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St i t d dStay invested and carry onGlobal Market Outlook
GIC summaryGIC summary
December 2012
This commentary reflects the views of the Wealth Management Group of Standard Chartered Banky g p
December 2013
Overview
Macro: 2013, Year of Transition Bonds: Still underweight• Recent data reaffirms the outlook for 2013
to be a ‘Year of Transition’ towards stronger growth in 2014, led by Developed markets
• EM concerns remain
• Retain longer term outlook for US Treasury yields – Remain Underweight on a 12 month basis
• US and Europe HY preferred within USD portfolios, but moderate returns expected
• Keep maturity profile in USD portfolios shortEM concerns remain• B.R.I.D.G.E. investment framework
helped by Fed inaction thus far
Keep maturity profile in USD portfolios short
Equity: Europe and US preferred• Strengthening growth, a lack of
inflationary pressures and receding tail risks likely to support equities
FX: Fed delays USD modest appreciation• Delay in Fed tapering has weakened the USD,
but is expected to form a base going forward• Asian currencies have seen pressures declinerisks likely to support equities
• Equities still cheap relative to government and high yield bonds
• DM preferred on a 6-12m basis, led by Europe and the US
• Asian currencies have seen pressures decline, but this may prove temporary once tapering comes back on the agenda
• CNY likely to remain stable• AUD expected to weaken long-term
2
Global Market OutlookB.R.I.D.G.E. Investment
FrameworkFramework
Equities outperform – our key OW
2013 YTD asset market performanceYear-to-date Total return performance of different asset classes
Cash losing Cash losing purchasing power
Equities have 19.57
0.37
Equities
Cash
performed strongly
Bonds hit by rising yields HY1.63
-11.35
-2.93
USD Index
Commodities
Bonds
yields, HY outperforms
USD gradually i i i t t
-1.89
-20 -15 -10 -5 0 5 10 15 20 25
Asian FX
%
Source: Bloomberg, Standard CharteredAs of 21 November 2013
gaining against most currenciesCash = JP Morgan Cash Index
Equity = MSCI AC World Daily TR Index Bonds = CITI BIG Index Commodities = DJ UBS Commodities IndexUSD = DXY Currency
Global equities have led the way higherAsian FX = ADXY Index
B.R.I.D.G.E Framework
Year-to-date total return performance of difference themes within BRIDGE strategy
Strong performance
Good year-to-date performance
Global Equities of equities, our key call for 2013
High dividend stocks
11.5%
19.6%
Overweight Assets
Diversified Income Basket
Global Equities
High dividend stocks continued to perform well
‐5.7%
17.8%+ High Dividend Yield Equities
+ Asia Local Currency BondsTrade closed on 20 June 2013
Asian local currency bonds – strong 2012 performance partially offset by
‐2.9%
6.9%
Underweight Assets
+ Global High Yield Bonds
G3 IG Bonds partially offset by weakness in 2013
US high yield f d i b d
Source: Bloomberg, Standard CharteredAs of 21 November 2013
MSCI AC World TR USD, MSCI AC World High Dividend yield Net TR USD, Barcap Asia Local Currency Net TR,* Income basket is equally weighted performance of global high dividend yielding equities (MSCI ACWI High Dividend Yield
-12% -7% -2% 3% 8% 13% 18%
B.R.I.D.G.E. framework has had a strong H1 2013
favoured in bonds Income basket is equally weighted performance of global high dividend yielding equities (MSCI ACWI High Dividend Yield USD),Global HY bonds (BarCap Global HY TR USD) and Asian local currency bonds (BarCap Asia Local Net TR USD, until 20 June). Asia local currency bond performance after June 20 is not excluded.
