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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.
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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. All information, views and estimates are based on the opinions on or
before this date, and are subject to change without further notice. Past performance is not indicative of future performance. It is provided for
your information only. It is not intended as an offer or solicitation for the purchase or sale of any security. Information in this document has
been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should,
before acting on the information, consider its appropriateness, having regard to their objectives, financial situation and needs. Any decision
to purchase securities mentioned herein should be made based on a review of your particular circumstances with your financial adviser.
Investments referred to in this document are not recommendations of Citibank (Hong Kong) Limited (“Citibank”) or its affiliates. Although
information has been obtained from and is based upon sources that Citibank believes to be reliable, Citi analysts do not guarantee its accuracy
and it may be incomplete and condensed. All opinions, projections and estimates constitute the judgment of the author as of the date of
publication and are subject to change without notice. Prices and availability of financial instruments also are subject to change without notice.
Past performance is no guarantee of future results. The document is not to be construed as a solicitation or recommendation of investment
advice. Subject to the nature and contents of the document, the investments described herein are subject to fluctuations in price and/or value
and investors may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value
that could equal the amount invested. Certain investments contained in the document may have tax implications for private customers whereby
levels and basis of taxation may be subject to change. Citibank does not provide tax advice and investors should seek advice from a tax adviser.
Investment products: (i) are not insured by the Federal Deposit Insurance Corporation; (ii) are not deposits or other obligations of any insured
depository institution (including Citibank); and (iii) are subject to investment risks, including the possible loss of the principal amount invested.
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