1 Please note and carefully read the Important Disclosure on the last page Citibank Wealth Management Investment Pulse 2014 02 Opportunities amid market volatility In January, market volatility increased substantially as investors are wary that liquidity outflow from emerging markets may pose a threat on global growth. In the near term, investors may continue to be cautious on EMs. In the longer run, the prospects of EM growth could be boosted by its exports, which will benefit from recovery in the U.S. and Europe. As such, buy-on-dip opportunities may have emerged for European equities. Citi analysts expect Stoxx 600 Index to reach 370 by end- 2014 (it closed at 322 on Jan 31). COVER STORY: Opportunities amid market volatility 02 GLOBAL FOCUS & HK/CHINA STOCKS: China to avoid systemic risk China developers could be a catch-up play 03 FX: Asian currencies likely to be more resilient 04 BOND MARKET & COMMODITIES: European high-yield corporate bonds may outperform Gold recovery may be short-lived 05 IMPORTANT ECONOMIC EVENTS 06
Transcript
1Please note and carefully read the Important Disclosure on the last page
Citibank Wealth Management
Investment Pulse
2 0 1 4 02
Opportunities amid market volatility
In January, market volatility increased substantially as investors are wary that liquidity outflow from emerging markets may pose a threat on global growth.
In the near term, investors may continue to be cautious on EMs. In the longer run, the prospects of EM growth could be boosted by its exports, which will benefit from recovery in the U.S. and Europe.
As such, buy-on-dip opportunities may have emerged for European equities. Citi analysts expect Stoxx 600 Index to reach 370 by end-2014 (it closed at 322 on Jan 31).
Cover Story:
Opportunities amid market volatility 02
Global FoCuS & HK/CHina StoCKS:
China to avoid systemic risk
China developers could be a catch-up play 03
FX:
Asian currencies likely to be
more resilient 04
bond MarKet & CoMModitieS:
European high-yield corporate bonds
may outperform
Gold recovery may be short-lived 05
iMportant eConoMiC eventS 06
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COVER STORY
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Citibank Wealth Management
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Investment Pulse
Economies that recorded current account surplus are mainly
North East Asian economies, including Taiwan, Korea and
China.
In the near term, investors may continue to be cautious on
EMs. In the longer run, the prospects of EM growth could be
boosted by its exports, which will benefit from recovery in
the U.S. and Europe.
Citi analysts expect reacceleration in global real GDP growth
from 2.5% in 2013 to about 3.3% in 2014, the best since
2010.
In the U.S., Citi analysts expect a modest firming in growth
as fiscal drag declines sharply and already stronger cyclical
forces take charge. The updated forecast shows a quarterly
pattern of growth averaging 3% through 2015.
On the other hand, the Euro Area is emerging from
recession, Citi analysts anticipate GDP growth at 1.1% in 2014
and 1.3% in 2015.
Against the backdrop of stronger economic growth, Citi
analysts expect earnings-per-share of European equities to
grow about 10% in 2014.
As such, buy-on-dip opportunities may have emerged for
European equities. Citi analysts expect Stoxx 600 Index to
reach 370 by end-2014 (it closed at 322 on Jan 31).
Chart 1: eM Current account / Gdp (Forecast) and Fiscal balance / Gdp (Forecast)
Source : Citi (forecast as of Dec 4, 2013)
Opportunities amid market volatility
In January, market volatility increased substantially as
investors are wary that liquidity outflow from emerging
markets may pose a threat on global growth.
Citi analysts believe that recent outflows in emerging
markets, which saw their currencies and equities being
sold off, is about concerns over EM economy on liquidity
withdrawal by central banks, including the Federal Reserve
and European Central Bank.
As a result, equity markets across the board posed a loss in
the first month of 2014. The S&P 500 Index fell 3.6%, while
European equities dived 1.8%.
Citi analysts believe that over the short-term, markets
may remain volatile. But the mid-to-long term outlook for
global equities remains positive as the global economy and
corporate earnings are expected to grow. Therefore, short-
term volatility could be buying opportunities.
Following the FOMC meeting by the end of January, the Fed
announced that beginning in February, the pace of asset
purchases will drop from $75 billion to $65 billion per month,
in line with promises of “further measured steps at future
meetings”.
Citi analysts continue to see QE ending this fall, followed by
an end to reinvestment early next year, and preparations for
rate hikes closer to mid-2015.
Emerging markets that recorded substantial current account
deficits, including India, Indonesia, Brazil, Turkey and South
Africa could be more affected by the Fed’s QE tapering, in
Citi analysts’ views. (Chart 1)
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■ 2014 Current Account / GDP (Forecast)
■ 2014 Fiscal Balance / GDP (Forecast)
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HK/CHIna STOCKSGlObal FOCuS
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China developers could be a catch-up play
Shares in Chinese property developer underperformed the broader index local governments in China have stepped up tightening after the peak sales season in Sep – Oct last year.