Asset Allocation summaryAll figures are in percentages Currency : USD
Summary View vs. SAA Conservative Moderate Moderately Aggressive Aggressive
Tactical Asset Allocation - December 2013 (12M)
Cash UW 21 0 0 0
Fixed Income UW 35 35 17 4
Equity OW 27 42 60 85
Commodities N 5 10 10 5
Alt ti OW 12 13 13 6Alternatives OW 12 13 13 6
Asset Class Region View vs. SAA Conservative Moderate Moderately Aggressive
Aggressive
Cash & Cash Equivalents USD Cash UW 21 0 0 0
IG Developed World UW 24 15 0 0
IG Emerging World UW 4 9 3 0
HY Developed World OW 2 6 6 2
HY Emerging World N 5 5 8 2
N th A i OW 8 12 17 23
Investment Grade
High Yield
North America OW 8 12 17 23
Europe OW 9 12 17 25
Japan N 0 2 2 3
Asia ex-Japan UW 8 13 20 27
Other EM UW 2 3 4 7Emerging Market Equity
Developed Market Equity
Source: Standard Chartered
Commodities Commodities N 5 10 10 5
Hedge FoF/CTAs OW 12 13 13 6
US stocks continue to climb the wall of worryS&P 500 index
1900 US QuantitativeEasing (QE) 1
US (QE) 2 OperationTwist
US (QE) 3
1500
1700
g ( )
9.9% record high unemployment
Bailout on Greece, Ireland, Hungary
Double dip recession worries
900
1100
1300
Ind
ex
Fed tapering
500
700
concernsUS government
partial shutdownGrowth impact
of mandatory spending cutsS&P
downgrades US credit rating
US Predisdential elections
Debt ceiling debate
US debt ceiling reached
Yellen nominatedas Fed chair
Source: S&P 500, Bloomberg, Standard CharteredAs of 21 November 2013
*Highlighted areas refer to periods of Quantitative easing by the Federal Reserve
300Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13
US stocks made a new all-time high within 24 hours of debt ceiling agreement
Expecting the same from Europe
Source: MSCI Europe, Bloomberg, Standard CharteredAs of 21 November 2013
Europe likely to continue out-performing as economy emerges from recession and profit margins expand
Global Market OutlookGlobal Market OutlookMacro: Still A Year of Transition
US: Still in recovery mode
Manufacturing
Forward-looking indicators still strongUS ISM new orders - Manufacturing and Non-manufacturing
70 Manufacturing weakness was an area of concern
R t d t hi t55
60
65
Recent data hints suggests a much brighter outlook for both manufacturing 40
45
50
Inde
x
gand service sectors
30
35
40
Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13
Source: Bloomberg, Standard CharteredAs of 21 November 2013
ISM Manufacturing PMI ISM Non-Manufacturing
Soft patch likely to be temporary
US: Labour market remains relatively robust
Average job creation has started to pick up againUS nonfarm payroll 3mma vs. Initial jobless claim 4wmma
700600
Job creation still running above our 2013 forecast of 175k
th550
600
650
0
200
400
a month
Initial jobless (benefit) claims have risen in 400
450
500
-600
-400
-200 '000
'000
recent times due to temporary factors
Wages are starting to
300
350
00
-1000
-800
600
Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Wages are starting to
pick up very slightlySource: Bloomberg, Standard Chartered
As of 21 November 2013
US nonfarm payroll Initial jobless claims 4wma (RHS)
Trend improvement in labour market likely to continue
US: Housing key to the economyHomeowners with negative equity decline% of residential properties where the size of mortgage is greater than the value of property
House prices remainHouse prices remain in an uptrend, reducing negative equity significantly
24
26
Rising mortgage rates a headwind, but lending standards are 18
20
22
%
geasing
Signs of stabilisation in housing market
14
16
18
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Source: Corelogic, Standard CharteredAs of 21 November 2013
in housing market after Q2/Q3 slowdown
2Q 2010
3Q 2010
4Q 2010
1Q 2011
2Q 2011
3Q 2011
4Q 2011
1Q 2012
2Q 2012
3Q 2012
4Q 2012*
1Q 2013*
2Q 2013
* Q1 2013 and Q4 2012 were revised
Fed is likely watching housing developments very closely
Interest rates expected to remain low for a long time
Fed has managed to bring expectations lowerEurodollar 90 day futures
Fed is very keen for tapering not to be seen as tightening
Forward guidance has20-Nov
19-Sep
2
2.5
3
Forward guidance has been key to this effort
Tapering may be i d b
1-May
1
1.5%
accompanied by a reduction in the unemployment rate threshold for rate hikes
0
0.5
Dec13 Mar14 Sep14 Jun15 Mar16 Dec16
Source: Bloomberg, Standard CharteredAs of 21 November 2013
20-Nov 1-May 19-Sep
Short term interest rates likely to be stable through 2014
European recovery continues
European companies looking to increase capital expenditureBalance of European Companies increasing vs. cutting spending
Fundamentals in the 40% periphery are also
improving
ECB cuts rates in the10%
20%
30%
40%
ECB cuts rates in the face of falling inflation
Bank lending remains k lth h th-20%
-10%
0%
10%
weak, although there are signs that this is going to improve gradually in the
-40%
-30%
20%
May-12 Survey Nov-12 Survey Jun-13 Survey Oct-13 Survey g ycoming 6-12 months
Source: Bloomberg, Standard CharteredAs of 21 November 2013
Next 6 months Next 12 Months
Shift from recession into modest growth very important
Japan – A new source of growth?
Data continues to
Japanese companies accelerate investment spendingJapan Tankan business conditions, Manufacturing and Non-manufacturing (%,y/y)
3040 Data continues to show recovery extending
Pl d A il
10
20
0102030
Planned April consumption tax remains the key concern-20
-10
0
-40-30-20-10
%%
-40
-30
-70-60-50
Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13
Source: Bloomberg, Standard CharteredAs of 21 November 2013
Fixed Investments Manufacturing Fixed Investments Non-Manufacturing (RHS)
How the economy deals with sales tax hike in Q2 2014 will be critical test
Performance of the economy in Q2 2014 onwards key
1997 experience highlights risks from consumption tax hikeJapan Real GDP recovery (from 1Q 1997 to 3Q 2000)
More aggressive 490000 central bank and
offsetting fiscal measures means this time is expected to be480000
485000
490000
5.5 years
time is expected to be different
470000
475000
480000
JPY
(bn)
460000
465000
470000
Source: Bloomberg, Standard CharteredAs of 21 November 2013
460000Jan-97 Dec-97 Nov-98 Oct-99 Sep-00 Aug-01 Jul-02
The moment of truth for Abenomics?
