Europe Strategy Q1 2019
Jeffrey Sacks Head - EMEA Investment Strategy +44 207 508 7325 [email protected]
Shan Gnanendran, CFA Vice President +44 207 508 0458 [email protected]
INVESTMENT PRODUCTS: NOT FDIC INSURED • NOT CDIC INSURED • NOT GOVERNMENT INSURED • NO BANK GUARANTEE • MAY LOSE VALUE Table of Contents Europe ex-UK European parliamentary elections 3 ECB, trade 4 Economy 7 Equities 12
Investment Grade outlook 19 High Yield outlook 22
Italy, Germany, France, Switzerland 25 Turkey, Greece 36 Sectors in focus: Banks, Autos 38
United Kingdom Sterling 42 Polls, economy, Bank of England 43 Equities 46 European Parliamentary Elections in May 2019
Anti-EU parties expected to gain over 30% of the votes in the 2019 vote
Party ideology and % of seat breakdown
2014 % of 2019 % of Ideology Political Party seats seats forecast Party share of votes (%) European People's Party Group Pro-EU 29% 26% (EPP) 30%
Progressive Alliance of 2014 % of seats 2019 % of seats Pro- EU Socialists and Democrats 25% 19% 25% (S&D)
Alliance of Liberals and 20% Pro-EU Democrats for Europe Group 9% 14% (ADLE) 15% Europe of Nations and Freedom Anti-EU 9% 9% (ENL) European Conservatives and Proportion of seats 10% Anti-EU 7% 9% Reformists (ECR) European United Left-Nordic 5% Anti-EU 7% 7% Green Left (GUE/NG:) Greens - European Free Pro- EU 7% 6% 0% Alliance (Greens/EFA) EPP S&D ADLE ENL ECR GUE/NGL Greens/EFA EFDD Europe of Freedom and Direct Anti-EU 6% 5% Democracy (EFDD)
- Other 1% 5%
Source: Pollofpolls.eu as of February 8th 2019.
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our 3 expectations due to a variety of economic, market and other factors. ECB QE ends though reinvestment ongoing
Reinvestments will continue beyond the first rate hike
The ECB is no longer expanding balance sheet… Markets not pricing in rate hikes until 2020
6 140 122 120 114 5 106 97 Estimated 100 ECB rate expectations 90 4 81 80 73 66 3 58 60 51
Basis Points Basis 43 37
Trillions (USD) Trillions 2 40 30 23 18 ECB Balance Sheet (in USD) 20 13 9 1 Fed Balance Sheet (in USD) 1 2 5 0 BoJ Balance Sheet (in USD)
0
Jun-19 Jun-20 Jun-21 Jun-22 Jun-23
Mar-19 Mar-20 Mar-21 Mar-22 Mar-23
Sep-19 Dec-19 Sep-20 Dec-20 Dec-21 Sep-22 Dec-22 Sep-23 Dec-23 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 Sep-21
Source: Haver as of January 11, 2019. All forecasts are expressions of opinion and are subject to Source: Bloomberg, Citi as of January 11, 2019 change without notice and are not intended to be a guarantee of future events. For illustrative purposes only.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the 4 performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real results may vary. Increased global trade concerns
US and China are the largest (Ex-Europe) trade partners for the UK and Europe. Global trade concerns could impact regional exports.
UK’s largest trading partners globally EU’s largest trading partners globally 160 1,800 13.9 % of Total Global 12.5 % of Total Global Total Trade ($bn) Total Trade ($bn) 140 1,600 Trade 10.6 Trade 120 Trade Surplus ($bn) 1,400 Trade Surplus ($bn) 100 7.6 7.5 1,200 80 6.3 1,000 4.8 6.6 6.3 6.3 60 4.1 800 5.8 3.4 3.2 3.0 4.8 4.8 4.7 40 2.6 2.1 600 3.5 3.0 20 400 2.5 2.3 0 200
-20 UK UK Trade by Country($ billions)
EU EU Trade by Country($ billions) 0 -40 -200 -60 -400
Source: Bloomberg, Q3 2018 Source: Bloomberg, Q3 2018
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 5 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Potential car tariffs are a threat
The US is the largest export market for EU motor vehicles, while only ranks fourth for imports
EU Exports EU Imports
Other, S.Africa, 13% Japan, 7% 22% Other, US, 29% 32% Mexico, 10%
S.Korea, US, 14% Turkey, 5% China, S.Korea, 19% Turkey, 17% 5% 15% Swiss, Japan, 6% 6%
Source: Eurostat as of 2017 Source: Eurostat as of 2017
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 6 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Largest downside surprises in economic data globally
Soft data particularly weak, suggesting particularly weak sentiment
Citi Economic Surprises - Global Indices Citi Economic Surprises – hard v soft
150 200 US Global Europe EM China
100 150 100 50 50
0 0
-50 -50
-100 Economic Surprise Index -100
Citi Economic Surprise Indices Surprise Economic Citi -150 Soft data surprises Hard data surprises -150 -200 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '14 '15 '16 '17 '18 '19
Source: Bloomberg, February 15th 2019 Source: Bloomberg, February 15th 2019 Citi Economic Surprise Indices (CESI) measures data surprises relative to market expectations. A Citi Economic Surprise Indices (CESI) measures data surprises relative to market expectations. A positive positive reading means data has been better than expected and vice versa. reading means data has been better than expected and vice versa. Hard data refers to quantitative economic data points (i.e. wage growth), while soft data refers to data points such as business confidence and sentiment based surveys.
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 7 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Confidence indicators weakened in 2018
Fading confidence seen across all sectors
Euro area confidence indicators
20 120
15 115 10 110 5 0 105 -5 100
-10 95 -15 Consumer (Left)
Sector Sector Confidence Indicator 90
-20 Services (Left) Economic Confidence Indicator Industrial (Left) 85 -25 Economic (Right) -30 80 '12 '13 '14 '15 '16 '17 '18 '19
Source: Bloomberg as of January 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 8 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. PMI’s have continued declining since mid-2018
France and Italy are now within contraction territory (sub-50)
Euro area composite PMI’s
61 French PMI German PMI 59 Italian PMI Spanish PMI 57
55
53
Composite PMI Composite PMI Level 51
49
47 '15 '16 '17 '18
Source: Bloomberg, February 2019 Purchasing Managers Index (PMI) is indicative of the economic health of the manufacturing sector, driven by new orders, inventory levels, production, supplier deliveries, and the employment backdrop.