However, latest industry data continue to point to healthy sales growth, and major developers beat sales target in 2013.
Citi analysts are of the view that shares in developers may grind higher in 1H 2014 as the prospects of property sales remain positive and valuations remain attractive.
Government tightening likely to ease in 2014China’s commodity property sales in 2013 reached Rmb8.1trn, up 26.3% year-on-year, latest statistics showed.
Citi analysts anticipate that government tightening may ease in 2014. The government’s prime focus is likely to be on supply and social housing, explicit price targets on property are unlikely this year.
Sales of residential units may grow 18% in 2014, with price expected to go up 9%, while sales volume may rise 9%, according to Citi analysts’ estimates.
While liquidity concerns and tighter controls on credit have been sector overhangs since 4Q 2013, the impact on earnings should not be exaggerated.
Key listed names’ balance sheets are manageable while sales as key inflows are also robust. Pain should mostly come to small or unlisted developers with their hefty reliance on high-cost borrowings, which would likely eventually crowd them out of a competitive market. Leading developers are likely to widen their market share.
attractive valuationShares in property developers are trading at 45% discount to net asset values, while the estimated 2014 price-to-earnings is only 6.9x. Such valuation is attractive, in Citi analysts’ views.
China property names could catch up on an anticipated healthy sales numbers in 2014, easing property tightening and liquidity condition may improve after the Chinese Lunar New Year.
China to avoid systemic risk
In China, 2014 began with fears of a crisis, triggered by the risk of default by a trust product linked to a Chinese bank and high capital costs.
Citi analysts believe that there are policy tools to avert a crisis, including government-led restructuring and liquidity injections by the People’s Bank of China.
Last month, China Credit Trust Co. said it reached an agreement to restructure a high-yield product that sparked concern over the health of the nation’s financial stability.
Citi analysts are of the view that while other trust products have the risk of default in future, mainland authorities may regulate shadow banking activities through market mechanism. This could be positive for Chinese economy in the long run.
This is necessary to shake off incompetent assets and institutions in order to avoid any systemic risk.
Bankruptcies and defaults would impose hard budget constraints on local governments and state-owned enterprises, and price risk premiums more fairly.
Policy tools to avert a crisisHowever, Citi analysts believe that the Chinese government would only be willing to take a measured crisis. Any defaults or bankruptcies are unlikely to jeopardize economic growth, estimated at around 7.5% this year.
There are policy tools to avert a crisis, including government-led restructuring, establishing provincial-level asset management companies, securitization, PBOC relending, liquidity injections and debt nationalization.
On capital cost, the People’s Bank of China pumped more than 375 billion yuan into the banking system (through conducted reverse-repurchase agreements) in January to meet increased cash demand before the Lunar New Year holiday.
Following the injection, the seven-day repurchase rate, a gauge of interbank funding availability, dropped 134 basis points to 4.98% by the end of January.
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FX
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asian currencies likely to be more resilient
Stepping into 2014, the EM currencies depreciated sharply on worries about the slowdown of economic growth and the growing default risk of trust products in China. Another trigger is that, as the Argentine government loosened capital controls of foreign currencies, investors were concerned that the authority may remove the supportive measures to the Argentine Peso in an attempt to slow the decline of its reserve.
In Turkey, to prevent further capital outflows, the government announced to raise the benchmark repo rate from 4.5% to 10% last month, and also sharply increased the overnight rates and lending rates. These measures may avoid further panic in the EM market in short term, leading to a rebound in EM currencies.
However, in medium term, central banks are unlikely to be able to reverse the recent downtrend of EM currencies by raising interest rates only. Turkey is a case in point. Since Turkey is now facing severe inflation and massive current account deficit, there is no doubt that the Turkish Lira may depreciate further.
uSDCnY to grind lower to 6.00 In contrast, Asian currencies may be more resilient due to
improvement in fundamentals. For example, the current
account deficit as a percentage of GDP in Indonesia may
drop to 2.7% in 2014, from 3.7% in 2013. The deficits of both
current and capital accounts in India may narrow this year. In
China, the yuan may benefit from the tightening of monetary
policies by the People’s Bank of China. For the coming
6-12 months, USDCNY may test lower to 6.00.