China recovery remain tepid
US businesses have been more upbeat on prospects than China since 2009US ISM and China PMI Manufacturing new orders indices
China data has 70 stabilised, but has not
impressed
Growth expected to be55
60
65
70
Growth expected to be in the 7-8% range for 2014
C t l b k t d35
40
45
50
Inde
x
Central bank expected to retain a tight rein on credit growth
20
25
30
35
Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10 Jun-11 May-12 Apr-13
Source: Bloomberg, Standard CharteredAs of 21 November 2013
Jan 05 Dec 05 Nov 06 Oct 07 Sep 08 Aug 09 Jul 10 Jun 11 May 12 Apr 13US ISM China PMI 50-mark separating expsansion/contraction
China hard landing risks reduced, but strong recovery unlikely
Macro scenarios
1. Strong growth 2. Transition to
stronger growth
3. Muddle through
4. Global recession
10%
- US economy b d t l
50%
- The US weakens i t Q1 b t th
30% 10%
rebounds strongly as consumers give into pent-up demand. - Europe introduces
into Q1, but then rebounds strongly into the second half of the year to over 3% growth.
- The US economy continues to grow by around 1.5-2.5% through H2.
- Policymakers fail to offset the deleveraging forces and the world heads into
ia significant policy response which allows the core economies to rebound in H2.
- Europe remains in recession in Q1, but then recovers gradual in H2. - Asia continues to
- Europe remains in a slow burn recession.- China expected to stabilise around
recession. - The credibility of the single currency comes under huge scrutiny and the
- China experiences a V-shaped recovery.
recover, initially led by China and then the US.
7.5-8.0% growth. economy weakens sharply.
2013: Transition to stronger growth most likelySource: Standard Chartered
Global Market OutlookBonds: Continue favouring
corporatescorporates
The year so far for bonds
High yield continues to outperformYear-to-date performance
DM High Yield has been top performer YTD-2.42
0.98
Asia IG
Asia High Yield
G3 government and Asia IG bonds have weakened
6 44
4.71
10.98
US High Yield
Europe IG
Europe High Yield
Clipping coupons likely to remain the main theme for the
-1.19
6.44
-5 -1 3 7 11 15
US IG
US High Yield
rest of this yearSource: Citigroup, Barclays Capital, JPMorgan, Bloomberg, Standard Chartered
As of 21 November 2013Citi World BIGUSD ,Barclays Global HY TR Unh USD, JPM EM Global IG, JPM EM Global HY
%
Clipping coupons likely to remain key theme for rest of 2013
We favour Developed market HY
Directionally, lending conditions are supportive of HYFed Senior Loan Officers’ Survey, ECB Bank Lending Survey, % of banks tightening lending condition
100 US and Europe HY
both face continued low rates60
80
100
Lending conditions are turning increasingly 0
20
40
%
g ysupportive in Europe
Credit quality remains largely supportive
-40
-20
Apr-05 May-06 Jun-07 Jul-08 Aug-09 Sep-10 Oct-11 Nov-12
Source: Barclays Capital, Standard CharteredAs of 21 November 2013
largely supportiveEurope US
Favour diversified exposure to US and European High Yield credit
Further underperformance in EM, Asia HY likely
Asian HY premium over US HY risingUS HY vs. Asia HY spreads
Asia HY premium 14over US HY rising
However, credit quality remains a
11
12
13
quality remains a concern.
We still believe a 7
8
9
10
%
selective approach is key
4
5
6
7
Jun 11 Nov 11 Apr 12 Sep 12 Feb 13 Jul 13
Source: BarCap, JP Morgan, Bloomberg, Standard CharteredAs of 21 November 2013
Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13BarCap US HY OAS JACI HY Corp Spread
Asian HY attractiveness rising, but further underperformance remains possible for now
Be mindful of risks to USD bonds
Large, rapid rises in Treasury yields not uncommonUS 10yr Treasury yield (%), boxes show trough-to-peak rises in bps
Key risks:Key risks:
Interest rate risk
C dit i k11
13
15
+325bp Credit risk
Liquidity risk7
9
11
%
+285bp
325bp
+263bp
Recent experience was an illustration of risks from rising yields
2.401
3
5+160bp
Source: Bloomberg, Standard CharteredAs of 21 November 2013
yields11980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Percentage allocation to HY and short maturity profile key
FX, credit are key risks to Asia local currency bonds
Rebound was short-lived, as expectedPerformance of Asia local currency bonds*
Rebound was likely160 Rebound was likely led by rising expectations of Fed tapering delay
155
160
FX, Credit are key risks
145
150
Inde
x
We would not be adding at current levels
135
140
Source: Barclays Capital, Bloomberg, Standard CharteredAs of 21 November 2013
*Barcap Asia local currency diversified Total return unhedged USD
135Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13
FX, Credit key risks to local currency bonds in Asia
Underweight EM IG bonds
EMBI IG sensitivity to interest rates very highApproximate interest rate sensitivity (duration) of benchmark indices
EMBI IG carries the8 EMBI IG carries the largest USD interest rate sensitivity relative to other bond asset 6
7
8
classes
Low yields do not compensate investors3
4
5
Dur
atio
n
compensate investors for risks taken
0
1
2
Source: Citigroup, Barclays Capital, JPMorgan, Bloomberg, Standard CharteredAs of 21 November 2013
0EM IG DM IG EM HY US HY EU HY
