Citibank Wealth Management Investment Pulse 2012 - U.S. to Take On Fiscal Cliff
Citibank Wealth Management Investment Pulse 2012 - U.S. to Take On Fiscal Cliff. Following the U.S. presidential election last month, in which Obama was re-elected, investors have shifted their focus to the development of the “fiscal cliff”. Equity markets have been volatile as investors were concerned about the possible economic impact if Democrats and Republicans fail to agree on a deal to avoid the fiscal cliff. However, Citi analysts anticipate the two political parties to reach a budget agreement by year-end, which may drag the U.S. economy by 1.25% in 2013.
Citibank Wealth Management Investment Pulse 12 2012 U.S. to take on fiscal cliff COVER STORY: U.S. to take on fiscal cliff 02 Following the U.S. presidential election last month, in which Obama GLOBAL FOCUS & HK/CHINA STOCKS: was re-elected, investors have shifted their focus to the development China's new leadership likely to be pro-stability of the “fiscal cliff”. Equity markets have been volatile as investors China property stocks’ outperformance were concerned about the possible economic impact if Democrats and may continue in 1H13 03 Republicans fail to agree on a deal to avoid the fiscal cliff. FX: However, Citi analysts anticipate the two political parties to reach a AUD and CAD to become reserve currencies 04 budget agreement by year-end, which may drag the U.S. economy by 1.25% in 2013. BOND MARKET & COMMODITIES: Investment grade corporate bonds remain a top pick Gold may outperform oil 05 IMPORTANT ECONOMIC EVENTS 06 Please note and carefully read the Important Disclosure on the last page 1 Citibank Wealth Management Investment Pulse COVER STORY Chart 1: 3-year Annualized Return and Risk (%) 10 50% global equities + 50% global bonds U.S. to take on fiscal cliff 8 Global equities Annualized return % Global bonds 6 Following the presidential election in the U.S. last month, in which Obama was re-elected, investors have shifted their 4 focus to the development of the “fiscal cliff”. 2 In January 2013, Bush era tax cuts will expire and the automatic spending cut (sequestration) will begin. The impact 0 0 2 4 6 8 10 12 14 16 18 20 of both measures on the U.S. economy is called “fiscal cliff”, Annualized volatility % which may post a threat to the U.S. economy. Republicans Source: Morningstar Direct, as of September 30, 2012 and Democrats are split over tax hikes and deficit reduction. Reference Index: Global equities – MSCI AC World Index; Global bonds – Citi World Broad Investment Grade Index Equity markets have been volatile as investors were concerned about the possible economic impact if Democrats and Republicans fail to agree on a deal to avoid the fiscal cliff. U.S. and Asia stocks remain attractive However, Citi analysts anticipate the two political parties The U.S. stock market may be more volatile in the short term to reach a budget agreement by year-end, which may given uncertainties over the fiscal cliff and the U.S. debt drag the U.S. economy by 1.25% in 2013. And in the face of ceiling. uncertainties, investors could deploy appropriate strategies to ride through volatility. However, in the medium-to-long term, Citi analysts believe that the valuation of U.S. stocks remains attractive and anticipate that the Dow Jones Industrial Average Index may reach 15,300 in 2013. Potential impact of fiscal cliff: Dividend names may do well as investors seek income even if • The fiscal cliff may represent an unprecedented there is somewhat higher taxation. US$800 billion (5% of GDP) shock to the U.S. economy in 2013 In Asia, analysts have on average become less bearish on earnings over the last few weeks. Citi analysts anticipate • If it materializes, it may halt U.S. economic growth. that the downward earning revision cycle may come to an U.S. GDP may decline by 1% in 2013 (i.e. recession) end, together with attractive valuations, and that the MSCI Asia ex-Japan Index may reach 600 in 2013 (531 by end of November 2012). The price-to-book of Asian equities was Citi analysts believe that a piecemeal, short-term fiscal deal about 1.6x, suggesting that probability for the upside in the that could temporarily resolve the problem could be reached next 12 months could reach 70% based on historical data. during the “lame duck” Congress, or in January after the new president is inaugurated. On the investment markets, the fiscal cliff remains a major Yield advantage favors investment uncertainty for equities. Maintaining a diversified portfolio, grade corporate bonds including both equities and bonds, may help investors mitigate risk amid market volatility. On fixed income, the re-election of Obama may mean that a deal on the U.S. budget deficit may not be imminent, so For reference, the return of an investment portfolio Citi analysts anticipate that U.S. treasury yields will remain consisting of 50% equities and 50% bonds in the past three low. Yield advantage and improving credit quality favor years outperformed a global bond index, and the volatility of investment grade corporate bonds and emerging market this portfolio is also lower than that of a global equity index debts. (chart 1). For more information on bonds, please turn to page 5. To find out more Latest Market Information, please visit