Navigating a maturing bull market

Navigating a maturing bull market Asia Pacific Wealth Management March 2018 INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE

Market Review Market Performance EQUITIES 1Q17 2Q17 3Q17 4Q17 2017 Jan Feb QTD 1Q18 Global Equities 6.5% 4.2% 5.0% 5.6% 23.1% 5.3% -4.1% 1.0% US 6.1% 3.1% 4.5% 6.6% 21.8% 5.7% -3.7% 1.8% Europe 6.3% 1.2% 2.8% 0.6% 11.2% 1.7% -3.8% -2.2% Asia 13.4% 8.4% 6.7% 8.1% 41.8% 7.5% -5.0% 2.2% Japan -0.4% 6.1% 2.2% 12.0% 21.3% 1.5% -4.4% -3.0% EM 11.5% 6.3% 8.0% 7.3% 37.5% 8.3% -4.6% 3.3% BONDS Global IG Bonds 1.3% 3.2% 1.8% 0.7% 7.1% 1.1% -1.0% 0.0% Global HY Bonds 2.4% 2.0% 1.8% 0.5% 7.0% 0.8% -0.9% -0.1% 2 EM Sovereigns 4.1% 2.4% 2.5% 0.6% 9.7% -0.3% -2.0% -2.2% COMMODITIES Gold 8.9% -0.6% 3.1% 1.8% 13.5% 3.2% -2.0% 1.2% Oil (Brent) -7.0% -9.3% 20.1% 16.2% 17.7% 3.3% -4.7% -1.6% CURRENCIES Dollar Index -1.8% -4.7% -2.7% -1.0% -9.9% -3.2% 1.7% -1.6% Source: Bloomberg as of 28 Feb 2018. Returns for Europe and Japan are in local currency.

Recent sell-off not due to growth concerns Global cyclicals have not underperformed global defensives* The outperformance of cyclical sectors over defensive sectors show that investors are not worried about economic growth. Rather, it reflects worries over interest rates and inflation. Source: MSCI. Bloomberg. Data as of 12 Feb 2018. *Cyclicals include Consumer Discretionary, Materials, Technology and Industrials. Defensives include Utilities, Telecoms, Health Care and Consumer Staples. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include and expenses, fees or sales charges, which would lower performance. For illustrative purposes only. 3

Loosening lending conditions There can be no assurance that these market conditions will remain in the future. Past performance does not guarantee future results. Actual results may Easier lending environment points to stronger growth ahead % of banks tightening loans to large firms vs private non-residential fixed investment lagged three quarters The US' 4Q17 loans survey shows that US banks are making it easier for large companies to take on Construction & Industrial (C&I) loans. This has historically been a leading indicator for higher employment, capacity utilisation and corporate earnings. Source: Haver Analytics and Citi Research US Equity Strategy. As of 16 Feb 2018. 4

Not yet the end of the equity bull market Bear Market Checklist According to Citi s Bear Market Checklist, only 3.5 out of 18 indicators are flashing red. Citi analysts suggest that investors focus on the yield curve and credit spreads. A flat or downward sloping yield curve, together with high and rising credit spreads would potentially warrant more concern. Source: Citi Research as of 6 February 2018. 5

Still limited signs of inflation for now US - Core goods and services prices US unemployment rate, wages & PCE inflation Source: Bloomberg as of February 2018. Source: Haver Analytics as of February 2018. 6

What happens when inflation moves higher? High growth with low inflation S&P 500 MSCI EM CRB Commodity Index Dollar Index US Govt Bonds US Investment Grade Corporates Average return 15.7% 36.3% 5.9% 5.6% 6.8% 8.7% Standard Deviation 13.1% 16.9% 11.5% 7.0% 4.6% 5.2% Return/Risk 1.20 2.14 0.51 0.79 1.47 1.67 High growth with higher inflation Average return 7.6% 14.2% -8.1% 4.5% 8.7% Standard Deviation 17.2% 6.4% 7.7% 3.8% 6.5% Return/Risk 0.44 2.23-1.05 1.17 1.35 Source: Bloomberg and Citi Research. As of 15 February 2018. Moving to a higher growth and higher inflation backdrop has historically resulted in lower equity and bond returns but higher volatility. Dollar performance is weaker but commodity markets deliver better performance. 7

Could trade tensions weigh on markets? Largest Sources of US Steel Imports by Country Uncertainties remain as to how far the US is going with protectionism and how much reaction comes from China and other trading partners. Protectionism could pose some upside risks for US inflation, but for now Citi analysts think the impact on US consumer prices should be limited as steel and aluminum tariffs represent only around ~2% of total imports. Source: Citi Research. As of 3 March 2018. 8

US dollar expected to move lower in the medium term US net international investment position (excluding financial derivatives) as a % of GDP A sharp deterioration in the US net international asset position over the past 10 years will require a lower real exchange rate longer term or higher yields or both. Recent further fiscal deterioration from spending bills and tax reform are likely to add pressures. Eurozone growth is also expected to match the US over 2017 2019. EM economies are in better shape Source: Bloomberg and Citi Research. As of 15 February 2018. and the Japanese economy is catching up. 9

EM and commodities likely to benefit from a weak dollar Source: Bloomberg. As of 22 February 2018. 10

Stronger euro unlikely to derail the Eurozone economy The Eurozone overall trade surplus has widened since 2010, largely unaffected by large FX swings. Citi analysts remain positive on European equities. Euro nominal effective exchange rate The robust domestic demanddriven growth cycle is unlikely to be derailed by the strong euro. Profitability remains robust with the Trade surplus (% of GDP) stronger euro helping to offset the recent rise in commodity prices and helping support households and firms purchasing power. Source: Eurostat. Haver Analytics and Citi Research 11

The rise in bond yields may be limited US Treasury bond yields higher than most developed market yields Net bearish bets on ultra-long term US Treasuries by speculative investors has reached an all-time high. This could limit the rise in long term bond yields. At current levels, the yields on 10- year US treasuries are high compared to other developed markets. This could attract more demand, limiting the further rise in yields. Source: Bloomberg, Barclays Indices as of February 6, 2018. 12

Selected bond opportunities exist US investment grade bond yields still higher than Europe s Citi favours banks, energy and materials within US investment grade corporate bonds. Despite expensive valuations, US high yields still offer higher yields versus euro denominated high yield corporate bonds. Other positives include tax reforms, healthy earnings and expectations of further decline in the default rate. Citi analysts are positive on USD Source: Bloomberg. Barclays as of 6 February 2018. and local currency Emerging Market bonds, with Latam still one of our more favoured regions. 13

Asset Allocation Source: Citi Private Bank GIC Asset Allocation as of February 2018. 14

Key takeaways Themes Strategies Expect greater volatility Macro trading strategies Long/Short + Alternatives Ride the weak dollar Emerging Market equities Commodities (ex oil) EUR/European equities Position for elevated yields US Investment Grade & High Yields, Emerging Market Debt 15

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