Underweight EM IG (USD) bondsIndices: Citi World BIGUSD ,JP Morgan EMBI IG , JP Morgan EMBI HY, Barclays US HY, Barclays Pan-European HY
Equity risk-return profile superior to leveraged high yield
Leverage increases the risks of holding any assetReturns/maximum drawdowns of global equities and a global investment grade corporate index (50% leveraged and unleveraged) Leverage is a double-g p ( g g ) Leverage is a double
edged sword
We remain d i ht fi d
110
115
underweight fixed income
There is a very 100
105
Drawdown: 5.86%
Drawdown: 8.8%
ysignificant risk of negative returns for global bonds
85
90
95Drawdown:
11.7%
US HY expected to see more two-way volatilitySource: Bloomberg, Standard Chartered
As of 17 July 2013
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13
Global IG Corporates Cumulative Return (Unleveraged)
Global IG Corporates Cumulative Return (Leveraged)
MSCI ACWI Cumulative Return
Use leverage carefully
yAs of 17 July 2013
Global Market OutlookGlobal Market OutlookEquity: Still favoured
Equities: A good year do far
Equity markets have performed well year to dateTotal Return* Performance year-to-date (in USD)
EU and US our preferred markets
Strong preference for EU on improving data-1.07
22.71
19.57
Emerging Markets
Developed Markets
Global equities
data
Asia ex-Japan and other EM remain UW b t till t
20.26
26.58
Europe
US
g g
UW but still expect upside
Japan Neutral in
26.21
2.26
-8 -2 4 10 16 22 28
Japan
Asia ex-Japan
pUSD allocation termsSource: MSCI, Bloomberg, Standard Chartered
As of 21 November 2013MSCI AC World TR, World TR, Emerging Market, TR US, Europe TR, Asia ex-Jap TR, Japan TR
* Including dividends
%
Overweight EU and US
The markets have climbed the ‘wall of worry’
Pullbacks have been good opportunities to addS&P 500 index price chart (year to date)
We advocated UW We advocated UW investors consider adding on weakness
1700
1800
-7.52%
-4.77%-4.68%
Pullbacks have been limited in size
1500
1600
Inde
x
-3.13%
-3.63%
-3.15%
+32%
1300
1400
Source: Bloomberg, Standard CharteredAs of 21 November 2013
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13
‘Buying the dip’ has worked well this year
Equities – Still offer some value against history
Valuations remain attractive relative to historyMSCI AC World 12m forward P/E ratio Leveraged to
b d i l b lbroadening global growth
Receding tail risks in 19
21
23
25
P/Ex g
DM
Accommodative monetary policy is
13
15
17
12m
For
ward
P
monetary policy is positive for equities
Valuations below 7
9
11
Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12
1
Source: Datastream, Standard CharteredAs of 21 November 2013
median and cheap against bonds
MSCI AC WORLD 13.815 P/Ex Median +- 1SD
Environment supportive of Equities
Develop market equities offer more value
The equity-bond yield spread is greatest in DMEquity-bond yield gap*, deviation from long-term mean – across regions
Greatest relative value5 Greatest relative value in DM as yields still very low
3
4
5
EM equities no longer as attractive on a relative basis
1
2
3
%
-1
0
1
DM EM
Source: Datastream, Standard CharteredAs of 21 November 2013
-1Global US Europe Japan Australia AxJ China Latam
*Equity yield –10y sovereign bond yield
Developed market equities still preferred
Negative earnings revisions are stabilising
But a recovery is not yet obvious Consensus EPS growth expectations* (indexed=100)
Lacklustre economic105 Lacklustre economic outlook relative to the Developed markets
S t t ti i95
100
105
an 1
3)
Some tentative signs of stabilisation in China. This has yet to filter over to other 85
90
exed
(100
=1Ja
EM
Catalyst for sustained upside not
75
80
Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13
Ind
Source: IBES, Datastream, Standard CharteredAs of 21 November 2013
sustained upside not obvious
*MSCI World & MSCI Emerging markets 12m forward EPS estimates
Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13DM EM
Continue to prefer DM over EM
Europe: Our favoured market
Expectations for EU showing improvement Analysts starting to
i th iConsensus EPS growth expectations* (indexed=100)
revise up their forecasts
Margins improvement 125
135
Mar
13)
g pand operational leverage a key driver
95
105
115
exed
(100
=1 M
75
85
Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13
Inde
Source: IBES, Datastream, Standard CharteredAs of 21 November 2013
*MSCI World & MSCI Emerging markets 12m forward EPS estimates
Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13US EU
Higher margins will feed into higher earnings
EU operating margins are stabilising
Margins supported by lower financing and labour costs US and Europe operating margin (%)
EU corporate15 EU corporate margins have been declining for last few yrs and have greater
id th US12
13
14
15
upside than US
Benefit from high operating and 9
10
11%
p gfinancial leverage
Improvement in profit margins will support
6
7
8
Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12
Source: MSCI, Bloomberg, Standard CharteredAs of 21 November 2013
margins will support re-rating
*MSCI EU trailing operating margin
Europe US
Watch for upside earnings’ surprises
US remains a preferred region
US equities still cheap relative to bonds Improving housing
