2019 annual outlook - the edge markets

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Asia Pacific Wealth Management – December 2018

2019 Annual Outlook Volatility & Opportunities in the Late

Stage Bull Market

There can be no assurance that these market conditions will remain in the future. Past performance does not guarantee future results. Actual results may differ materially from the forecasts/estimates. Views, opinions, trends and prices expressed are subject to change without prior notice and are expressed solely as a general market commentary and do not constitute investment advice or a guarantee of returns.

Market Performance

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Market Performance

EQUITIES 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18 3Q18 4Q18 2018 YTD

Global Equities 6.5% 4.2% 5.0% 5.6% 23.1% -1.1% 1.9% 5.1% -13.3% -8.2% 7.8%

US 6.1% 3.1% 4.5% 6.6% 21.8% -0.8% 3.4% 7.7% -13.5% -4.4% 8.0%

Europe 6.3% 1.2% 2.8% 0.6% 11.2% -4.0% 4.3% 1.3% -11.5% -10.3% 6.4%

Asia 13.4% 8.4% 6.7% 8.1% 41.8% 0.6% -5.4% -1.5% -8.8% -14.4% 7.3%

Japan -0.4% 6.1% 2.2% 12.0% 21.3% -5.0% 4.1% 9.0% -16.9% -10.4% 3.8%

EM 11.5% 6.3% 8.0% 7.3% 37.5% 1.4% -7.9% -1.0% -7.6% -14.5% 8.8%

BONDS

Global IG Bonds 1.3% 3.2% 1.8% 0.7% 7.1% 1.2% -2.7% -0.9% 1.1% -1.3% 0.9%

Global HY Bonds 2.4% 2.0% 1.8% 0.5% 7.0% -0.7% 1.1% 2.4% -4.7% -2.1% 4.2%

EM Sovereigns 4.1% 2.4% 2.5% 0.6% 9.7% -2.1% -3.6% 2.3% -0.7% -4.1% 2.8%

COMMODITIES

Gold 8.9% -0.6% 3.1% 1.8% 13.5% 1.7% -5.5% -4.9% 7.7% -1.6% 3.0%

Oil (Brent) -7.0% -9.3% 20.1% 16.2% 17.7% 5.1% 13.0% 4.1% -35.0% -19.5% 15.0%

CURRENCIES

Dollar Index -1.8% -4.7% -2.7% -1.0% -9.9% -2.3% 5.0% 0.7% 1.1% 4.4% -0.6%

Source: Bloomberg as of 31 January 2019. Returns for Europe and Japan are in local currency.


Global Growth Remains Supported

3

Source: Citi Research. As of 26 October 2018.

Global — Real GDP Growth (%YY) Global, DM, EM - Manufacturing PMI (Index), 2012-2018



Earnings Growth Steady

4

• Consensus forecast global

corporate earnings to grow 7% in

2019.

• Lower levels of growth next year

are due to tax cut effects fading in

the US.


2018E EPS Growth By Region


Valuations: Below Historical Average

5

Source: Citi Research. As of 3 January 2019.

MSCI AC World Trailing PE

• The MSCI AC World benchmark

now trades on a trailing PE of

15x, after derating 27% in 2018.

• That is back below the long-run

median of 17x.


Central banks are tightening

6

• Monetary policy divergence looks

to continue. The Federal Reserve

embarked on the normalization

path earlier than the ECB or BOJ.

• Central bank net asset purchases

are falling sharply. They are likely

to be around zero by end-2018,

down from $180bn/month in mid-

2016.


Central Banks Net Asset Purchases are Falling Sharply


Political risks remain elevated

7

US: Trade

Tensions

UK: Brexit transition deal

Middle East:

Tensions between

Turkey and Iraq,

Iran and Saudi

Arabia, in Egypt,

Syria or around

Israel could

escalate

China: Trade Tensions, Policy

uncertainty post 19th People’s

Congress

North

Korea:

Geopolitical

tensions Europe: Italian

budget woes


Are trade tensions priced in?

8

• Unlike Jan/Feb 2018 correction

period, trade tensions unlikely to

be a new surprise.

• Citi expects some retaliation from

US trading partners, this is

unlikely to escalate into a full-

blown trade war.

Source: Citi Private Bank. As of 18 October 2018.

US Policy Uncertainty: Trade, Non-Trade


Commodities: Oil Supply Risks Loom

9

• Citi analysts maintain an average

oil price forecast of US$57/barrel

for Brent and US$49/barrel for

WTI in 2019.

• Downside risks however include

slowing oil demand growth on

concerns over economic growth –

globally, in EMs, and particularly

in China, as well as decelerating

demand caused by USD

appreciation.

Source: Citi Research. As of 21 November 2018.

Global observable oil stocks (bln bbls)


1. Embracing Uncertainties

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• History suggests that global

markets weaken together across

geographies, but only over short-

term periods.

• By having a well diversified,

portfolio, investors can still reap

the benefits of diversification.

Global Markets Weaken Together across Geographies, But Only Over Short-

Term Periods


2. Benefit From Growth Expansion: Asia

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• Asia is less dependent on

outbound trade, and more driven

by domestic consumption.

• EM Asian exports amounted to

32% of GDP in 1997. This ratio

rose to a peak of 41% in 2006,

but has since fallen to 24% in

2017.

Exports account for a shrinking share of Asian economies, while consumption

share is growing


2. Benefit From Growth Expansion: Europe

1 2


• Euro area PMI’s have softened

since the beginning of the year,

but still showing expansion.

• Attractive valuations: On a price-

to-book basis, Europe is 47%

cheaper than the US, which is a

historically low level.

Euro area composite PMIs


3. Seek Shelter with Income

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Source: Citi Research. As of 5 November 2018.

• US Investment Grade Bonds:

Yields have now reached 3.3%

(highest since 2009), as the Fed

continues to hike policy rates.

• EMD: In Asia, Citi analysts

continue to favor China. In

external markets, we are seeing

improved liquidity in the property

sector, which has been under

pressure this year. Opportunities

can still be found in the core

state-owned enterprises and

select developers.

Short-term IG yields highest since 2009

Developed Market

Sovereigns


4. USD Strength Unlikely to Last

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• A deterioration in the US’s twin

deficits (fiscal and current) could

result in USD weakness.

• With investors currently

positioned for much higher Fed

rates and a stronger USD, a shift

to a more cautious Fed stance

could also negatively impact USD.

• Commodity currencies are likely

to be supported as they enjoy a

healthy terms of trade balance

even against the backdrop of

heightened trade tensions. Source: Citi Research. As of 17 October 2018.

US Dollar Index vs Long positioning


Key Takeaways

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Benefit from Growth Expansion

Seek Shelter with Income

Embracing Uncertainties

USD Strength Unlikely to Last

• Multi-asset

• Long/Short + Alternatives

• Commodity currencies may benefit

• Global Equities

• Asian Equities

• European Equities

• US Investment Grade

• Emerging Market Debt

Themes Strategies


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2019 annual outlook - the edge markets

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