Monthly Market Outlook

Transcription

1 *INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE 1 Monthly Market Outlook July 2016

2 July Core Views and Investment Themes 2 Investment Strategy in 2H 2016 Brexit a significant market development by end-1h Risk assets had a volatile 1H 2016, on worries over RMB Chart 1. 1H 2016 Asset Performance depreciation, oil prices, European banks and Brexit (Chart 1). Global markets may be still in the search for equilibrium prices following Brexit, and their implied trajectories going forward. The Fed is likely to delay rate hike Our research has shown that uncertainty can induce a significant drag on economic growth. The Brexit vote amplifies uncertainty with unprecedented economic and political considerations, which may have significant impact on global economic activity. S&P 500 Index STOXX Europe 600 Nikkei 225 Hang Seng Index HSCEI Shanghai Comp. US Gov't Bond Index ^ World IG Corp Bond Index ^ US HY Bond Index ^ US Dollar Index COMEX Gold Futures WTI Crude Oil Futures Bloomberg L.P., as of June 30, % -18.2% -5.1% -9.8% -17.2% -2.5% 2.7% 5.3% 6.7% 9.6% 24.6% 30.5% So we delay our call for the next hike to December (from Sep). Key Strategies BOND EQUITIES FX Developed sovereign USD and EUR high yield USD and EUR investmentgrade Emerging Latin America, Emerging EMEA, Asia, China, Japan, Europe US EUR, GBP USD, RMB NZD, AUD, CAD JPY

3 Impact of Brexit and Related Investment Strategy Yield Plays may outperform as Brexit may have far-reaching impact globally 3 Political and Economic impact of Brexit The Brexit vote creates major uncertainties over the UK s political outlook, the negotiations over new arrangements with other EU countries and follow-on effects for other EU countries. Chart 2. UK GDP forecasts We revise down our GDP growth forecasts sharply for the UK (by around 3pp over three years and with a risk of a recession in 2H) and also cut our Eurozone forecasts (Chart 2). For non-eu countries, we pencil in only modest effects at this stage. Indeed, globally our forecasts are only little changed, with global growth expected at 2.4% in 2016 and 2.6% in 2017 (- 0.2pp). Source: ONS & Citi, as of Feb 5, 2016 Stay On Course with Yield Plays REIT: Year-to-date, the S&P Global REIT Index (USD) rose more than 10% (Chart 3), outperforming MSCI AC World s 0.4% increase. Global REIT now yields 4.3% on average. Chart 3. YTD Performance Investment-Grade Bond: More than 30% of developed sovereign debt now yields below zero. Overweight investment grade corporate bonds as yields remain relatively attractive. Favour long-duration US credits. Dividend stocks: MSCI World High Dividend Index now yields 3.9%, compares to MSCI AC World Index s 2.7%. Source: Bloomberg L.P., as of July 4, 2016

4 Investment Strategy Asset Allocation Trim European equities; Add EM assets 4 Reduce Portfolio Risk from certain assets UK and European equities: We removed our remaining overweight in all European shares (Chart 4). We have revised down Stoxx 600 end-2016 target from 380 to 310, FTSE 100 revised down from 6,600 to 6,000. Chart 4. Latest Asset Allocation Core equities Developed Large Cap Emerging Markets UK and European banks could fall 20-30% in coming days/weeks Europe equities (starting from June 24). US equities Japan equities Find Opportunities from Market Dislocation US equity: Europe only accounted for 9% of S&P500 Sales. Core Fixed Income Developed Sovereign Developed IG Corporate US earnings are up roughly 20% since ; therefore, US equity index may not re-test of those lows during the case with Grexit anxiety. In Oct 2011, S&P dropped to as low as 1,100. Developed Corporate High Yield EM Sovereign Source: Citi, as of June 30, 2016 EM assets: We now see a more benign global backdrop for beaten down emerging markets. While we added slightly to all three EM regions, assets closely linked to the petroleum bust seem best positioned to outperform in recovery. Our preference for EM is slightly stronger in fixed income, and Latin America above other regions.

