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Monthly Market Outlook
May 2017
May 2017 - Core Views and Investment Themes

French election results ease market concerns :
►
Emmanuel Macron won the French presidential election earlier
Chart 1. YTD Asset Performance
S&P 500 Index
Nikkei 225
Hang Seng Index
HSCEI
-1.4%
Shanghai Comp.
STOXX Europe 600
US Gov't Bond Index ^
World IG Corp Bond Index ^
EM Gov't Bond Index ^
US HY Bond Index ^
US Dollar Index
-2.5%
COMEX Gold Futures
WTI Crude Oil Futures -11.0%
this month.
►
In the upcoming legislative elections (11 & 18 June), our baseline is
that En Marche! (EM!) may obtain the largest number of seats in
the lower house, but will likely need to strike a deal with another
party/parties to build a “presidential majority”.

Investment Opportunities following the French election
►
European equities is likely to benefit from lower risk premium.
►
Energy stocks may benefit from improving sentiment and
2
7.0%
4.4%
14.2%
9.2%
9.1%
0.8%
1.7%
4.4%
3.6%
6.3%
Source: Bloomberg L.P., as of May 11, 2017
potential recovery in crude oil price.
Key Strategies
BOND
►
Developed sovereign
►
Developed investment-grade
►
Emerging Market sovereign
►
High-yield Corporate
EQUITIES
►
Europe
►
Japan
►
US, Emerging Markets
Please note and carefully read the Important Disclosure on the last part
FX
►
GBP, EUR, JPY
►
RMB
►
NZD, AUD, CAD
►
USD
Key takeaway on Macron’s win in French election
What’s next?
 Government appointments (mid-May)
 French Parliamentary Election (11th/18th
June)
Political risk
 A Macron win is likely to lower political
risk
 Equity risk premium(ERP)/Political risk
premium(PRP) could both fall further
European equities
 Significant opportunity in European
equity, with target 430 for mid-2018
(Stoxx 600)
 Banks and beta should be winners in a
falling ERP/PRP world
Please note and carefully read the Important Disclosure on the last part
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FX
 There could be limited upside for EUR
post Macron’s win
 EUR/USD’s next support may find at
1.0778-1.0828
European equities – Risk Premium expected to decline
Within Europe, we are overweight banks
Risk Premium – Pan Europe
French election likely to lower Risk Premium in Europe
►
Europe’s Political Risk Premium accounts for 50% of the
5-year Correlation with Equity Risk Premium
European Banks – the main beneficiary
►
Equity Risk Premium.
►
As political risk falls in Europe, e.g. French elections, we
would expect the Equity Risk Premium and Political Risk
Premium to fall further in coming months and quarters.
►
European banks are most negatively correlated with Equity
Risk Premium.
►
If ERP is to fall, banks will likely outperform.
►
YTD as of May 15, European banks rose 11.3%, outperforming
the Stoxx 600 Index. (+9.4%)
This is likely to drive a further re-rating of European shares.
Source: MSCI, Factset, Citi, as of Apr 27, 2017
Please note and carefully read the Important Disclosure on the last page
Source: DataStream, Citi, as of Apr 27, 2017
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European equities – Earnings may rebound strongly
Re-rating and earnings growth may send European equities higher
Annual EPS Growth
Stoxx 600 Index
Mid-2018 Target: 430
Earnings in Europe may stage a strong rebound
►
►
The US (+11%), UK (+22%), Europe ex UK (+19%), Japan
European equities could be part of a diversified portfolios
►
With support from earnings growth (10%+) and further re-
(+13%) and EM (+23%) are all expected to see healthy EPS
rating, we introduce a mid-2018 Stoxx 600 target of 430, which
increases in 2017.
suggests 10% total returns from current levels.
In Europe, there are signs that earnings trends are re-
►
While Citi analysts are underweight European equities due to
connecting with robust PMIs as commodity and bank drags
political concerns, the allocation to Europe ranges between 8 to
reverse.
12% across Citi's diversified model portfolios.
Source: Citi, IBES, as of Apr 27, 2017
Please note and carefully read the Important Disclosure on the last page
Source: Bloomberg L.P., as of May 8, 2017
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Energy Stocks – May benefit from potential oil recovery
WTI Crude Oil (USD a barrel)
Crude Oil Outlook
►
►
YTD,
crude oil fell 6% as investor worries about the
►
Overweight Energy Stocks
►
Of the 32 energy stocks in the S&P 500 Index that have
commitment of output cuts by OPEC.
reported Q1 earnings, 25 or them (or 78%) beat market
The OPEC meeting on May 25th appears key for both physical
estimates in earnings.
traders as well as investor sentiment.