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 9 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Industrial production at lowest level for a decade
0.46 correlation between Euro IP and equity y/y performance, using data over the past 25 years
Euro-area industrial production
20 60%
15 40%
10
20% 5
0 0%
-5 -20%
-10
Industrial Industrial Production YoY (%) Europe Europe UK ex equities YoY (%) -40% -15 Eurozone IP YoY (%) Europe ex UK equities YoY (%) -20 -60% '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Source: Bloomberg, February 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 10 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Fiscal loosening likely to support Euro-area
Germany and Italy have announced significant fiscal easing plans
Fiscal deficits expected to rise
0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 2016-2017 Average 2018 2019 -1.0
Structural Balance Change (% GDP) -1.2 EA Italy Germany Spain UK France US China
Source: Bloomberg, February 15th 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 11 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Yield gap favours equities vs fixed income
European dividend yields 2.5% greater than European IG bond yields, a multi-year high
European dividend vs corporate bond yields
9
8 Dividend Yield (%) 7 IG Yield (%)
6
5
4 Yield (%) 3
2
1
0 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Source: Bloomberg, February 2019 Eurostoxx 50 Dividend Yield: Average Dividend Yield on EuroStoxx 50 Index - covers 50 companies from 12 countries in Europe ex UK. Euro IG Corporate Bond Yield – Average yield across Eurozone Investment Grade corporate bonds. IG: Investment Grade, HY: High Yield Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 12 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. European equity valuations
Cyclically Priced as of close on Free Market Earnings per Share (year-on- Price / Return on Dividend Adjusted Price / Earnings 18 Feb 19 Capitalisation year %) Book Equity Yield (%) Price to Earnings US$bn 18E 19E 20E 18E 19E 20E 19E 19E 19E 10Yr Europe 8,384 14.2 13.2 12.1 7.4 7.2 8.9 1.6 12.3 4.1 20.0 United Kingdom 2,292 12.9 12.6 11.6 11.8 2.9 8.8 1.6 12.9 4.9 17.3 Europe ex UK 6,092 14.7 13.5 12.4 5.6 9.0 9.0 1.6 12.0 3.7 21.4 France 1,484 14.4 13.3 12.1 7.1 8.0 9.7 1.5 11.0 3.7 21.5 Switzerland 1,164 17.9 16.1 14.8 28.7 11.2 8.7 2.5 15.6 3.4 26.4 Germany 1,160 12.7 11.8 10.9 -5.1 7.9 8.7 1.4 11.6 3.7 18.4 Netherlands 473 15.9 15.3 13.6 4.6 4.2 12.1 2.0 13.4 3.1 28.0 Spain 407 12.2 11.3 10.5 -1.4 7.8 7.4 1.1 10.2 4.8 14.1 Sweden 365 18.8 14.3 14.3 -6.3 31.5 0.9 2.1 14.4 4.1 22.3 Italy 305 10.7 10.0 9.2 17.1 6.5 8.7 1.0 10.1 4.9 17.8 Portugal 21 17.5 15.2 13.7 1.4 15.1 11.4 1.7 11.3 4.8 13.0 South Africa 309 16.2 13.5 11.8 17.3 19.3 14.9 1.8 13.5 3.5 23.0 Russia 196 5.7 5.6 5.3 53.4 -3.1 5.7 0.8 13.8 7.0 10.1 Turkey 35 7.2 7.3 5.7 16.4 -0.7 28.8 1.0 13.5 4.9 15.4 Greece 11 14.9 12.5 10.4 12.3 18.6 20.5 0.8 6.7 4.9 2.5
Source: Source: Citi Research, Worldscope, MSCI, Factset, 18th February 2019 *Note: The above data are compiled based on companies in MSCI AC World Index. The market capitalization for regions, markets and sectors are free-float adjusted. P/E, EPS Growth, P/B, Dividend Yield and ROE are aggregated from Factset consensus estimates (calendarized to December year end) with current prices. CAPE is calculated by current price divided by 10-year average EPS based on MSCI index-level data.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the 13 performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real results may vary. Moderating growth underpriced by equities
Equity prices have oversold versus economic data
European Coincident Indicators vs Eurozone Equities Y/Y%
1.5 60
1 40
0.5 20
0 0 EuroCOIN
-0.5 -20 StoxxEurope YoY % Change EuroCOIN Growth Indicator -1 Stoxx Europe (YoY %) -40
-1.5 -60 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19
Source: Bloomberg, January 2019 EuroCOIN Growth Indicator: Tracks European coincident indicators, which are economic variables which tend to change at approximately the same time as the overall economy. Stoxx Europe is a broad yet liquid subset of the STOXX Europe 600 Index. With a variable number of components, the index represents large, mid and small capitalization companies of 12 Eurozone countries. Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 14 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Moderating earnings growth to 8%
Share prices and earnings have held a high 0.77 correlation since 2015
Prices have fallen more than justified by earnings 80 50 60
40 30
20 10
0 -10
-20
EPS Change EPSChange (y/y%) Price Change Price Change (y/y %) -30 -40 EPS change (y/y %) - left Price Change (y/y %) - right -60 -50 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
Source: Bloomberg, February 15th 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 15 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. European ex-UK valuation discount to US
48% discount on a P/B basis, 19% discount on a CAPE basis
Europe v US historical Price to Book Europe vs US P/E historical discount
1 1.2
0.95 Europe v US Relative CAPE 1.1 Equal valuation 0.9 Long term average 0.85 1 0.8
0.75 0.9
0.7
Relative Relative Valuation (x) 0.8 0.65
0.6
0.7 Europe v US P/B relative valuation (x) 0.55
0.5 0.6 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '03 '05 '07 '09 '11 '13 '15 '17 '19
Source: Bloomberg, February 15th 2019 Source: Bloomberg, February 15th 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 16 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. European mid-caps less exposed to trade
Mid-caps have outperformed over the last five years, with recent outperformance has been driven by lower auto exposure. Valuations remain compelling relative to large caps.