5 July 2016 Investment Core Views Key asset class outlook 5 Asset Class Outlook Allocation US Equities We see a resumption in earnings per share (EPS) growth amid low expectations. We do note the advanced state of the US recovery and some near-term political risks across the world. Overweight European Equities With a higher level of expected volatility, we removed our remaining overweight in all European shares. We are now Neutral on European equities. Neutral Japanese Equities We revise our equity market outlook in response to the Brexit vote in the UK referendum. We lower our end-december 2016 TOPIX target to 1,350 from 1,500. Neutral Emerging Market Equities We now see a more benign global backdrop for beaten down emerging markets. Assets closely linked to the petroleum bust seem best positioned to outperform in recovery. Neutral Developed market sovereign bonds Negative rate policy and growth concerns to keep core rates low; Favor longer duration in the US and Eurozone. Underweight Investment-grade Corporate Bond Prefer IG corporates to extend portfolio duration in both the US and Europe. Favor select issuers in US energy, subordinated financials & REIT sectors. Overweight High Yield Bond Favor both the US and European HY markets; Valuations remain attractive though we suggest proactive management; Favor select, high quality energy issuers. Overweight

6 FX Focus: GBP & AUD The BoE may cut the interest rate in July 6 GBP may drop further Worries on Brexit: GBP fell sharply on worries that Brexit may send shockwaves through markets, economies and politics. Weak economic outlook: Domestic demand may enter a moderate recession as early as 3Q-16E, as major uncertainties lower business and residential construction investment, and slow consumption growth. Potential rate cut: We expect the Bank of England (BoE) may cut rates by 25bps in July. Purchases of gilts and other assets may be on the menu if the economy deteriorates or if financial conditions tighten unexpectedly. This may be negative for GBP. On technical analysis (Chart 5), GBP/USD may consolidate in short term before falling to with resistance at Chart 5. GBP/USD (Feb low) (0-3 month forecast & fibo 0.236) Source: Bloomberg L.P., as of July 5, 2016 Chart 6. AUD/USD Australian GDP growth in 2016 may reach 3.2% Small direct impact from the Brexit: The Brexit impact on Australian economy may be limited, as the export and import from Australia to UK are below 1% of total GDP. Solid economic outlook: Given the solid Q1 data amid strong housing construction and consumer spending, Citi analysts raised 2016 GDP forecast from 2.7% to 3.2%. Rate cut by the RBA: However, given the uncertainty of global economy, we expect the RBA may be forced to cut the interest rate again in August, which may cap AUD s upside. On technical analysis (Chart 6), as the RSI is in neutral, we expect the pair may trade inside range (Apr top) (24 Jun top) (fibo & 0.50) Source: Bloomberg L.P., as of July 5, 2016

7 Gold Accommodative policy may underpin gold price 7 Gold s attractiveness may increase More easing measures from the central banks: Given the global growth uncertainty, we expect the central banks, such as the Bank of England, the Bank of Japan and the Reserve Bank of Australia, may cut the interest rates and add easing measures. Continued accommodative policy: For the coming months, continued accommodative policy may continue to increase gold s attractiveness. Low yields: Although gold offers no interest income, 30% of developed market government bonds have a negative yield (Chart 7), much higher than the level six months ago (14.6%). Expect further fund inflow into the gold market Gold ETF holdings rose above 1,950 tonnes and may rise above 2,000 tonnes for the coming months on expectation of safehaven demand. Non-commercial net positions in gold futures rose to 300K, a record high, highlighting the strong demand in gold. For the coming 0-3 months, gold price may rise to $1,400/ounce. On technical analysis (Chart 8), spot gold/usd may consolidate in short term before rising to 1, ,433.83, with support at 1, Chart 7. Increasing ratio of negative government bond yields Source: Citi, as of Jun 14, 2016 Chart 8. Spot gold (Mar 2014 & Aug 2013 tops) (28 Jun low) Source: Bloomberg L.P., as of July 5, 2016