S&P500 earnings yield – UST 10yr bond yield, %10
and labour market
Resilient corporate margins
6
8Equities relatively cheap
margins
Earnings growth still supportive2
4
%
10y at 3%
10y at 4%
-2
0
Equities relatively expensive
Source: Datastream, Standard CharteredAs of 21 November 2013
-4Nov-88 Aug-91 May-94 Feb-97 Nov-99 Aug-02 May-05 Feb-08 Nov-10 Aug-13
US market still expected to generate solid returns
House prices a key driver for the economy
Positive wealth effect from rise in home pricesCase-Shiller Composite-20 house price index, y/y
Housing market is20 Housing market is recovering
High home prices d i lth ff t5
10
15
20
drive wealth effect
Positive impact on consumer sentiment 10
-5
0
5
Inde
x
and bank loan books
25
-20
-15
-10
Source: Case-Shiller index, Bloomberg, Standard CharteredAs of 21 November 2013
-25Jan-01 Nov-02 Sep-04 Jul-06 May-08 Mar-10 Jan-12
Fed policy still very supportive of equities
Japan: Remain Neutral but looking for upside
Market has broken through key resistanceTopix Index price chart (weekly chart)
Market has broken Market has broken through key resistance
Inflation still well below 1150
1250
1350
target – BoJ may print more
Expect further yen950
1050
1150
Inde
x
Expect further yen weakness
650
750
850
Source: Bloomberg, Standard CharteredAs of 21 November 2013
650Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13
Looking for a breakout to the upside
Underweight but not negative on Asia ex-Japan
Asia ex-Japan earnings revisions still negative but trend improvingMSCI Asia ex-Japan earnings revision ratio and 3m chg% in 12m forward EPS
Asia ex-Japan10 Asia ex Japan expected to generate positive returns
Chi d t h i2
4
6
8
10
2
4
6
China data showing some improvement but risks remain
-4
-2
0
2
-4
-2
0
Rat
io
%
-10
-8
-6
-8
-6
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
Source: Datastream, Standard CharteredAs of 21 November 2013
Earnings revision ratio= (Net upgrades/Upgrades+downgrades)*100
MSCI ASIA EX-JAP 3m% Chg 12m Fwd EPS Earnings Revision Ratio(RHS)
Asia ex-Japan expected to generate positive returns
China: Policy reforms an uncertainty MSCI China is dominated by large SOEs
y y
Composition of MSCI China sectors* by state owned linked (SOE) companies Some early signs of stability in earnings1000 stability in earnings and economic data
Longer term, reform 62%
600700800900
1000
Bn)
measures are positive
Banks are very cheap
76%
75% 38% 19% 53% 36%100200300400500
USD
(B
Banks are very cheap but risks remain
36%
0100
Bank
s
Ener
gy
Telc
o
nsur
ance
eal E
stat
e
tal G
oods
Mat
eria
ls
Source: Datastream, Bloomberg, Standard Chartered, As of 21 November 2013
In Re
Cap
it M
Non SOE SOE*Top 7 sectors by market capitalisation , July 2013
Reform uncertainties are slowing becoming priced in
Global Market OutlookCommodities: Upside catalyst
missingmissing
We are Neutral commodities
China growth not supportive for commoditiesDJ-UBS commodity index vs. China Manufacturing PMI index
Extended period of58180 Extended period of weakness likely limits further downside risks
55565758
150
160
170
180
However, upside catalyst is lacking
51525354
120
130
140
Inde
x
Inde
x
484950
90
100
110
1/5/2009 1/5/2010 1/5/2011 1/5/2012 1/5/2013
Source: DJ-UBS, Bloomberg, Standard CharteredAs of 21 November 2013
DJUBS Commodity Index China Manufacturing PMI
Neutral commodities. We struggle to see why prices would turn higher
Gold: Downtrend remains in place
Prices likely to fall furtherGold price, spot (USD)
High inflation-2135 adjusted price, rising
opportunity costs, USD strength negative factors for1535
1735
1935
2135
negative factors for gold
Break below long-t t li
935
1135
1335
USD
/Oz
term support line would be very bearish for gold
135
335
535
735
Source: Bloomberg, Standard CharteredAs of 21 November 2013
135Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12
We remain Underweight and bearish gold/silver
Commodities: Balanced energy outlook
Seasonality may dampen returnsAverage monthly performance of Brent crude oil from 1988
Both demand andBoth demand and supply trends have remained stable
G liti l i k
3.97%
2.56%
5.61%
3.19% 3.06%4%
6%
Geopolitical risk may have been overstated in the short term0.57%
1.60%
56%
0.59%1.18%
0%
2%
%
However, we are entering a seasonally weak period for oil-2.98%
-2.61%
-1.15%
-4%
-2%
Source: Bloomberg, Standard CharteredAs of 24 October 2013
4%Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
We remain Overweight oil
Global Market OutlookGlobal Market OutlookFX: Return of the (US) Dollar
Modest USD strength expected
USD likely to remain within recent rangeDXY Index
We do not expect a85 We do not expect a break lower out of recent range
D l i F d83
84
85
Delay in Fed tapering likely increasingly priced in80
81
82
Index
Long-term, we expect the USD to rebound77
78
79
rebound
Source: Bloomberg, Standard CharteredAs of 21 November 2013
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13
We are moderately bullish on USD
Moderate EUR weakness expected
Dovish ECB likely to be EUR-negativeEUR currency and 10-year German Bund yield (%)
Strong currentStrong current account, reducing ECB balance sheet, USD weakness have
t d EUR1.35
1.37
1.39
2
2.2
supported EUR.