www.citibank.com.hk/marketinfo Please note and carefully read the Important Disclosure on the last page 2 Citibank Wealth Management Investment Pulse GLOBAL FOCUS HK/CHINA STOCKS China's new leadership China property stocks’ likely to be pro-stability outperformance may New leaders were elected at China’s 18th Party Congress last continue in 1H13 month. Xi Jinping was named the party’s Secretary General and Chairman of the Central Military Committee. China’s property stocks rose about 60% year-to-date, mainly benefitting from government policies that emphasize The congress has unveiled four upcoming economic “stability is paramount” and help stabilize house prices and development themes. As the 11-quarter-old economic sales volumes. With an improving outlook for the sector, Citi downturn might have ended, China’s economy is set to analysts anticipate the property stock rally to continue into rebound which will likely support Chinese equities. the first half of 2013. One of the government’s targets is to double 2010’s GDP On the sales front, the mainland property sector, especially a by 2020. By then, China’s GDP could achieve RMB80-112 number of key developers, has posted strong growth year-to- date. As of October, 19 major developers have achieved, on trillion. The new government also aims to facilitate more average, 89% of their 2012 sales target, and locked in 46% balanced and sustainable growth through industrialization, of their 2013 target. digitalization, urbanization and agricultural modernization. Among the top priorities of the new leaders are avoiding the “middle-income trap” by improving efficiency of No signs of overheating resource allocation in the economy, and maintaining growth in GDP per capita. This requires reforms in the financial So far, the Chinese property market has not shown any signs sector, deregulation in the service sector, and promoting of overheating. According to data from the National Bureau urbanization as the next growth engine. of Statistics, real estate investment increased 15.4% from January to October, the same as the first nine months of 2012. As developers remain rational on investment, this will ease fears over policy shocks and will support stock prices. HSCEI to climb to 11,740-13,550 On valuation, the sector is now trading at about 30% As China's economy shows signs of stabilizing, Chinese discount to net asset value (NAV) in 2013 (chart 3), in line stocks may start to outperform early next year. Citi analysts with the average over the past years; Citi analysts believe anticipate the Hang Seng China Enterprises Index (HSCEI) this is undemanding. to test higher to 11,740-13,550 (chart 2), and the Shanghai A Share Index to reach 2,565 in 2013. Chart 3: China Property – Discount to NAV 50% +1 Standard Deviation 40% Chart 2: HSCEI - Daily Chart 30% Average -1 Standard Deviation 20% 13,000 10% 2013 Year Target: 11,740-13,550 0% 12,000 -10% -20% -30% 11,000 -40% -50% 10,000 -60% -70% -80% 9,000 2005 2007 2009 2011 2012 Source: Citi, as of November 8, 2012 8,000 10/11 01/12 04/12 07/12 10/12 Source: Bloomberg L.P., as of December 4, 2012 To find out more Latest Market Information, please visit www.citibank.com.hk/marketinfo Please note and carefully read the Important Disclosure on the last page 3 Citibank Wealth Management Investment Pulse FX Interest Rate Forecast December 4, 4Q 2012 1Q 2013 2Q 2013 AUD and CAD to become USD 2012 0.25% 0.25% (Forecast) 0.25% 0.25% reserve currencies EUR 0.75% 0.50% 0.50% 0.25% GBP 0.50% 0.50% 0.50% 0.50% In November, the International Monetary Fund (IMF) considered classifying AUD and CAD as official reserve CHF 0.00% 0.00% 0.00% 0.00% assets. At present, only USD, EUR, GBP, JPY and CHF are JPY 0.10% 0.10% 0.10% 0.10% recognized as reserve currencies in IMF’s quarterly Currency AUD 3.00% 3.00% 2.75% 2.75% Composition of Official Foreign Exchange Reserves report, NZD 2.50% 2.50% 2.50% 2.50% while AUD and CAD are within the “Other currencies” category. CAD 1.00% 1.00% 1.00% 1.00% Source: Citi, forecast as of December 4, 2012 IMF’s latest move may reflect that AUD and CAD are gaining popularity among global central banks. Amid the deepening EU debt crisis, the number of European countries that hold Major Currencies Forecast AAA sovereign credit rating has been dropping. In November, for example, rating agency Moody's Investors Service 0-3 months 6-12 months downgraded France’s AAA rating to Aa1 with negative (Forecast) outlook, whilst both Australia and Canada retained their AAA ratings with stable outlook. This may boost central banks’ USD Index 82.94 84.52 confidence in holding AUD and CAD. EUR 1.25 1.21 GBP 1.57 1.53 CHF 0.96 0.99 Relatively stable economies in JPY 84.00 85.00 Australia and Canada AUD 1.04 0.97 While Europe and the U.S. are facing severe debt problems, NZD 0.82 0.79 Citi analysts anticipate that fiscal deficit as a percentage CAD 1.01 0.98 of GDP in Canada may only reach 0.9% in 2013 (chart 4). Source: Citi, forecast as of November 19, 2012 Australia may even post a fiscal surplus. Chart 4: Forecasts of Selected Countries’ Fiscal Other Currencies Balance as Percentage of GDP in 2013 % 2% EUR: Worsening EU debt crisis and a possible rate cut 0.1% by the European Central Bank in early 2013 may 0% drag on the euro. In the coming three months, -0.9% -2% EUR/USD