Chart 2: eM currencies performances ytd
Source: Bloomberg L.P. (as of February 5, 2014)
Interest Rate Forecast
Jan 24, 2014
1Q 2014 2Q 2014 3Q 2014
(Forecast)
uSD 0.25% 0.25% 0.25% 0.25%
EuR 0.25% 0.25% 0.00% 0.00%
GbP 0.50% 0.50% 0.50% 0.50%
CHF 0.00% 0.00% 0.00% 0.00%
JPY 0.10% 0.10% 0.10% 0.10%
auD 2.50% 2.50% 2.50% 2.50%
nZD 2.50% 2.75% 3.00% 3.25%
CaD 1.00% 1.00% 1.00% 1.00%
Source: Citi, forecast as of Jan 24, 2014
Major Currencies Forecast0-3 months 6-12 months
(Forecast)
uSD Index 80.38 79.32
EuR 1.37 1.40
GbP 1.69 1.75
CHF 0.90 0.89
JPY 105 107
auD 0.87 0.85
nZD 0.83 0.87
CaD 1.11 1.12
Source: Citi, forecast as of Jan 21, 2014
other Currencies
Jpy to be pressured in medium term
Citi analysts expect the Japanese yen may resume depreciation as the BoJ will likely expand the size of asset purchase program in mid-2014.
The 20-year JGB yield recently dropped below 1.5%, which is a crucial watershed on whether Japanese long-term investors like lifers would increase foreign investments or not. Under this circumstance, money outflow from Japan may help stabilize global markets but send the JPY lower.
Therefore, Citi analysts believe, for the coming months, USD/JPY may test higher to 105. In Jun - Jul this year, the pair may rise further towards 108-110.
argentine Peso
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Chinese Renminbi
Russian Ruble
South african Rand
Turkish lira
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bOnD MaRKET COMMODITIES
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Investment Pulse
Gold recovery may be short-livedSpot gold has been underpinned recently on risk aversion,
as the Chinese HSBC manufacturing PMI in January dropped
below 50, the first time for 6 months, a Chinese trust
product is facing risk of default and money flowed massively
out of Latin America.
In addition, the Indian Revenue Secretary said a review of
curbs on gold demand would come by the end of March,
fueling speculation that the government may remove the
measures in the near future. These resulted the gold price
jumping from the low at $1182 an ounce in early January to
around $1270.
Since India added the import tax to gold and gold jewelry by
10% and 15% respectively in order to stem money outflow,
import of gold have tumbled to 515 tonnes in the current
financial year, from 846 tonnes in the previous financial year.
But now, money outflow from India has already slowed down
and the expected current account deficit will likely drop
from record high at $88 billion to below $50 billion this year,
which may encourage the Indian government to relax some
of the restrictions on gold demand.
In the longer term, as the global economy is improving and
that investors predict equities may go up in 2014, money
outflow from commodity markets may resume. Even if the
Indian government removes import tax on gold in future, the
rebound in gold price is unlikely to be sustained.
Technically, although the gold price recovered from $1182 an
ounce, upside may be limited at around $1300 and price may
later fall back toward $1200.
Chart 4: Spot gold/uSd - daily Chart
Source: Bloomberg L.P. (as of Jan 29, 2014)
European high-yield corporate bonds may outperform With anticipation that the Federal Reserve will continue to taper
bond buying this year, bond investors will have to be tactical amid
an expected surge in U.S. treasury yields.
A pick-up in U.S. treasury yields will generally exert pressure on USD
bonds. On the other hand, a monetary policy in Europe is expected
to loosen further, which could be good news for bond investors.
As such, Citi analysts believe that European high-yield corporate
bonds could benefit from European Central Bank’s loose
monetary policies and accelerating growth in the region.
Default rate to drop in Europe The ECB may cut rate in 1H 2014. The yield of 5-year German
Bunds may drop to 0.5%-0.6%. European corporate bonds
may benefit from loosening policies. (Chart 3)
Citigroup’s Economic Surprise Index showed Eurozone
economic data have been better than expected since July,
hinting it is exiting from recession. The Eurozone economy
may grow 1.1% and 1.3% respectively in 2014 and 2015.
According to Moody’s, in Europe, speculative-grade default
rate declined to 3.4% in 4Q 2013 from 3.6% in 3Q 2013.
Moody's expects default rate to drop to 2.1% in Europe by
end-2014 (Expected U.S. default rate by end-2014: 2.3%).
In the U.S., with risk free rates rising, and limited scope for further
spread contraction, Citi analysts believe U.S. credit returns will be
much lower than in stocks. Greater corporate sector leverage is a
relative negative for credit compared with stocks.
Citi analysts anticipate 2.0% total return (in US$) for U.S.
High Yield and 4.6% total return (in €) for European High
Yield to end-2014.
Chart 3: 5-year government bond yields – u.S. & Germany
Source: Bloomberg L.P., as of January 17, 2014
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