However, EUR is likely to weaken
1.31
1.33
1.35
1 4
1.6
1.8
EUR/
USD
%
yfrom here:(a) USD rebound(b) Risk of further ECB easing
1.25
1.27
1.29
1
1.2
1.4
J 13 M 13 M 13 J l 13 S 13 N 13 ECB easingJan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-1310yr German Bunds Euro (RHS)
Source: Bloomberg, Standard CharteredAs of 21 November 2013
We are moderately bearish on EUR
Shift in BoE stance opens divergence with ECB
Short GBP/CHF may be best way of expressing this viewCHF/GBP spot
BoE raised its BoE raised its growth forecasts, brought forward timing of expect rate hike
This opens divergence withdivergence with likely ECB policy
Short EUR/GBP or CHF/GBP tCHF/GBP to express this view
Source: Bloomberg, Standard CharteredAs of 21 November 2013
We are neutral GBP in the medium term
Bullish on CNY
Rising FX reserves highlight appreciation pressureChina foreign exchange reserves
China likely to China likely to maintain stable CNY amidst policy reform, Renminbi
3
3.5
internationalisation
Rising FX reserves highlight continued
2.5
3
Trilli
on
highlight continued appreciation pressures
1.5
2
J 09 S 09 M 10 J 11 S 11 M 12 J 13 S
Source: Bloomberg, Standard CharteredAs of 24 October 2013
Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-
CNY remains our preferred regional currency
JPY likely to weaken long-term
Short market positioning, though, remains a riskJPY non-commerical future positions
BoJ’s inflation goal100 BoJ s inflation goal means quantitative easing likely to stay in place
0
50
100
000)
This is JPY-bearish long-term
-100
-50
0
. of c
ontra
cts (
'
Very short market positioning continues to pose a i k
-200
-150
N 05 N 07 N 09 N 11 N
No
risk
Source: Bloomberg, Standard CharteredAs of 24 October 2013
Nov-05 Nov-07 Nov-09 Nov-11 Nov-
Bearish on JPY, but risk of interim rebound exists
Fed delay a temporary reprieve for Asian FX
Weak current account balances to weigh on currenciesADXY index vs. Current account % of GDP – Weighted according to components of the ADXY Index Delay in Fed p
tapering likely only a temporary positive for Asian currencies115
120
6
7
External imbalances will still need to be addressed105
110
4
5
Index
% o
f GDP
Risk of renewed weakness once Fed tapering approaches95
100
2
3
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 p g pp
Source: Bloomberg, Standard CharteredAs of 21 November 2013
Current Account % of GDP - ADXY weighted ADXY Index (RHS)
We remain bearish on Asia ex-Japan currencies
Long-term bearish on AUD
Use any rebounds to reduce exposureAUD vs. RBA Commodity Price Index
Short-term AUD-1.1120
positive factors largely played out:- USD weakness- Short market positioning0.9
1
1.1
90
100
110
120
D - Pricing out of rate cut expectations
Long-term the currency0.7
0.8
60
70
80
AUD-
USD
Inde
x
Long term the currency remains expensive
Strong USD, narrowing i ld k
0.5
0.6
30
40
50
Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12yield gap, weak commodity prices likely to work against AUDSource: Bloomberg, Standard Chartered
As of 21 November 2013
RBA Commodity Index (LHS) AUD-USD
We remain bearish on AUD
H2 outlookAlternative Strategies: A great
alternativealternative
Favour Equity Long/Short strategies
L/S Strategies offer low volatility equities exposure
Equity long/shortSharpe ratios, HFRX Equity Long/Short Index vs. MSCI AC World
Equity long/short strategies retain high correlation with equities
0.484
0 4
0.5
0.6
o
However, volatility is lower
0.2
0.3
0.4
Shar
pe R
ati
Suitable for investors wanting to build in some downside insurance
0.003 0.0
0.1
1994 - 2013
Source: Credit Suisse, MSCI, Bloomberg, Standard Chartered
As of 24 October 2013
insuranceCredit Suisse Equity Long Short MSCI World
Indices used are Credit Suisse Equity L/S, MSCI AC World, UST 10y (Rf rate)Period (Monthly 1994-date)
Favour equity long/short strategies as an alternative way of gaining equities exposure
B.R.I.D.G.E. Tweaked Broadening Global recovery • 2013 – a year of transition towards strengthening
growth and reduced uncertainty
• Growth gap between DM and EM growth expected Bto narrow
• DM tail risks receding, but increasing in EM
Receding tail‐risks
Income generation still relevant • Yield still an important aspect of any investment in l l
R
an ultra‐low interest rate environment
• Rising bond yields and higher valuations mean asset selection is increasingly important for income focused investments
I
Diversification remains key • Maintain a balanced portfolio
• Gradually rising USD bond yields expected
Go local (bond) and global (equity) • Take profit on Asian Local Currency Bonds
D
Go local (bond) and global (equity) • Take profit on Asian Local Currency Bonds
• Preference for DM over EM equity remains
Equity offers the best value • Equities still cheap on a relative basis
G
E
54
• Europe is our favoured equity market, followed by the US
E
Source: Standard Chartered
Investment Advisory & Strategy
List of Investment Strategy Market Commentary (Private Bank)
Global Market Outlook
Publication that captures the house view of key asset classes i d b th Gl b l I t t
Weekly Market View
Update on recent developments and the key things to look out for
issued by the Global Investment Council. Release: Monthly
y gin the coming week. Release: Weekly
Market Watch
Commentary issued during periods of elevated market volatility
Global Market Outlook presentation
Captures the key rationale of the of elevated market volatility.