Mid-caps have outperformed over the last 5-years Mid-caps trade below 5-yr average
190 22 Forward 12m P/E 180 21 Mid caps Average 170 20 Large caps 160 19
150 18
140 17
130 16 Forward 12m P/E 120 15
110 14 Rebased Rebased to 100 01/01/2013 on 100 13
90 12 '13 '14 '15 '16 '17 '18 '19 '13 '14 '15 '16 '17 '18 '19
Source: Bloomberg as of February 21st 2019 Source: Bloomberg as of February 21st 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 17 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Equity volatility reflective of HY
European equities show a close correlation with European FI high yield spreads
Equity volatility moves in tandem with Euro high yield spreads 40 6 European volatility index (left) Euro HY Spread (right) 35 5.5
5 30 4.5 25 4 20 3.5 15
3
EuropeanHY Spreads(bps) V2X V2X (EuropeanIndex volatility) 10 2.5
5 2 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
Source: Bloomberg, February 15th 2019 V2X Index: VSTOXX Index is based on a new methodology jointly developed by Deutsche Borse and Goldman Sachs to measure volatility in the Eurozone. VSTOXX is based on the EURO STOXX 50 Index options traded on Eurex. It measures implied volatility on options with a rolling 30 day expiry.
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 18 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Investment Grade Corporates Sector views Arrows imply our expectations of sector performance versus the Bloomberg Barclays Euro Aggregate Corporate Bond Index Up arrow = outperform, Sideways arrow = market perform, Down arrow = underperform
Outperform Neutral Underperform
Financials – Banks Basic Industries Capital Goods Aerospace & Defense, Building Materials, Banks Chemicals, Metals & Mining, Pulp-Paper Machinery, Diversified Manufacturing
Financials –Non-banks Brokerage, finance companies, insurance, Communications Utilities REITS, other financials Cable-Satellite, Media, Wireless, Wirelines Electric, Natural Gas, Other Utility
Consumer – Non-cyclical Transportation Consumer Products, Food-Beverage, Consumer - Cyclical Airlines, Transportation Services Healthcare, Pharmaceuticals, Automotive, Services, Construction, Supermarkets, Tobacco Leisure, Lodging, Restaurants, Retailers Energy Independent, Integrated, Midstream, Oil Fields, Refining
Source: Citi Private Bank, Bloomberg Barclays Euro Aggregate Corporate Bond Index as of February 2019. The expressions of opinion are not intended to be a forecast of future events or a guarantee of future results. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative 19 purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary. IG Corporates likely to remain under pressure
Investor outflows expecting further spread widening as ECB QE ends
Investors had been anticipating the end of ECB QE for awhile Spreads have widened steadily for 12 months
1,000 Euro IG corp spread (current: 161bp) 500 0 Long-term average (130bp) 450 STD+1 -1,000 400 STD-1 -2,000 350 -3,000 300 -4,000 250 -5,000
Millions ($) Millions 200 Spread Spread (bp) -6,000 150 -7,000 Euro IG corporate fund flows 100 -8,000 50 -9,000 0 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 '00 '03 '06 '09 '12 '15 '18
Source: EPFR as of January 11, 2019 Source: Bloomberg Barclays Indices as of January 11, 2019 STD: Standard Deviation: A measure that is used to quantify the amount of variation or dispersion of a set of data values.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the 20 performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real results may vary. IG Corporates have unfavourable technicals
Net purchases by the ECB have fallen to zero, though reinvestments will continue
The ECB has bought 70% of non-financial IG growth Reinvestments small relative to size of ECB holdings
300 ECB estimated CSPP 1400 redemption profile 250 ECB CSPP cumulative purchases 1200 1,097 ECB non-financial bond market growth 200 1000 938 834 769 150 800 592 600 529 100 (€) Millions 447
Millions (€) Millions 400 273 50 205 186 200 120 0 0 0
-50
Jul-19
Apr-19 Oct-19
Jun-19 Jan-19
Feb-19 Mar-19
Dec-19 Nov-19
Aug-19 Sep-19
Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18 May-19
Source: ECB, FTSE Yield Book Indices as of January 11, 2019 Source: ECB as of January 11, 2019 CSPP: Corporate Sector Purchase Programme
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the 21 performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real results may vary. High Yield Corporates Sector views
Arrows imply our expectations of sector performance versus the Bloomberg Barclays Euro High Yield Corporate Bond Index Up arrow = outperform, Sideways arrow = market perform, Down arrow = underperform
Outperform Neutral Underperform
Financials – banks Consumer - Cyclical Capital Goods Aerospace & Defense, Building Materials, Banking Automotive, Services, Construction, Leisure, Lodging, Restaurants, Retailers Machinery, Diversified Manufacturing
Financials – non-banks Consumer – Non-cyclical Brokerage, Finance companies, Insurance, Consumer Products, Food-Beverage, Utilities REITs Healthcare, Pharmaceuticals, Electric, Natural Gas Supermarkets, Tobacco
Energy Basic Industries Independent, Integrated, Midstream, Chemicals, Metals & Mining, Pulp-Paper Oil Fields, Refining
Communications Cable-Satellite, Media, Wireless, Wirelines
Source: Citi Private Bank, Bloomberg Barclays Euro High Yield Bond Index as of February 2019. The expressions of opinion are not intended to be a forecast of future events or a guarantee of future results. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only 22 and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary. HY Corporates exposed to worsening macro outlook
Less impacted by the ending of ECB net purchases, especially in lower quality bonds
Lower quality HY suffered during the end of 2018… …leaving valuations in B-rated issuers relatively attractive
2 385 Euro HY B-rated spread less BB-rated 1 335 spread 0 285 -1 235 -2 185
Total (%) return Total -3 135
-4 points) (basis Spread Euro HY total return (BB-rated) Euro HY total return (B-rated) -5 85
-6 35 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 2014 2015 2016 2017 2018 2019
Source: Bloomberg Barclay’s Indices as of January 11, 2019 Source: Bloomberg Barclay’s Indices as of January 11, 2019
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the 23 performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real results may vary. HY Corporates have low default rates, but prefer bank loans Yields on Euro bank loans are higher than high quality HY bonds
Euro HY default rates remain below 2.0% Euro HY bank loans have outperformed HY bonds
16 3.0
14 2.0 European HY bond default rate 12 1.0 10 0.0 8 -1.0
6 Euro HY bonds Default Rate (%) Rate Default Total (%) Return Total -2.0 4 Euro bank loans -3.0 2
0 -4.0 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19
Source: S&P as of January 11, 2019 Source: Bloomberg Barclay’s Indices, S&P as of January 11, 2019
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the 24 performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real results may vary. Italy – the Achilles heel of Europe
Fallen into recession as quarterly growth has fallen below 0%
