Market Outlook - Citibank UAE...4Q16. The lack of meaningful precious metal price reaction following...

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Market Outlook

October 2016

Summary 2

All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to

a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.

Oil prices may be supported by OPEC agreement

At an informal meeting on September 28, the 14 OPEC member countries reached a broad agreement to

cut crude production to a range of 32.5 to 33 million barrels per day by November. This compares with

33.24 million barrels per day in August. If implemented, this is the first time in eight years OPEC has

agreed to a production adjustment.

There is lot of scepticism over implementation and success of such an agreement. Also many question

the extent of reduction to be effective. But the willingness of OPEC to act on supply together with

reported declines in crude oil inventories may keep oil prices supported. Thus, Citi reaffirms its Brent

crude oil price view of a $40-50 trading range in 2H16, rising toward the upper bound of this range into

4Q16 and potentially above $50 depending more on winter weather than OPEC action. Citi continues to

see 2017 Brent averaging $60, with 4Q17 reaching $65.

Macro Overview

US: Sep FOMC statement supports rate hike in Dec; Presidential election poses uncertainty.

Europe: ECB may announce at least six more months of QE expansion in Dec; Political risks are rising.

Japan: Further rate cut to -0.2% expected in January 2017; Yen strength is a key risk.

Asia: Rising activity in real estate, infrastructure and auto sectors has helped stabilise China’s economy

but a dip in private investment may weigh on growth; Expect one RRR cut and interest rate cut this year.

Equities: Neutral

Slow growth, low inflation, easy central banks and a range-bound $ continue to support markets,

especially Emerging Markets (EM). Citi maintains a slight positive bias for EM over Developed Markets

(DM). Citi analysts are modestly overweight Latin America on the back of recovering commodity prices.

Bonds: Slightly Underweight

IG Corporates: IG corp should benefit from lower core sovereign rates; Favour select issuers in US

energy and telecom. Financials are still likely to underperform due to low yields and a flatter yield curve.

EM Debt: Decline in volatility and dovish Fed may support local EM Debt in the near-term. Citi analysts

are overweight in Latin America (hard and local currency) as well as local currency Asian bonds while

remaining neutral EMEA.

Commodities: Neutral

Gold: Likely range bound in near term.

Oil: Prices may be supported by OPEC agreement.

Currencies: Election Risks Aside, $ Has Probably Peaked

EUR: More Resilient.

GBP: Expect Weakness vs EUR.

Equity Markets and Commodities 3



Equity Markets and Commodities

United States

Sept FOMC statement supports rate hike in Dec

Moderate growth continues to be Citi’s baseline forecast. Official

data have been more robust than implied by the dive in the ISM

non-manufacturing survey. Nevertheless, the most recent data for

retail sales and industrial production have been weaker than

expected. Growth continues to be supported by consumer spending

and robust, albeit slowing, job growth.

The September FOMC statement indicated that the case for a

second rate hike has strengthened, pending confirmation from data.

Citi believes a December hike remains likely so long as labour

markets continue to improve, growth remains above potential,

inflation proceeds toward target, and markets remain calm.

Citi analysts are constructive about US equities in the long term

although the market may see some volatility in the short term given

election uncertainty. Citi analysts have set their mid-2017 and end-

2017 S&P targets at 2,250 and 2,325 respectively, on the back of

an expected 6% earnings growth for next year.

Chart 1

S&P 500 Index

-0.12%

6.08%

12.93%

28.94%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1-Mth YTD 1-Yr 3-Yr*

*Denotes cumulative performance

Performance data as of 30 September 2016

Source: Bloomberg

Euro - Area

Economy expanding at modest rate

Citi raise its GDP forecast by 0.2pp in 2017 to 1.4% and by 0.1pp in

2018 to 1.6%. A significant part of this upgrade comes from the

decision to remove Grexit from its base case, and signs that Brexit-

related drag might be slightly less significant than initially expected.

The ECB did not change any interest rates at the 8 Sep meeting

and confirmed that it intends to purchase €80bn of assets per

month. At the 8 Dec meeting, the ECB may announce at least six

more months of QE. Citi’s base case remains that the asset

purchase programme (APP) may likely run until Sep-18, inclusive of

six months of tapering, with a first rate hike in Dec-19.

