Latam Brazilian Real USDBRL 4.02 4.33 4.37 4.39 4.31 4.23 Mexican Peso USDMXN 17.94 17.0 17.0 17.0 16.9 16.8 Source: Citi Research and Bloomberg as of 8 January 2016 Weekly Market Performance (4-8 January 2016) -6.5% -8.4% -8.5% -6.2% -6.3% -10.0% -10.5% -4.8% -2.2% 4.0% 0.6% -20% -10% 0% 10% Gold Citi World Broad Inv Grade Citi High Yield Citi Global Emerging Mkt Sovereigns Korea KOSPI MSCI Emerging Europe UK FTSE 100 Taiwan TAIEX US S&P 500 MSCI AC World MSCI AsiaXJapan Japan TPX Index HK Hang Seng Europe Stoxx Europe 600 China HSCEI MSCI Latin America China Shanghai Composite Market Performance (Year-To-Date) (As of 8 January 2016) Oil Short Rates and 10-Year Yield Forecasts Last price 08-Jan-16 1Q16 2Q16 3Q16 4Q16 1Q17 Short Rates (End of Period) US 0.50 0.75 0.75 1.00 1.25 1.25 Japan 0.1 0.10 0.10 0.10 0.10 0.1 Euro Area 0.05 0.05 0.05 0.05 0.05 0.05 10-Year Yield (Period Average) US 2.12 2.20 2.25 2.30 2.30 2.33 Japan 0.25 0.25 0.35 0.45 0.50 0.50 Euro Area 0.51 0.20 0.20 0.30 0.40 0.50 Source: Citi Research and Bloomberg as of 8 January 2016 4.0% 0.6% -2.2% -4.8% -6.2% -6.3% -6.5% -8.4% -8.5% -10.0% -10.5% -20% 0% Gold Citi World Broad Inv Grade Citi High Yield Citi Global Emerging Mkt Sovereigns Korea KOSPI MSCI Emerging Europe UK FTSE 100 Taiwan TAIEX US S&P 500 MSCI AC World MSCI AsiaXJapan Japan TPX Index HK Hang Seng Europe Stoxx Europe 600 China HSCEI MSCI Latin America China Shanghai Composite Oil Page 3

World Market At Glance Last price 52-Week 52-Week Historical Returns (%) 08-Jan-16 High Low 1 week 1 month 1 year Year-to-date Year-to-date (USD) US / Global MSCI World 374.75 443.98 372.91-6.16% -6.58% -9.45% -6.16% -6.16% Dow Jones Industrial Average 16346.45 18351.36 15370.33-6.19% -6.95% -8.72% -6.19% -6.19% S&P 500 1922.03 2134.72 1867.01-5.96% -6.86% -6.79% -5.96% -5.96% NASDAQ 4643.63 5231.94 4292.14-7.26% -8.92% -1.95% -7.26% -7.26% Europe MSCI Europe 384.75 478.94 382.08-6.38% -6.52% -9.57% -6.38% -6.38% Stoxx Europe 600 341.35 415.18 331.98-6.69% -6.67% -0.29% -6.69% -6.50% FTSE100 5912.44 7122.74 5768.22-5.28% -3.63% -10.01% -5.28% -6.67% CAC40 4333.76 5283.71 4119.35-6.54% -7.44% 1.73% -6.54% -6.35% DAX 9849.34 12390.75 9325.05-8.32% -7.72% 0.12% -8.32% -8.51% Japan NIKKEI225 17697.96 20952.71 16592.57-7.02% -9.21% 3.09% -7.02% -4.80% Topix 1447.32 1702.83 1343.29-6.46% -7.74% 5.06% -6.46% -4.23% Emerging Markets MSCI Emerging Market 740.07 1069.13 736.77-6.82% -6.96% -22.82% -6.81% -6.81% MSCI Latin America 1674.47 2776.68 1672.03-8.49% -11.18% -37.72% -8.49% -8.49% MSCI Emerging Europe 105.07 159.85 104.44-4.78% -5.33% -17.08% -4.78% -4.78% MSCI EM Middle East & Africa 194.93 300.26 194.93-7.27% -8.21% -29.57% -7.27% -7.27% Brazil Bovespa 40612.21 58574.79 40463.49-6.32% -8.62% -18.68% -6.32% -8.21% Russia RTS 736.82 1092.52 708.25-2.67% -5.19% -9.26% -2.67% -2.67% Asia MSCI Asia ex-japan 468.46 644.14 464.92-6.31% -5.93% -16.82% -6.30% -6.30% Australia S&P/ASX 200 4990.84 5996.90 4880.10-5.76% -2.31% -7.26% -5.76% -9.60% China HSCEI (H-shares) 8845.89 14962.74 8510.87-8.44% -8.44% -26.43% -8.44% -8.60% China Shanghai Composite 3186.41 5178.19 2850.71-9.97% -8.17% -3.25% -9.97% -11.44% Hong Kong Hang Seng 20453.71 28588.52 19865.18-6.67% -6.63% -14.19% -6.67% -6.83% India Sensex30 24934.33 30024.74 24825.70-4.69% -1.49% -8.58% -4.53% -5.50% Indonesia JCI 4546.29 5524.04 4033.59-1.02% 1.84% -12.77% -1.02% -1.43% Malaysia KLCI 1657.61 1867.53 1503.68-2.06% -0.70% -4.08% -2.06% -4.60% Korea KOSPI 1917.62 2189.54 1800.75-2.23% -1.61% 0.68% -2.23% -4.64% Philippines PSE 6575.43 8136.97 6342.80-5.42% -3.85% -10.75% -5.42% -6.14% Singapore STI 2751.23 3549.85 2690.45-4.56% -4.34% -17.75% -4.56% -6.17% Taiwan TAIEX 7893.97 10014.28 7203.07-5.33% -5.39% -14.55% -5.33% -6.81% Thailand SET 1244.18 1619.77 1224.83-3.40% -4.80% -18.23% -3.40% -4.16% Commodity Oil 33.16 62.58 32.10-10.48% -11.60% -32.04% -10.48% -10.48% Gold spot 1104.05 1307.98 1046.43 4.02% 2.71% -8.66% 4.02% 4.02% Page 4

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