Release: Ad hoc
Captures the key rationale of the latest Global Investment Council (GIC) view and tactical asset allocation (short and long term). Release: Monthly
Investment Advisory & Strategy
List of Investment Strategy Market Commentary (Priority)
FX Strategy Weekly Market View
Weekly update on the currency market outlook. It looks at both fundamentals developments as well as technical analysis. Release: Weekly
Update on recent developments and the key things to look out for in the coming week. Release: Weekly
Market Watch
Commentary issued during periods of elevated market volatility
Global Market Outlook
Publication that captures the house view of key asset classes issued by the Global Investment Council. of elevated market volatility.
Release: Ad hoc
Release: Monthly
DisclaimerThis document is not research material and it has not been prepared in accordance with legal requirements designed to promote the independence of investment
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THIS IS NOT A RESEARCH REPORT AND HAS NOT BEEN PRODUCED BY A RESEARCH UNIT.
Global Market OutlookGlobal Market OutlookAppendix
Asset Class 12M Views Key Reasons
Asset Allocation Road Map
Bonds: Investment Grade
We are Underweight G3 sovereign bonds and Neutral corporate IG bonds. We expect US Treasury yields to continue rising on a 12m horizon as the tapering conversation returns to the fore. IG corporate credit spreads are now a little tighter than their long-term historical average, but we continue to see a little more value here relative to Treasuries. We continue to believe USD-denominated bond portfolios should maintain a short maturity profile on a 12 month horizon.
Bonds: We remain Overweight Developed market HY as we believe it offers the best risk/reward trade-off relative to the rest of the corporate credit
universe. Continued low rates, still-low default rates and loose lending conditions are supportive factors, not only for US but also for European
U
OHigh Yield HY. Asian and EM HY also appear to be offering a little more value relative to US HY, but we remain concerned about the credit quality backdrop, which is less attractive than the US, and thus expect relative underperformance to continue.
Equities: US
The US housing market continues to show an improving trend which has a significant impact on consumer sentiment via the wealth effect. We consider the US to be in the mid-phase of the business cycle which usually sees Consumer Discretionary, Financials and Technology sectors perform best.
While the market is trading at median valuations, earnings growth is still expected to come in at high single digits and may accelerate if economic growth is better than expected.
O
O
Equities: Europe
Economic data is improving both in the core and periphery countries. We believe moving from recession to even sluggish growth is a positive backdrop for European equities.
Parts of the market offer significant value as well as yield and it remains a very good ‘stock pickers’ market. We expect the market to post positive returns over the coming 12 months.
Equities:
With the BoJ’s clear mandate to achieve 2% inflation and the rapid upward revision of earnings expectations, we are Neutral Japan from a USD allocation standpoint. While the weaker yen will benefit the exporters, the additional liquidity will also feed into the housing market as well as
O
Equities: Japan
equities in general which is likely to have a positive wealth effect. The authorities are now moving onto the hard work of micro policy reforms. The market has recently broken through key resistance and we are looking for further upside.
Equities: Asia ex-Japan
We are Underweight Asia ex-Japan on concerns of slower growth and weaker Asian currencies. Under this backdrop, parts of Asia including Indonesia, India and Thailand may be more vulnerable to fund outflows. In the case of China (N), valuations are cheap, but this by itself is not sufficient to drive outperformance. Growth outlook though, appears to be stabilising, but not attractive to override our preference for Developed markets.
N
U Asia-ex Japan equities still expected to generate positive returns on a 12m view.
Equities: Other EM
Emerging markets have underperformed ytd, the recent strong bounce notwithstanding, and we continue to have a preference for the Developed markets.
Given the fragility in the market, we expect investors to rotate into ‘defensive cyclicals’ such as Technology before they go into the more cyclical higher risk markets, such as EM. These areas are, however, increasingly offering excellent longer term value.
We are turning Neutral commodities (from underweight earlier). An extended period of weakness now suggests increasingly limited downside,
U
NCommodities though we continue to see very little reason to be optimistic on prices. We remain Underweight Gold and continued tapering concerns are negative for the metal. We are also entering a seasonally weak period for oil.