may fall to 1.25. -4% JPY: JPY may be undermined as the Bank of Japan -6% will likely expand the asset-purchase program and -6.4% -6.7% political uncertainty may rise. In the coming three -7.0% -8% -8.1% months, USD/JPY may surge to 84.00. -10% U.S. Japan Canada Australia Spain Greece RMB: As the People's Bank of China may reduce Source: Citi, forecast as of November 26, 2012 intervention in the yuan, together with an improving economy, USD/RMB may test lower to Therefore global central banks may gradually increase their 6.15 gradually over 6-12 months. holdings of AUD and CAD given the nations’ fiscal stability, which will likely support AUD and CAD. To find out more Latest Market Information, please visit www.citibank.com.hk/marketinfo Please note and carefully read the Important Disclosure on the last page 4 Citibank Wealth Management Investment Pulse BOND MARKET COMMODITIES Investment grade corporate Gold may outperform oil bonds remain a top pick In 2012, the European sovereign debt crisis, China’s growth slowdown and the U.S. fiscal cliff heightened market risk. The Funds continue to flow into the bond market as investors gold market has seen strong safe-haven fund inflows, driving search for yields amid low global interest rates. Besides prices to US$1,796 an ounce. The metal has posted about higher yielding debt such as U.S. High Yield and Emerging 10% rise in the first 11 months this year. Market bonds, investment grade corporate bonds also registered relatively strong performance this year. Oil, on the other hand, underperformed. Oil prices dropped after hitting US$110 a barrel early this year, and have now Year to date, global investment grade corporate bonds reached US$86. posted a return of 10.9%, close to U.S. High Yield's 11.6% (chart 5). Federal Reserve Chairman Ben Bernanke said during last month that the unemployment rate is still well above its longer-run sustainable level by 2-2.5 percentage points. He Chart 5: Bond Market Performance - Year-to- believed that a highly accommodative stance on monetary date% policy will remain appropriate for a considerable time even 14% after the economic recovery strengthens. Low-rate policy 12% 11.6% would restrain the dollar’s upside, sending gold prices higher. 10.9% 10% In addition, market focus will likely remain on EU debt 8% problems and the U.S. fiscal cliff in 2013. In the coming three 6% 5.3% months, gold may climb to US$1,770 (chart 6), and test 4.2% higher to US$1,790 in the first quarter next year. 4% 2.5% 2% 0% Chart 6: Spot gold/USD – Year-to-date (Daily Global Bond Global U.S. Global Investment U.S. High Yield Chart) Government Government Grade Corporate Bond Bond Bond Bond USD/oz 1,850 Source: Bloomberg L.P., as of November 16, 2012 1,800 0-3 months target price: USD 1,770/oz 1,750 Amid low U.S. Treasury rates, investment grade corporate 1,700 bonds remain one of the few high-quality asset classes that 1,650 offer positive yields. As of September 30, the average credit 1,600 rating of global investment grade corporate bonds was A-. 1,550 1,500 The average yield on investment grade corporate bonds with 1,450 tenures of 7 to 10 years is about 3.0%, much higher than the 1,400 yield of 10-year U.S. treasuries at 1.6%. 12/11 01/12 02/12 03/12 04/12 05/12 06/12 07/12 08/12 09/12 10/12 11/12 In the past, investment grade corporate bonds have Source: Bloomberg L.P., as of November 20, 2012 demonstrated more stable performance than high-yield corporate bonds. Citi analysts continue to favor U.S. The oil prices may perform less well than gold as slowing investment grade corporate bonds, including financial and global growth would curb fuel demand. Citi analysts non-financial corporate bonds with tenures of 7 to 10 years. anticipate that demand for crude oil may only increase by 1% (yoy) in 2013, while that from the member countries of the Credit spreads for investment grade corporate bonds have Organization for Economic Cooperation and Development tightened since July, from 187 basis points on July 31 to 139 may fall 0.6% (yoy). The price of oil is expected to hover bps on October 26, below the long-term average of 150 bps. around US$85 in 2013. Looking forward, Citi analysts anticipate the credit spreads to tighten further, given strong inflows into the corporate bond market and lackluster issuance of new bonds. To find out more Latest Market Information, please visit www.citibank.com.hk/marketinfo Please note and carefully read the Important Disclosure on the last page 5 Citibank Wealth Management Investment Pulse Important Economic Events 1/12 China Manufacturing 3/12 Eurozone 7/12 U.S. Unemployment Purchasing Manager Manufacturing Rate Index Purchasing Manager Index 9/12 China Consumer 10/12 China trade balance 13/12 FOMC Rate Decision Price Index 14/12 EU Summit 19/12 German IFO 20/12 U.S. GDP data Business Climate Index Online Daily Market Information Please visit www.citibank.com.hk and click the button below to check out the daily updated market information: Daily Market Today's Update FX Pick Important Disclosure This document is based on information as of December 4, 2012 provided by Citigroup Investment Research, Citigroup Global Markets, Citigroup Global Wealth Management and Citigroup Alternative Investments. 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