Real GDP growth rebased in 2007 Italian economy slowing 2 0.6 1.5
0.4 1 1 0.2 0.5 0 0 0 -0.2 -1 -0.5
-0.4
year year growth (%)
quarter quarter growth (%) -
Q/Q GDP Growth (right) - -1
on on
- -2 -0.6 Y/Y GDP Growth (left) - -1.5 Italy Coincident Indicators
Year -0.8 -3 Coincident Indicator Index
Quarter Europe Coincident Indicators -1 -2
-4 -1.2 -2.5 '11 '12 '13 '14 '15 '16 '17 '18 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Source: Bloomberg, February 18th 2019 Source: Bloomberg, February 18th 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 25 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Italy – the Achilles heel of Europe
Slowing growth and elevated debt levels make Italy a medium term risk for the Euro-area
PMI’s have fallen into contraction territory Elevated debt at over 130% of GDP
60 Services Manufacturing 250 58 Construction Composite Expansion/Contraction 56 200
54 150 52
50 100 PMI PMI Reading
48 GDP G20Debt / (%) 50 46
44 0
Source: Bloomberg, February 15th 2019 Source: Bloomberg, February 15th 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 26 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Italy – the Achilles heel of Europe
Fitch rating review on February 22nd is a risk factor, with possible downgrading not discounted
Sovereign spreads vulnerable to negative rating agency action Divergence with German Bunds driving equities
3.60 10,000 3.5 3.40 3.20 12,000 Italian equities (left - inverse) 3 3.00 Italian 10-year yield (%) 14,000 BTP-Bund Spread 2.80 2.60 2.5 16,000 2.40
2.20 year spread (%)
18,000 2 - year year yield (%) - 2.00 1.80 20,000 1.5 1.60
Italian Italian 10 1.40 22,000 1.20 Italian equity index (inverse) 1
24,000 BTP Bund to 10 1.00 0.80 26,000 0.5
Source: Bloomberg, February 15th 2019 Source: Bloomberg, February 15th 2019 BTP-Bund spread is the yield differential between 10-year Italian and German sovereign bonds.
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 27 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Germany – exposed to external slowdown
Export expectations weakened slightly in the face of growing trade concerns
Expectations of future economic growth have weakened Export expectations also weaker due to trade concerns
120 40 100 30 80 20 60
40 10
20 0
0 -10 -20
Ifo Ifo export expectations -20 -40 ZEW Expectation of Economic Growth IFO German Manufacturing ZEW Assessment of Current Situation -30 Export Expectations -60
-80 -40 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 Source: Bloomberg, February 18th 2019 Source: Bloomberg, February 18th 2019 ZEW: Centre for European Economic Research is a non-profit and independent institute, which runs surveys on expectations of future economic growth and assessments on the current situation.
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 28 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Germany - Chinese growth impact
China embarking on monetary and fiscal easing may be supportive for Germany
China tends to lead German data with a 6-month lag Looser Chinese monetary conditions may be supportive
16 Li Keqiang Index (left) 40 160 180 China Monetary Conditions Index (LHS) Ifo Export Expectations (right) 14 MSCI Germany (RHS) Ifo Monthly Orders (right) 30 140 160 12 20 120 140 10
8 10 100 120
6 MSCI EMU
China MCI Index Y/Y Y/Y change (%) Li Li Keqiang Index 0 80 100 4 -10 60 80 2
0 -20 40 60 '11 '12 '13 '14 '15 '16 '17 '18 '19 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: Bloomberg, February 18th 2019 Source: Bloomberg, February 18th 2019 Li Keqiang Index: Index which tracks Chinese economic growth through bank lending, rail freight and China Monetary Conditions Index: An index which tracks China’s monetary stance, covering the real electricity consumption. interest rate, real effective exchange rate and total loan growth. Ifo Export Expectations: Survey data tracking current and future expectations in the German export sector . The MSCI China Index is a free-float weighted equity index. It was developed with a base value of Ifo Monthly Orders: Survey data tracking monthly orders in the German manufacturing sector. 100 as of December 31, 1992.
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 29 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. German car industry faces tariff threat
Economic impact would be significant, with Germany accounting for 55% of total EU car exports in 2017
More German cars produced in US than exported to the US Vehicles represent 18% of total exports
German cars produced in the US Exported from Germany to US Iron / Steel 1.8% 900 Mineral Fuels (inc oil) 1.9% 800 Articles of Iron/Steel 2.1% 700 Aircraft / Spacecraft 2.9% 600 Plastics 4.4% 500 Optical, technical, medical 5.0% 400 Pharmaceuticals 5.8% 300
Cars (Thousands) Cars Electrical Machinery 10.3% 200 Machinery (inc computers) 17.0% 100 Vehicles 17.8% 0 0% 4% 8% 12% 16% 20% 2014 2015 2016 2017 % of Total German Exports
Source: German auto-industry lobby VDA, 2017 Source: Worldstopexports, Bloomberg, December 2018
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 30 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Spain – political risks growing with 28th April snap election
Expecting centre-right coalition win, which would be business friendly, but Catalonia tensions likely to mount
Spanish GDP growth Falling unemployment
6 28
4 26 24 2 22 20
0 18
16 -2 Spanish GDP growth (%) GDP GDP Growth (%) 14 Citi Forecasts 12 -4 Spanish Unemployment (%) 10
-6 8 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17 '20 '23 '83 '87 '91 '95 '99 '03 '07 '11 '15 '19
Source: Bloomberg, December 2018 Source: Bloomberg, December 2018
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 31 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. France – strong EPS and high yields led to outperformance
But a lack of progress in Macron’s reform agenda and fading economic momentum
French equity and FI yield gap French equities have outperformed since the beginning of 2018
5 110 4 105 3 2 100 1
0 95 -1
Yield Yield gap (%) -2 90 -3 France Europe-ex-UK -4 85 Germany -5 80 -6 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 '95 '98 '01 '04 '07 '10 '13 '16 '19
Source: Bloomberg as of February 18th 2019 Source: Bloomberg as of February 18th 2019 Past performance is not indicative of future returns. Real results may vary. Past performance is not indicative of future returns. Real results may vary.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. 32 For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary. Switzerland - equity underperformance likely over
Earnings have rebounded despite the stronger Swiss Franc
Prices have decoupled from earnings this year Swiss Franc strength 2 10000 500
1.8 9500 450 1.6 9000 400 1.4 8500 1.2 350
8000 USD against CHF
Trailing Trailing 12M EPS 1 Swiss Market Index Equity Index Performance 300 USDCHF 7500 Trailing 12M EPS 0.8 Average
7000 250 0.6 '13 '14 '15 '16 '17 '18 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Source: Bloomberg as of February 18th 2019 Source: Bloomberg as of February 18th 2019 The Swiss Market Index is an index of the largest and most liquid stocks traded on the Geneva, Zurich, and Basel Stock Exchanges. The index has a base level of 1500 as of June 1988.