8 FX Currency Outlook at a Glance GBP may be pressured on Brexit 8 Currency Commentaries JPY AUD NZD CAD USD RMB EUR GBP The Brexit vote and negative impact on the Japanese economy may increase the likelihood of adding easing measures by the Bank of Japan in Jul. However, the measures is unlikely to terminate JPY strength. Given the strong Q1 data amid strong housing construction and consumer spending, Citi analysts raised Australian GDP forecast from 2.7% to 3.2%, which may be positive for AUD. The Reserve Bank of New Zealand (RBNZ) may cut the rate in Aug but NZD may be still supported due to the strong economic outlook and yield advantage. Although oil prices and CAD may be supported as the supply side is rebalancing the oil market, CAD s upside may be limited as the Bank of Canada may cut the interest rate in Q4 this year. The global growth uncertainty may prompt the Fed to delay the next rate hike from September to December, which may cap USD s upside. Citi analysts expect the People Bank of China (PBoC) may cut the Requirement Reserve Ratio (RRR) by 50 bps in July and two more cut (total 100 bps) may be seen for the rest of this year. We expect the Brexit may have negative political and economic repercussions on EU members, which may prompt the European Central Bank to cut the rate and to extend its QE program to at least September 2017 in September. Given the downside risk in UK economy due to Brexit, we expect the Bank of England may cut the interest rate in July. Thus, Citi analysts expect GBP/USD may drop toward 1.25 for the coming 0-3 months.

9 Appendix: Economic Forecasts Citi analysts global economic forecasts (as of Jun 29, 2016) 9 GDP Growth (%) CPI Inflation (%) Current Balance Fiscal Balance (% of GDP) (% of GDP) F 2017F F 2017F F 2017F F 2017F Global U.S Japan Euro Area U.K Canada Australia New Zealand EM Asia Latin America EM Europe China Hong Kong South Korea India Indonesia Brazil Russia Source: Citi analysts forecasts as of Jun 29, 2016

10 Appendix: Interest Rate Forecasts Citi analysts short-term interest rate forecasts (as of Jun 29, 2016) Jun Citi analysts forecasts - Interest Rate (%) Close 3Q16F 4Q16F 1Q17F 2Q17F 3Q17F Developed Market U.S Japan Euro Area U.K Canada Australia New Zealand Emerging Market China (1-year deposit rate) Hong Kong (3-month Hibor) India Indonesia Brazil Russia Source: Citi analysts forecasts, as of as of Jun 29, 2016; Bloomberg L.P., as of Jun 30, 2016

11 Appendix: Bond Market Forecasts Citi analysts sovereign bond yield forecasts (as of Jun 29, 2016) Jun Citi analysts forecasts - Bond Yield (%) Close 3Q16F 4Q16F 1Q17F 2Q17F 3Q17F U.S. 5 Year Treasury U.S. 10 Year Treasury U.S. 30 Year Treasury Germany 5 Year Bobl Germany 10 Year Bund Germany 30 Year Bund Japan 5 Year JGB Japan 10 Year JGB Japan 30 Year JGB U.K. 5 Year Gilt U.K. 10 Year Gilt U.K. 30 Year Gilt Source: Citi analysts forecasts, as of Jun 29, 2016; Bloomberg L.P., as of Jun 30, 2016

12 Appendix: Foreign Exchange Forecasts Citi analysts exchange rate forecasts (as of Jun 27, 2016) Jun Close Sep-2016 Dec-2016 Mar-2017 Jun-2017 Sep-2017 Dec-2017 Dollar Index (DXY) Euro (EUR/USD) Japanese Yen (USD/JPY) British Pound (GBP/USD) Swiss Franc (USD/CHF) Australian Dollar (AUD/USD) New Zealand Dollar (NZD/USD) Canadian Dollar (USD/CAD) Chinese Renminbi (USD/CNY) Hong Kong Dollar (USD/HKD) Source: Citi analysts forecasts, as of as of Jun 27, 2016; Bloomberg L.P., as of Jun 30, 2016