From an equities perspective, Citi remains neutral on Europe. While

valuations are not expensive, a packed electoral calendar for the

coming year could prove disruptive. Against a muted economic

recovery, it may be difficult for the market to outperform.

Chart 2

Dow Jones Stoxx 600 Index

-0.18%

-6.26%

-1.39%

10.46%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%




Source: Bloomberg

Japan

BoJ may cut policy rate in January 2017

The BoJ introduced a new policy framework called “QQE

(quantitative and qualitative easing) with yield curve control” in Sept.

Under this framework, the Bank will control short-term policy rates

at -0.1% and also the 10-year JGB yields at “around 0%”.

Citi analysts believe this is unlikely to facilitate achievement of 2%

inflation and expect the BoJ may implement additional easing in the

form of cuts in short-term policy rates from -0.1% currently to -0.2%

in January 2017.

While the revisions in ETF purchasing methods could be positive for

certain sectors, Citi analysts remain neutral on Japanese equities.

Further rate cuts (negative for the banks) and concerns over the

perceived loss of credibility of the Japanese authorities may weigh

on the market.

Chart 3

Topix Index

-0.51%

-14.51%

-6.26%

10.78%

-20%

-15%

-10%

-5%

0%

5%

10%

15%




Source: Bloomberg

Equity Markets and Commodities 4



Emerging Markets (Asia, CEEMEA and Latam)

Modestly overweight Latin America

Dividend yields are higher than bond yields in many EM markets

such as Hong Kong, Malaysia, Singapore, Taiwan, Thailand,

Poland and Russia. An expected earnings growth recovery and

stronger cash flows may help increase dividend payouts in EM.

Furthermore, the stabilization in the US dollar after a historic period

of strengthening has also removed a headwind from many EM

assets and economies.

A combination of these factors suggests that EM still offers a good

risk-reward opportunity. Within the region, Citi analysts prefer Latin

America on the back of improving commodity prices. Banks,

consumer discretionary, materials, technology and utilities are Citi’s

favoured sectors.

Chart 4

MSCI Emerging Markets Index

1.09%

13.77% 14.07%

-8.51%-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%




Source: Bloomberg

Gold

Likely range bound in near term

Precious metals have largely traced side-ways in September, with

prices forecast to remain somewhat range-bound in October.

While the rise of political uncertainty in the US and the EU could be

modestly supportive of gold in the coming weeks, Citi analysts

maintain their expectation for weaker gold prices of $1,320/oz in

4Q16.

The lack of meaningful precious metal price reaction following the

FOMC rate hike pass on 21st September, could suggest limited

further upside in the months ahead.

Chart 5

GOLDS Commodity Index

0.52%

23.96%

18.00%

-0.99%-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%




Source: Bloomberg

Oil

Prices may be supported by OPEC agreement

At an informal meeting on September 28, the 14 OPEC member

countries reached a broad agreement to cut crude production to a

range of 32.5 to 33 million barrels per day by November. If

implemented, this is the first time in eight years OPEC has agreed

to a production adjustment.

There is lot of scepticism over implementation and success of such

an agreement. Also many question the extent of reduction to be

effective. But the willingness of OPEC to act on supply together with

reported declines in crude oil inventories may likely keep oil prices

supported.

Thus, Citi reaffirms its Brent crude oil price view of a $40-50 trading

range in 2H16, rising toward the upper bound of this range into

4Q16 and potentially above $50 depending more on winter weather

than OPEC action. Citi continues to see 2017 Brent averaging $60,

with 4Q17 reaching $65.

Chart 6

Brent Oil

4.29%

31.60%

1.43%

-54.73%-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%




Source: Bloomberg

Bond Markets 5



Bond Markets

US Investment grade credit remains the largest relative overweight

US Treasuries

The low global interest rate environment may anchor the long-end for US Treasuries as foreign investors continue to

bid up safe haven, higher yielding USD assets.

Citi analysts remain overweight US Treasury debt.

Investment Grade Corporates

Citi analysts remain overweight IG corporates as they are likely to benefit from lower core sovereign rates.

In US sectors, Citi favours telecom and energy. Financials are still likely to underperform due to low yields and a

flatter yield curve.

In euro IG, telecom and energy are preferred, as well as healthcare, which could benefit from positive industry

trends.