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 33 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Switzerland - equities generate revenue globally
Less than half of Swiss revenues are generated within Europe, with 30% from the US
Significant revenues generated from the US
N.America, 30%
Europe, 44%
CEEMEA, 3%
LatAm , 5%
Japan, 3% Australia/NZ, 1% APAC, 14%
Source: Bloomberg, October 4th 2018
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 34 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Switzerland - Economic upturn in 2018
Strong Swiss Franc not holding back economic performance
Stronger economic data PMI’s have been rising for the last 2 years
5 70 4.5 65 4 60
rolling 3 rolling 3.5 - 3 55
2.5 50
quarters 2 45
1.5 Composite PMI 40 1
Real GDP Growth GDP Growth Real (%) 0.5 35
0 30 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19
Source: Bloomberg as of February 18th 2019 Source: Bloomberg as of February 18th 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 35 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Turkey – economic pressures ongoing
Turkish CPI at 20.35% in January 2019, driven by a weaker Turkish Lira. Current account deficit at 5.6% of GDP continues to deteriorate
Turkish CPI Deteriorating current account 28 4 26 24 Inflation rate 2 22 Inflation target 20 0 18 -2 16 14 -4 12
10 -6 TUrkey TUrkey Inflation (%) 8
6 Current Account (% of GDP) -8 4 2 -10 '13 '14 '15 '16 '17 '18 '19 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Source: Bloomberg as of February 18th 2019 Source: Bloomberg as of February 18th 2019
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the 36 performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real results may vary. Greece - exited the bailout program in August 2018
Equities trading at 12.1x P/E (12m forward), EPS expected to grow over 20% y/y in both 2019 and 2020.
Greek GDP growth and 2018-2020 CR forecast Banks represent 25% of the index
8 140 6 130 120 Greek Equities 4 Greek Banks 110 2 100 0 90 -2 80 -4 70 60 -6 50 -8 Greek GDP grorwth (y/y%) Greek GDP growth (y/y%) 40 -10 Citi Research forecast (%) 30 -12 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 Greek unemployment declining Greek economic sentiment indicator
30
120 26
110 22
100 18
14 90 Unemployment Unemployment Rate (%)
10 Greek Economic Sentiment 80
6 70 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Source: Bloomberg as of February 15th 2019 Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 37 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Key sector in focus – European Banks
Current valuation levels offer compelling opportunities however needs selectivity
NPL’s are trending lower Better capitalised 20 Italy Euro area 18 Portugal Spain 16 France Germany 14 12 10 8 6 4
2 performing loans (% total loans)total (%loans performing - 0
Non 07 08 09 10 11 12 13 14 15 16 RoE’s picking up Attractive absolute and relative valuations 30 40 20 30 20 10 10 0 0 -10 -20
banks (%) banks -30 -10 -40 Return on equity (%) equity on Return -50 -20
European bank discount to USto discount bank European -60 -70 -30 '02 '04 '06 '08 '10 '12 '14 '16 '18 '02 '04 '06 '08 '10 '12 '14 '16 '18 Source: Bloomberg, October 2018. CET1: Common Equity Tier 1 ratio measures a bank's core equity capital compared with its total risk-weighted assets. NPL: Non-performing loans are loans where the borrower is not making interest payments or repaying any principal. Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 38 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Key sector in focus – European Autos
Expecting EU auto tariffs to be recommended, but suspended subject to EU taking certain measures. Stock prices discount tariffs already
Auto underperformance, hit by trade concerns Autos trade at nearly 50% discount versus broader Europe 120 18x Autos 110 16x Europe-ex-UK
100 14x
90 12x
80 10x 50% discount
Forward Forward 12M PE 8x 70 Stoxx Europe - Autos Stoxx Europe 6x
60 Daimler Performance Performance (rebased 01/01/18) Continental 4x 50 '11 '12 '13 '14 '15 '16 '17 '18 '19 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 US trade concerns driving auto-underperformance Multi-year lows on a forward PE basis
130 3.5 0.9 125 0.85 Relative SXAE to SXXE forward 12M PE (x) 120 3 0.8 115 0.75 2.5 110
0.7 yr yield (%)
105 - 2 0.65 100
US US 10 0.6 95 1.5 0.55
90 SXAE/SXXE Relative Performance (%) Relative Relative forward PE valuation Autos v Autos EUrope v relative performance US 10-year yield (%) 0.5 85 1 '13 '14 '15 '16 '17 '18 '19 0.45 '11 '12 '13 '14 '15 '16 '17 '18 Source: Bloomberg as of February 19th 2019 SXAE/SXXE: Relative European autos (SXAE) versus broader Europe (SXXE) performance. Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 39 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Euro expected to range-trade
Support from improving EU current accounts and lower EZ breakup risks
However weaker economic data and political risk (European May elections).
The market is now marginally net short Euro Euro real effective exchange rate
60% 1.6 115 % Net Open Interest EURUSD 110 40% 1.5
Euro 105 -
20% 1.4 100
95 0% 1.3
90 EURUSD -20% 1.2 85
REER Euro % of %of Net Open Interest 80 Long-term average -40% 1.1 LT Avg + 1SD Real Effective Real Effective Exchange Rate 75 LT Avg - 1SD
-60% 1 70 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Source: Bloomberg as of February 19th 2019 Source: Bloomberg as of February 19th 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 40 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Likelihood of Euro-breakup has fallen
No major European countries facing imminent calls for a Euro-area breakup
Probability of a Euro-area break up in the following 12 months 80
70
60 up up (%) - 50
40
30
20 Probability of break 10
0 '12 '13 '14 '15 '16 '17 '18 '19
Source: Sentix Indices, Bloomberg, February 15th 2019 The Sentix Euro Break-up Index reflects the probability that one of the euro area countries will leave the Euro within a horizon 12 months, based on a monthly survey amongst individual and institutional investors.