13 Appendix: Equity Indices Forecasts Citi analysts global equity indices forecasts (as of Jun 30, 2016) Jun +Price-to-Earnings +Price-to-Book Ratio +Estimated End-2016 Index Dividend Region / Index Close Forecasts 2015 Est Est Est Est. Yield (%) Global +Estimated 2016 EPS Growth (%) Global MSCI AC World Index EM MSCI Emerging Market Developed Countries U.S. S&P 500 Index 2,099 2, Dow Jones Industrial Average 17,930 18, Europe STOXX Europe FTSE 100 6,504 6, Japan TOPIX Index 1,246 1, Asia Asia ex Japan MSCI Asia ex Japan China MSCI China Hong Kong Hang Seng Index 20,794 21, Hang Seng China Enterprise 8, South Korea KOSPI Index 1,970 2, Taiwan Taiwan TWSE Index 8,667 8, India SENSEX 30 Index 27,000 32, Singapore Straits Times Index 2, Indonesia Jakarta Composite Index 5, Thailand SET Index 1,445 1, Malaysia FTSE Bursa Malaysia KLCI 1,654 1, Latin America Brazil Bovespa Index 51,527 60, Mexico BOLSA IPC Index 45, Eastern Europe Russia RTS Index $ Source: Citi analysts forecasts and Bloomberg L.P., as of Jun 30, 2016

14 Appendix: Commodity Forecasts Citi analysts commodity future price forecasts (as of Jun 29, 2016) Jun Close 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F 3Q17F 4Q17F Energy NYMEX WTI Crude USD/bbl ICE Brent Crude USD/bbl NYMEX Natural Gas USD/MMBtu Base Metals Aluminum (LME) USD/MT 1, ,530 1,480 1,480 1,500 1,510 1,530 1,540 Copper (LME) USD/MT 4, ,700 4,750 5,000 5,200 5,400 5,600 5,800 Lead (LME) USD/MT 1, ,720 1,650 1,680 1,700 1,680 1,720 1,730 Nickel (LME) USD/MT 9, ,650 8,500 8,600 8,700 9,200 9,300 9,350 Tin (LME) USD/MT 17, ,000 16,800 16,900 17,000 17,200 17,250 17,500 Zinc (LME) USD/MT 2, ,870 1,880 1,900 1,950 1,970 2,000 2,030 Precious Metals Gold (Comex) USD/oz 1, ,280 1,300 1,250 1,200 1,150 1,200 1,250 Silver (Comex) USD/oz Platinum (NYMEX) USD/oz 1, , ,000 1,010 1,050 1,090 Palladium (NYMEX) USD/oz Agriculture Corn (CBT) USD/bu Soybean (CBT) USD/bu 1, ,050 1, ,010 1,025 1,050 1,075 Wheat (CBT) USD/bu Cotton (NYB-ICE) USD/lb N/A N/A Coffee (NYB-ICE) USD/lb Cocoa (NYB-ICE) USD/MT 3, ,025 3,075 2,950 2,700 2,800 2,850 2,650 Source: Citi analysts forecasts, as of Jun 29, 2016; Bloomberg L.P., as of Jun 30, 2016