High-Yield

Though supported by ECB purchases, Citi analysts favour higher yielding USD over euro HY.

In particular, opportunities in the Single-B rated space look more attractive, as valuations in Double-B HY are

expensive.

Similar to Citi’s conviction in IG corporates, Citi prefers opportunities in HY telecom and energy sectors.

Emerging Market Debt

Emerging market (EM) bond performance in both local currency and external (USD) debt continues to benefit from

the recovery in oil prices and central-bank induced demand for yield.

More importantly, the cyclical deterioration that plagued many parts of EM for the last several years (i.e., weak

growth and rising inflation) has seemingly improved.

Citi analysts are overweight in Latin America (hard currency and local) as well as local Asian bonds while remaining

neutral EMEA.

Euro Bonds

With 10-year German Bund yields in negative territory, Citi finds very little value in core Eurozone (EZ) rates.

Additionally, despite supportive central bank policy and technical backdrop, Citi analysts are still reluctant to chase

UK Gilts.

Japan Bonds

The BoJ introduced a new policy framework called “QQE with yield curve control”, under which the BoJ will control

not only short-term interest rates but also the 10-year JGB yields. The current policy directive stipulates that the BoJ

will keep the 10-year JGB yields at “around 0%.”

In Citi’s view, the BoJ has powerful tools to cap any substantial rise in the 10-year yields – such as newly-introduced

fixed-rate JGB purchase operations – but it seems more difficult to set the floor under yields.

Citi analysts expect the 10yr yields may continue to stay in modestly negative territory.

Asia Bonds

In Asia, Citi analysts favour USD Indonesia debt and local India bonds, where attractive yields, improving macro

environment and increased foreign ownership of sovereign debt is likely to attract new investors.

Currency 6



Currency

Election Risks Aside, $ Has Probably Peaked

Long-term $ appreciation cycles tend to end after 5-6 years, suggesting that the current uptrend that began in 2011 may be

living on borrowed time and the overshoot relative to rate differentials which opened up over 2015, may now be correcting.

This suggests the USD may more likely be peaking. The big risk is the upcoming US election. A Trump win (Citi sees a 40%

probability) may likely be a game changer towards a stronger $ given his plan to cut corporate taxes and boost infrastructure

investment which could see a fiscal stimulus of up to 5% of GDP.

EUR: More Resilient

EURUSD is likely to follow a relatively flat path near term. Concerns about Brexit fallout, financial instability in the

region and political uncertainty in Italy may likely cap its upside while a dovish Fed along with ECB reluctant to ease

near term could likely help support the pair.

GBP: Expect Weakness vs EUR

While official data has been resilient of late, it does not mean the UK is out of the woods. With EU/UK trade

negotiations yet to commence, it may just be the calm before the storm.

UK is running a trade deficit of 7% GDP and the economy remains vulnerable to downside growth risks. That means

the BoE continues to retain its easing bias even as UK data’s current resilience suggests the slowdown may not be

as bad as imagined in the aftermath of the Brexit vote.

Overall, a dovish MPC bias on top of a vulnerable balance of payments position is likely to lead to a lower GBP.

JPY: Value and Fundamentals Triumph BoJ

BoJ’s recent comprehensive policy review shows that the exchange rate no longer seems central to BoJ policy and

the measures implemented fall well short of market expectations and reinforce market conviction that the BoJ is

running out of ammunition. This means the BoJ measures are no longer able to weaken the Yen.

And with Japan’s current account surplus of 3-3.3% of GDP tending to reinforce yen strength and coupled with a

dovish Fed, this may likely mean lower levels on USDJPY.

AUD, NZD & CAD: AUD & CAD May Perform, NZD Caught In Crosswinds

AUD: The RBA retains its easing bias despite some recent more upbeat comments from Governor Lowe on the

housing as well as the labour markets. However, despite the easing bias, the “grab for yield” dynamic in a risk-on

environment is likely to provide a supportive backdrop for AUD to strengthen, absent any shocks surrounding the

US presidential elections.

NZD: NZDUSD is likely to trade sideways as crosswinds take effect. The domestic macro backdrop remains firmly

robust supporting the pair but divergence with the weak inflation outlook means the RBNZ is still biased to cut rates,

possibly by November. And while the “grab for yield” dynamic is also relevant to NZD sentiment, the unit is likely to

attract less appeal than AUD even as both units may continue to gain against USD.