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 41 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Sterling remains cheap on a REER basis
Soft Brexit with a deal and without a general election would be supportive for Sterling
Sterling volatility likely to remain elevated ahead of March 29th deadline
The market is firmly short Sterling GBP real effective exchange rate
80% 2.3 110 % Net Open Interest REER GBP Long-term average GBPUSD 105 LT Avg + 1SD 60% 2.1
LT Avg - 1SD GBP
- 100 40% Brexit Vote 1.9 95 20% 1.7 90
0% GBPUSD 1.5 85 -20%
% Net of Open Interest 80 -40% 1.3 Real Effective Real Effective Exchange Rate 75
-60% 1.1 70 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Source: Bloomberg as of February 19th 2019 Source: Bloomberg as of February 19th 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 42 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. UK polls and business investment intentions
Formation of Independent Group causes further uncertainty in UK domestic politics
Investment intentions have recently fallen as Brexit uncertainty feeds through
Conservatives and Labour tied in the polls Investment intentions have fallen in the last six months
Conservatives (%) Labour (%) 4.0 50 Liberal Democrats (%) Other (%) 45 3.0
40 2.0 35 1.0 30 25 0.0
Percent(%) 20 -1.0 15 -2.0 10 Investment Investment Intentions Score Manufacturing 5 -3.0 Services
0 -4.0 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19
Source: YouGov, December 2018 Source: Bank of England, January 2019 Investment Intention Score: This score refers to both planned and possible expenditure over the next twelve months. It covers private sector companies’ investment intentions within the United Kingdom. Investment is defined as spending on tangible non-financial assets such as plant and machinery, vehicles, ICT (hardware and software), and new buildings. Research and development spending, training and acquisitions (or disposals) of companies are excluded.
Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past 43 performance is no guarantee of future results. Real results may vary. UK cyclical economic slowdown worsened by Brexit uncertainty
UK economy slowed to its lowest level in six years in 4Q 2018, growing only 0.2%
Falling UK GDP growth Vulnerable UK PMIs
3.5 61 Manufacturing Services 3 GDP growth (q/q) 59 Construction Composite Expansion/Contraction GDP growth (y/y) 2.5 57
2 55
1.5 53
1 PMI Index 51 GDP GDP Growth (%)
0.5 49
0 47
-0.5 45 '10 '11 '12 '13 '14 '15 '16 '17 '18 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
Source: Bloomberg, February 19th 2019 Source: Bloomberg, February 19th 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 44 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Bank of England not expected to raise rates again soon
BoE Governor Carney highlighted the rising economic need for clarity around Brexit
Average weekly earnings and unemployment UK CPI v wage growth
6 3 4 UK Average Weekly Earnings 3M Avg YoY (left) 3.5 5 UK Unemployment Rate (%) (right inverted) 4 3
4 5 2.5
2 3 6 % % 1.5 UK CPI % 2 7 Yearon year (%) 1 UK Wage Growth % 0.5 1 8 0 0 9 -0.5 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
Source: Bloomberg, February 19th 2019 Source: Bloomberg, February 19th 2019
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future 45 events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. UK equities supported by EPS growth and dividend yields
UK earnings have rebounded following GBP depreciation post the UK Referendum
Sterling versus FTSE 100 Rebound in UK earnings supported by weak GBP
110 8000 8000 600 105 7500 100 7000 7000 500 95 6500 6000 400 90 6000
85 5500 5000 300
80 5000 FTSE FTSE 100
FTSE100 Index 4000 200 Trade weighted GBP
75 4500 Trailing 12M EPS 70 4000 3000 FTSE 100 100 65 Trade weighted GBP (left) FTSE 100 (right) 3500 Trailing 12M EPS 60 3000 2000 0 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '02 '04 '06 '08 '10 '12 '14 '16 '18
Source: Bloomberg as of February 21st 2019 Source: Bloomberg as of February 21st 2019
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the 46 performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real results may vary. Disclaimers Bond Rating Equivalence
Alpha and/or numeric symbols used to give indications of relative credit quality. In the municipal market, these designations are published by the rating services. Internal ratings are also used by other market participants to indicate credit quality Bond Credit Quality Ratings Rating Agencies Credit Risk Moody’s¹ Standard and Poor’s² Fitch Ratings² Investment Grade Highest Quality Aaa AAA AAA High Quality (Very Strong) Aa AA AA Upper medium Grade (Strong) A A A Medium Grade Baa BBB BBB Not Investment Grade Lower Medium Grade (Somewhat Speculative) Ba BB BB Low Grade (Speculative) B B B Poor Quality (May Default) Caa CCC CCC Most Speculative Ca CC CC No Interest Being Paid or Bankruptcy C D C Petition Filed In Default C D D Source: investinginbonds.com. 1. The ratings from Aa to Ca by Moody’s may be modified by the additions of a 1, 2 or 3 to show relative standing within the category. 2. The ratings from AA to CC by Standard and Poor’s and Fitch Ratings may be modified by the addition of a plus or minus to show relative standing within the category. 48 Glossary
Li Ke Qiang Index (or Keqiang Index) measures China’s economy using three indicators; railway cargo volume, electricity consumption and loans disbursed by banks. Asia Pacific ex Japan equities are measured against the MSCI Asia Pacific ex Japan Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure the performance of large cap stocks in Australia, Hong Kong, New Zealand and Singapore. Cash is measured against the three-month LIBOR, which is the interest rate that banks charge each other in the international inter-bank market for three-month loans (usually denominated in Eurodollars). CBOE Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by Standard & Poor’s 500 stock index option prices. CBOE Crude Oil Volatility Index (OVX) measures the market’s expectation of 30-day volatility of crude oil prices. MOVE index: The Merrill lynch Option Volatility Estimate Index is a yield curve weighted index of the normalized implied volatility US Treasury options. CBOE SKEW Index ("SKEW") is an index derived from the price of S&P 500 tail risk. Similar to VIX, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible. Citigroup GRAMI (Global Risk Aversion Macro Index) measures risk aversion across asset classes. It is an equally weighted index of developed and emerging market sovereign spreads, US credit spreads, TED spread and implied FX, equity and swap volatility. GRAMI is shown as standard deviations from the mean. Citi Economic Surprise Index cover all G10 economies and are available by each country. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance beating consensus. The indexes are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The indexes also employ a time decay function to replicate the limited memory of markets. Commodities are measured against the Dow Jones-UBS Commodity Index, which is composed of futures contracts on physical commodities traded on exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME). The major commodity sectors are represented, including energy, petroleum, precious metals, industrial metals, grains, livestock, softs, agriculture and ex. energy. Corporate high yield is measured against the Citigroup US High Yield Market Index, which includes all issues rated between CCC and BB+. The minimum issue size is $50 million. All issues are individually trader priced monthly. Corporate investment grade is measured against the Citi World Broad Investment Grade Index (WBIG) – Corporate, a subsector of the WBIG. This index includes fixed rate global investment grade corporate debt within the finance, industrial and utility sectors, denominated in the domestic currency. The index is rebalanced monthly. Developed market large cap equities are measured against the MSCI World Large Cap Index. This is a free-float adjusted, market-capitalization weighted index designed to measure the equity market performance of the large cap stocks in 23 developed markets. Large cap is defined as stocks representing roughly 70% of each market’s capitalization. Developed market small and mid cap equities are measured against the MSCI World Small Cap Index, a capitalization-weighted index that measures small cap stock performance in 23 developed equity markets. Developed sovereign is measured against the Citi World Government Bond Index (WGBI), which consists of the major global investment grade government bond markets and is composed of sovereign debt, denominated in the domestic currency. To join the WGBI, the market must satisfy size, credit and barriers-to-entry requirements. In order to ensure that the WGBI remains an investment grade benchmark, a minimum credit quality of BBB–/Baa3 by either S&P or Moody's is imposed. The index is rebalanced monthly. World Government bond index-ex US is measured against the Citi World Government Bond Index (WGBI), which consists of the major global investment grade government bond markets excluding the United States and is composed of sovereign debt, denominated in the domestic currency. To join the WGBI, the market must satisfy size, credit and barriers-to-entry requirements. In order to ensure that the WGBI remains an investment grade benchmark, a minimum credit quality of BBB–/Baa3 by either S&P or Moody's is imposed. The index is rebalanced monthly. Emerging sovereign is measured against the Citi Emerging Market Sovereign Bond Index (ESBI). This index includes Brady bonds and US dollar-denominated emerging market sovereign debt issued in the global, Yankee and Eurodollar markets, excluding loans. It is composed of debt in Asia, Latin America (Latam), Europe/Middle East/Africa (EMEA) We classify an emerging market as a sovereign with a maximum foreign debt rating of BBB+/Baa1 by S&P or Moody's. Defaulted issues are excluded. Sub-indices for these regions are also used for greater detail. Europe ex UK equities are measured against the MSCI Europe ex UK Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure the performance of large cap stocks in each of Europe’s developed markets, excluding the United Kingdom. Global bonds are measured against the Citigroup Broad Investment Grade Bond. The index is weighted by market capitalization and includes fixed rate Treasury, government sponsored, mortgage, asset backed, and investment grade (BBB–/Baa3) issues with a maturity of one year or longer and a minimum amount outstanding of $1 billion for Treasuries, $5 billion for mortgages, and $200 million for credit, asset-backed and government-sponsored issues. Global equities are measured against the MSCI All Country World Index, which represents 48 developed and emerging equity markets. Index components are weighted by market capitalization. Japan equities are measured against the MSCI Japan Large Cap Index. A free-float-adjusted market-capitalization-weighted index designed to measure large-cap stock performance in Japan. 49 Glossary
Topix is the Tokyo Stock Exchange Tokyo Price Index. Along with the Nikkei 225, is an important stock market index for the Tokyo Stock Exchange in Japan, tracking all domestic companies of the exchange's First Section. Nikkei Index is a price-weighted average of the top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. LDXY Index is a spot index of emerging Asia's most actively traded currency pairs valued against the US dollar. MSCI EM (Emerging Markets) Index is free-float adjusted and weighted by market capitalization. The index is designed to measure equity market performance in regions of Asia, Latin America, Europe, and Africa. MSCI North America Index is free-float adjusted and weighted by market capitalization. The index is designed to measure equity market performance in the US and Canada. MSCI AC World Index captures large and mid-cap representation across 23 Developed Markets and 24 Emerging Markets countries. MSCI World Index (Gross) is free-float adjusted and weighted by market capitalization. The index is designed to measure global developed market equity performance. Emerging markets equities are measured against the MSCI Emerging Markets Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure equity market performance of 22 emerging markets in Asia, Latin America, Europe, and Africa. Sub-indices are also available for these regions and by country. Shanghai Shenzhen CSI 300 Index (CSI 300) Index is a free-float weighted index that consists of 300 A-share stocks listed on the Shanghai or Shenzhen Stock Exchanges. Hang Seng Composite Index (HSI) is a market-cap weighted index that covers about 95% of the total market capitalisation of companies listed on the Main Board of the Hong Kong Stock Exchange. TWSE, or TAIEX, Index is capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange. German DAX is a blue chip stock market consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. FTSE 100 is a share index of the largest 100 companies listed on the London Stock Exchange with the highest market capitalization. The FTSE 250 is the 101st to 350th largest companies listed on the London Stock exchange. S&P/TSX Composite is the headline index for the Canadian equity market. Securitized: Citi World Broad Investment Grade Index (WBIG) – Securitized is a subsector of the WBIG. This index includes global investment grade collateralized debt denominated in the domestic currency, including mortgage-backed securities, covered bonds (Pfandbriefe) and asset-backed securities. The index is rebalanced monthly. Supranationals: Citi World Broad Investment Grade Index (WBIG) – Government Related is a subsector of the WBIG. This index includes fixed rate investment grade agency, supranational and regional government debt, denominated in the domestic currency. The index is rebalanced monthly. UK equities are measured against the MSCI UK Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure large-cap stock performance in the United Kingdom. Europe STOXX 600 Index is a consists of 600 companies which represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. S&P 100 index is a subset of the S&P 500,and includes 100 leading U.S. stocks with exchange-listed options. Constituents of the S&P 100 are selected for sector balance and represent about 57% of the market capitalization of the S&P 500 and almost 45% of the market capitalization of the U.S. equity markets. The stocks in the S&P 100 tend to be the largest and most established companies in the S&P 500. US Dollar Index (DXY) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and six major world currencies. The ICE US computes this by using the rates supplied by some 500 banks. Thomson Reuters/Core Commodity CRB index (CRY) is a commodity futures index which comprises 19 commodities: Aluminium, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat. US equities are measured against the Standard & Poor’s 500 Index, a capitalization-weighted index which includes a representative sample of 500 leading companies in leading industries of the US economy. Although the S&P 500 focuses on the large cap segment of the market, with over 80% coverage of US equities, it is also an ideal proxy for the total market. Wells Fargo Hybrid & Preferred Securities Financial Index: The Wells Fargo Hybrid and Preferred Securities Aggregate Index is a modified market-capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. Hedge funds are measured against the HFRI Fund Weighted Composite Index. This is an equally weighted composite index including both domestic and offshore funds, with no fund of funds. The index includes over 2,000 constituent funds. All funds report assets in USD and all funds report net of all fees returns on a monthly basis. Fund must have at least $50 million under management or have been actively trading for at least 12 months.