►
MSCI AC World Index Sector Performance (YTD)
►
The energy industry has adjusted costs and profitability to
Citi’s baseline continues to project that some sort of OPEC
this pricing world. We think market valuations still offer
deal extension in in play.
upside against what we think industry return on capital can
achieve in this cycle.
Citi forecast WTI crude oil to reach US$54 in 0-3 months and
US$60 in 6-12 months.
►
We believe the current Return on Equity (RoE) of 4% can
expand to 8-10% in 2018.
Source: Bloomberg L.P., as of May 8, 2017
Please note and carefully read the Important Disclosure on the last page
Source: Bloomberg L.P., as of May 11, 2017
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May 2017 – Investment Core Views
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Key asset class outlook
Asset Class Outlook
US Equities
European Equities
Japanese Equities
Emerging Market
Equities
Developed market
sovereign bonds
Emerging Market
sovereign bonds
Investment-grade
Corporate Bond
High Yield Bond
Allocation
►
With US large cap profits reaching a new record high in 4Q 2016 already, we don’t believe EPS
estimates for 2017 are particularly far out of reach, even if a stimulus agreement isn’t reached.
Neutral
►
We believe the UK referendum and US presidential election highlighted unique political risks in
Europe, where several key elections lie ahead.
Underweight
►
Fed tightening helps to weaken the yen. The volatile outlook and domestic challenges in Japan
keep us from an overweight.
Neutral
►
With broadly measured EM equity valuations near a historic large discount to the US, and in an
effort to gradually shift portfolio holdings to less “USD biased” we raised both Asia and EMEA
EM equities to a slight overweight. This adds to an existing overweight in LatAm.
Overweight
Negative policy rates and slow economic growth have left core European bond yields low.
Meanwhile, we keep US intermediate and long-term Treasuries at a fully invested, neutral
weightings.
Underweight
Though likely to remain volatile, LatAm yield premiums are attractive on a global basis. Given
a more stable outlook for oil and commodities more broadly in 2017, we remain overweight
LatAm (hard currency and local). We are also overweight local Asian bonds, and neutral EMEA.
Overweight
►
Despite valuations that have become less compelling, US IG credit remains at an overweight as
yields still remain higher than other IG quality assets.
Overweight
►
We slightly reduced our large overweight to US HY to a single overweight. Spreads have
tightened substantially since their widest levels last year and are close to all-time lows.
Overweight
►
►
Please note and carefully read the Important Disclosure on the last part
FX Currency Outlook at a Glance
USD may gain some ground again in medium term
Currency
USD
AUD
NZD
CAD
GBP
RMB
EUR
JPY
Commentaries
►
Although over the short term, delayed tax reform/ fiscal stimulus may restrain the USD, US fiscal issues return to the
fore late this year, which may see USD gaining some ground again.
►
With the Fed hike well telegraphed and forward guidance implying that the tightening cycle may be gradual, we think
that the commodity currencies may perform moderately well in the medium term.
►
Citi analysts expect NZ GDP growth in 2017 and 2018 may reach 2.9% and 3.1% respectively, which may prompt the
RBNZ to hike rate in Q1-2018.
►
With oil prices may perform well in Q2 amid seasonality effect, CAD may be supported. However, the uncertainty over
Trump’s trade policy may restrain the CAD.
►
Uncertainty about the implications of a “hard Brexit” remains, which may restrain the GBP. However, with valuations
for the currency extremely cheap, there is a risk that GBP rallies may become more frequent.
►
Trump's protectionism may dampen China's economy. In addition, he criticized China for controlling its currency.
China may intervene RMB less frequently, which may accelerate RMB depreciation.
►
With fiscal stimulus in the US delayed and Fed hikes priced in, this could all add up to short term EUR strength with a
spike to 1.10 possible over 0-3 months. However, the pair may fall to 1.04 over 6-12 months amid USD strength.
►
Rising US Treasury yields widened US-Japan government bond yield spreads. Together with improved investment
sentiment, we expect JPY, the low-yield and safe-haven currency, may be pressured.
Please note and carefully read the Important Disclosure on the last part
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Important Disclosures on High Yield Bonds
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.
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Important Disclosures on RMB
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.
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