Alternatives
We remain Overweight Alternative Strategies, based on our view that the asset class offers exposure to our preferred asset classes, but with the possibility of lower volatility. A diversified approach offers attractive exposure to the asset class, but given our strong preference for equities, we favour equity long/short as an alternative way of gaining equity exposure.O
Source: Standard Chartered
N
Over Weight NeutralUnder WeightO U NU NO
Country Equity Insight SummaryCountry Relative Rank Rationalea
12M
Korea South Korea is well-leveraged to improvements in the developed markets and China. Exports have turnedaround led by a recovery in US and EU While a stronger Won may represent a potential headwinds foraround, led by a recovery in US and EU. While a stronger Won may represent a potential headwinds forexports, the impact so far has been muted, reflecting the resiliency of the sector. Consumption, whilelackluster, would likely be less a drag on growth going forward with house prices imparting a positive wealtheffect. Valuations look cheap on the back of improving earnings revisions and growth in Developed markets.
Technicals (3-6m): A move above 2012 top would bring the all time high back in focus, decline below 1920will likely downside to the index. Support at 1920 and resistance at 2160.
OW
Hong Kong While the market is well-leveraged to a growth recovery in China, eventual higher long term interest ratessuggest potential headwinds particularly for property developers, which account for over 30% of the market.We prefer to be selective in HK, preferring consumer discretionary and banking sectors.
Technicals (3-6m): Expect to target 2010 highs above 23500 with momentum picking up. Support at 20020and resistance at 24860.
Taiwan Consumer deleveraging is well advanced and increased economic linkages through ECFA with China should
N
Taiwan Consumer deleveraging is well advanced and increased economic linkages through ECFA with China shouldbenefit the banking sector. A synchronised recovery of global demand will likely be constructive for Taiwan’sexport and tech sectors. We have a preference for financials and technology sectors.
Technicals (3-6m): Chart patterns appear to support further recovery. Support at 7565 and resistance at9015.
China Recent data suggests that growth has stabilised and earnings revisions have trended higher. The ThirdPl ti i i ith li k ti i t f t t l f hi h ld
N
Plenum meeting was unsurprising, with policymakers continuing to focus on structural reforms, which wouldbe positive longer term. In the short-term though, some of these initiatives may negatively impact the state-own sectors which account for the bulk of the market. Valuations are cheap, but we prefer a more selectiveapproach to gaining exposure to China
Technicals (3-6m): Expect index to revisit the upper band of broad sideways trend channel, with a moveabove 10800 further reinforcing the constructive optimism. Support at 9920 and resistance at 12750.
N
India Recent measures taken by the central bank have helped to stabilise the rupee and alleviate concerns overfund outflows. Longer term, structural reforms are needed to address current account vulnerabilities. We seevalue in the market, but it is likely to remain volatile in the short-term.
Technicals (3-6m): Market should see further upside but short term signals getting overbought. Support at18925 and resistance at 22500.
Source: Standard Chartered
N
Over Weight NeutralUnder WeightO U NO U N
Country Equity Insight SummaryCountry Relative Rank Rationale
12M
Singapore Valuations are fair, with the index trading close to the historical mean on a price-earnings basis and a dividendyield of c.3%. GDP growth estimates have been revised up recently, on the back of strong exports andmanufacturing growth. Singapore, with its export-oriented economy, is well leveraged to growth in the Developedmarkets as well as the Asia region. Expectations of higher interest rates though, may present headwinds forproperty prices as well as the REIT sector, which we remain cautious on.
Technicals (3-6m): Medium term uptrend remains intact however momentum is deteriorating. Support at 3000and resistance at 3340.
Thailand Macro data has weakened on the back of funds outflows and a slowdown in consumption/investments. Weremain vigilant on the Thai baht for potential signs of weakening given their vulnerable current account surplus
N
N remain vigilant on the Thai baht for potential signs of weakening, given their vulnerable current account surplusposition. There are increased signs of political flaring, which may increase investors’ risk perception of investingin Thailand equity market.
Technicals (3-6m): Risk of pullback has risen since the strong rally from 2008 lows. Support at 1330 andresistance at 1530.
Malaysia We expect investment growth and domestic demand to pick up pace under the Economic Transformation Plan.P d fi l f d f th t ’ b id t i l t iti A th ASEAN
N
Proposed fiscal reforms and reforms on the country’s subsidy system is a long term positive. Among the ASEANcountries, Malaysia is one of the most defensive market, with a comfortable current account surplus and domesticgrowth drivers, that help mitigate some weakness within the region.
Technicals (3-6m): Upward Momentum remains firm. However, technicals looks stretched. Support at 1680 andresistance at 1960.
Indonesia We are UW on concerns over funds outflows re-emerging as the market returns to Fed taper expectations early
OW
g g p p ynext year. While we are positive on structural growth longer term, recent policy rate hikes as well fuel price hikespose risks to the growth outlook. We expect potential further downside to earnings forecasts.
Technicals (3-6m): Charts appear stretched with momentum turning down. Support at 3850 and resistance at4800.
Brazil Brazil is a levered play on the China growth story. The Brazilian economy remains weak and earnings revisions still negate We remain Neutral within the Other EM UW
UW
N still negate. We remain Neutral within the Other EM UW.
Russia Look to do as a trade rather than as a longer term hold as can be very volatile. Market offers good exposure to oil.
61
N
N
Source: Standard Chartered