CAD: CAD’s fortunes remain tied to the recent stability in oil prices as well as USD softness, both of which have

helped support CAD in the near-term. However, domestic data remains weak and this may prompt the BoC’s hand

to cut rates later in the year and makes CAD somewhat vulnerable, especially against its commodity peers. More

medium term however, Citi analysts expect higher oil prices and as such, expect USDCAD to test this year’s lows.

EM Asia: Likely Higher In The Next 12 Months

While much has happened since the end of August, little has changed in terms of key determinants of EMFX

forecasts. The G3 central banks have held their meetings and their policy stance has changed little. Thus, global

yields are likely to remain quite low and interest in EM assets should be high in Citi’s view.

The only risk to EMFX’s performance is a Trump win in the US Elections. Based on Trump strong views on trade

policy, continued underperformance of global trade may pose a headwind for EMFX and may ultimately neutralize

the effects from stronger capital flows into the EM asset class (due to low yields in developed markets). However, at

this point, the probability of Trump rocking the boat is at 40% - a fat tail risk but not enough to upset market

sentiment.

Model Portfolios 7



Model Portfolios

DEFENSIVE Global Model Portfolios

Seeking primarily capital preservation over time and

only willing to accept very minor portfolio value

fluctuations from month to month.

INCOME-ORIENTED

Seeking growth of wealth over time but unwilling to

accept significant fluctuations in the value of portfolio

from month to month

GROWTH AND INCOME

Seeking long-term capital growth foremost but unwilling

to accept significant losses on value of portfolio over the

medium term.

GROWTH ORIENTED

Seeking long-term capital appreciation and willing to

tolerate measured medium-term volatility in order to

enhance longer-term performance.

AGGRESSIVE GROWTH

Seeking long-term capital appreciation and can accept

potentially large losses on portfolio over the near-to-

medium term in order to maximise long-term

performance.

Cash 21%

Developed Govt Bonds 47%

Global IG Corp Bonds 22%

Global Equities 10%



HY Bonds 6%

US Equities 9%

European Equities 5%

Global Equities 11%

Global REITs 5%



HY Bonds 5%

Emerging Market Debt 4%

US Equities 19%


Pacific Equities 7%

EM Equities 4%

Global REITs 8%



HY Bonds 6%


US Equities 24%


Pacific Equities 9%

EM Equities 7%

Global REITs 10%


HY Bonds 6%


US Equities 29%


Pacific Equities 11%

EM Equities 9%

Global REITs 10%

Spotlight on Allocations 8



Spotlight on Allocations

EMEA Model Portfolio

This section shows the revisions to asset allocations decided by Citibank EMEA Model Portfolio Committee on 22 July 2016.

Citibank’s EMEA Model Portfolios provide a guide to possible diversification of investment portfolios and serve as an asset

allocation reference tool both for periodic evaluation and prospective investments. Citibank Model Portfolios are developed by

Citibank’s in-house Global and Regional investment specialists to cater to investors with various risk profiles (based on

Citibank’s risk assessment) and provide them with:

Diversified asset allocations, made uniquely relevant for EMEA investors

Up-to-date asset allocations which are reviewed and revised periodically by Citibank’s Research teams to reflect

changing market conditions in respect of relevant asset classes

Access to our best-in-class research from the Global Investment Committee

It is important to note that while Citibank Model Portfolios represent Citibank’s best thinking in terms of asset allocation and

diversification, they serve only as a guideline for investors based on certain risk profiles. Market movements, changing

market views, time horizons and liquidity constraints (among others) may result in a portfolio’s asset allocation deviating from

the model allocation.

Citibank does not monitor and/or manage individual customer portfolios. For a long term investor, it is advantageous to

diversify his/her investment portfolio and consider using Citibank Model Portfolios as a reference in diversification reviews.

The suggested allocations are intended to be general in nature and are not to be construed as specific investment advice.

Investors are encouraged to consult with their Relationship Managers to determine their allocation needs based on their risk

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Market Outlook - Citibank UAE...4Q16. The lack of meaningful precious metal price reaction following...

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