15 Important Disclosure 15 Citi analysts refers to investment professionals within Citi Research (CR) and Citi Global Markets (CGM) and voting members of the Global Investment Committee of Global Wealth Management. Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. Investment products are not available to US persons and not all products and services are provided by all affiliates or are available at all locations. This document is for general informational purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security, currency, investment, service or to attract any funds or deposits. Information in this document has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Therefore, investment products mentioned in this document may not be suitable for all investors. Any person considering an investment should seek independent advice on the suitability or otherwise of a particular investment. Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making an investment decision. Each investor should carefully consider the risks associated with the investment and make a determination based upon the investor s own particular circumstances, that the investment is consistent with the investor s investment objectives In any event, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Further, any projections of potential risk or return are illustrative and should not be taken as limitations of the maximum possible loss or gain. Investments are not deposits or other obligations of, guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Neither Citigroup nor its affiliates can accept responsibility for the tax treatment of any investment product, whether or not the investment is purchased by a trust or company administered by an affiliate of Citigroup. Citigroup assumes that, before making any commitment to invest, the investor and (where applicable, its beneficial owners) have taken whatever tax, legal or other advice the investor/beneficial owners consider necessary and have arranged to account for any tax lawfully due on the income or gains arising from any investment product provided by Citigroup. If an investor changes country of residence, citizenship, nationality, or place of work, it is his/her responsibility to understand how his/her investment transactions are affected by such change and comply with all applicable laws and regulations as and when such becomes applicable Citibank Citi and Citibank and Arc Design are registered service marks of Citibank, N.A. or Citigroup Inc. Citibank (Hong Kong) Limited

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17 Important Disclosures on High Yield Bonds 17 Unrated or non investment grade Debt Securities typically offer a higher yield than investment grade Debt Securities, but also present greater risks with respect to liquidity, volatility, and non-payment of principal and interest. As a result of being classified as non investment grade Debt Securities, these Debt Securities present a greater degree of credit risk relative to many other fixed income Debt Securities. Higher Credit Risk Unrated or non investment grade Debt Securities generally have predominantly speculative characteristics with respect to the issuer s capacity to pay interest and repay principal. There is greater risk of non-payment of interest and loss of principal. Many issuers of these Debt Securities have experienced substantial difficulties in servicing their debt obligations, which has led to default and restructurings. The issuers of these Debt Securities generally have to pay a higher rate of interest than investment grade Debt Securities. Higher Liquidity and Secondary Market Risk The markets in which unrated or non investment grade Debt Securities are traded are generally more limited than those in which investment grade Debt Securities are traded. This lack of liquidity may make it more difficult to resell these Debt Securities and obtain market quotations. Downgrade Risk Downgrades in the credit rating of unrated or non investment grade Debt Securities by rating agencies are generally accompanied by declines in the market value of these Debt Securities. In some circumstances, investors in the unrated or non investment grade Debt Securities market may anticipate such downgrades as a result of these credits being placed on credit watch by rating agencies, causing volatility and speculation of further credit deterioration. Higher Vulnerability to economic cycles - During economic downturns, unrated or non investment grade Debt Securities are typically more susceptible to price volatility and fall more in value than investment grade Debt Securities as i) investors may reevaluate holdings in lowerquality bonds in favor of investment-grade corporate Debt Securities; ii) investors become more risk averse; and iii) default risk rises. This is often referred to a flight to quality. Event Risk This includes any of a variety of events that can adversely affect the issuer of unrated or non investment grade Debt Securities, and therefore the issuer s ability to meet debt service obligations to repay principal and interest to Debt Securities holders. Event risk may pertain to the issuer specifically, the industry or business sector of the issuer, or generally upon the overall economy. It could have a direct or indirect impact on the issuer and their outstanding debts Citibank Citi and Citibank and Arc Design are registered service marks of Citibank, N.A. or Citigroup Inc. Citibank (Hong Kong) Limited

18 Important Disclosures on RMB 18 Risk relating to RMB If you choose RMB as the base currency or the alternate currency, you should also note the following: RMB is currently not freely convertible through banks in Hong Kong. Due to exchange controls and/or restrictions imposed on the convertibility, utilisation or transferability of RMB (if any) which in turn is affected by, amongst other things, the PRC government's control, there is no guarantee that disruption in the transferability, convertibility or liquidity of RMB will not occur. There is thus a likelihood that you may not be able to convert RMB received into other freely convertible currencies. CNH exchange rates and CNY exchange rates are currently quoted in different markets with different exchange rates, whereby their exchange rate movements may not be in the same direction or magnitude. Therefore, the CNH exchange rate may be different from the CNY exchange rate Citibank Citi and Citibank and Arc Design are registered service marks of Citibank, N.A. or Citigroup Inc. Citibank (Hong Kong) Limited