50 Glossary
Barclay CTA Index is a leading industry benchmark of representative performance of commodity trading advisors. There are currently 565 programs included in the calculation of the Barclay CTA Index for the year 2011, which is unweighted and rebalanced at the beginning of each year. LIBOR (London Inter-Bank Offered Rate) is based on rates that contributor banks in London offer each other for inter-bank deposits. From a bank's perspective, deposits are simply funds that are loaned to them. So in effect, a LIBOR is a rate at which a fellow London bank can borrow money from other banks. LIBOR is offered in various durations (i.e. overnight, one month, 3 month, 6 month, 1 year). EuroCOIN index is a coincident indicator of the euro area business cycle that provides an estimate of monthly growth of euro area GDP after the removal of measurement errors, seasonal, and other short run fluctuations. Eurofirst 300 index is a stock market index consisting of the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index. The Broad Trade Weighted Exchange Value of US Dollar index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S.trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. The real effective exchange rate (REER) is the weighted average of a country's currency relative to an index or basket of other major currencies, adjusted for the effects of inflation. The weights are determined by comparing the relative trade balance of a country's currency against each country within the index. Cyclically Adjusted Price-to-Earnings ratio (CAPE) is a valuation measure usually applied to the equity market. It is defined as price divided by the average of ten years of earnings (moving average), adjusted for inflation. As such, it is principally used to assess likely future returns from equities over timescales of 10 to 20 years, with higher than average CAPE values implying lower than average long-term annual average returns. The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. Mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages. The mortgages are sold to a group of individuals (a government agency or investment bank) that securitizes, or packages, the loans together into a security that investors can buy. The S&P MidCap 400 Index, more commonly known as the S&P 400, is a stock market index fthat serves as a barometer for the U.S. mid-cap equities sector. M2 is a measure of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits. Cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies. Fiat money is a currency without intrinsic value established as money, often by government regulation. It has an assigned value only because the government uses its power to enforce the value of a fiat currency or because the exchanging parties agree to its value. It was introduced as an alternative to commodity money and representative money Group of Seven (G7) is a group consisting of Canada, France, Germany, Italy, Japan, UK and the US. S&P Dividend Aristocrats Index measures the performance of S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company. Dow Jones Select Dividend Index aims to represent the U.S.’s leading stocks by dividend yield. Repatriation is a tax break which gave U.S. multinational corporations a one-time tax break on bringing back money earned in foreign countries back to the United States. Moody's Baa Corporate Bond Index is an investment bond index that tracks the performance of all bonds given an Baa rating by Moody's Investors Service. Bofa ML HY index tracks the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market. Economic policy uncertainty index is made up of three components which measure economic policy uncertainty. The dispersion in three forecast variables, the consumer price index (CPI), purchase of goods and services by state and local governments, and purchases of goods and services by the federal government are used as proxies for uncertainty about monetary policy and about government purchases of goods and services at the federal level. Trade Policy Uncertainty Index is derived using terms from over 2,000 US newspapers by scanning for language stressing uncertainty around various policy event types. Bond Connect is a new mutual market access scheme that allows investors from mainland China and overseas to trade in each other’s respective bond market.
51 Glossary
Adaptive Valuation Strategies (AVS) is Citi Private Bank’s proprietary strategic asset allocation methodology. It determines the suitable long-term mix of assets for each client’s investment portfolio. A covenant lite loan is a loan agreement that has fewer covenants to protect the lender and fewer restrictions on the borrower regarding payment terms, income requirements and collateral. Conversely a covenant heavy loan has more covenants. Corporate Sector Purchase Program (CSPP) is part of the European Central Bank’s asset purchase program (APP). Its purpose was to ease financing conditions in the real economy. In broad terms, the CSPP consists of purchases by the Eurosystem of investment-grade euro-denominated bonds issued by non-bank corporations. Barbell strategies incorporate weighing two distinctively different investments in order to mitigate potential market risk. Fixed to Float Preferred (F2F) securities are junior subordinated structures that carry a fixed coupon for a specified period of time. If not redeemed by the issuer at that time, coupon payments would then float at a spread, determined at issuance, over a specified benchmark — typically three-month LIBOR. The SIFMA Municipal Swap index is a 7-day high-grade market index comprised of tax-exempt VRDOs reset rates that are reported to the Municipal Securities Rule Making Board's (MSRB's) SHORT reporting system. The index is calculated by Bloomberg as the calculation agent for SIFMA. The Chicago Fed’s National Financial Conditions Index (NFCI) provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets and the traditional and “shadow” banking systems.
52 Important Information
In any instance where distribution of this communication (“Communication”) is subject to the rules of the US Commodity Futures Trading Commission (“CFTC”), this communication constitutes an invitation to consider entering into a derivatives transaction under US CFTC Regulations §§ 1.71 and 23.605, where applicable, but is not a binding offer to buy/sell any financial instrument. This Communication is prepared by Citi Private Bank (“CPB”), a business of Citigroup, Inc. (“Citigroup”), which provides its clients access to a broad array of products and services available through Citigroup, its bank and non-bank affiliates worldwide (collectively, “Citi”). Not all products and services are provided by all affiliates, or are available at all locations. CPB personnel are not research analysts, and the information in this Communication is not intended to constitute “research”, as that term is defined by applicable regulations. Unless otherwise indicated, any reference to a research report or research recommendation is not intended to represent the whole report and is not in itself considered a recommendation or research report. This Communication is provided for information and discussion purposes only, at the recipient’s request. The recipient should notify CPB immediately should it at any time wish to cease being provided with such information. Unless otherwise indicated, (i) it does not constitute an offer or recommendation to purchase or sell any security, financial instrument or other product or service, or to attract any funding or deposits, and (ii) it does not constitute a solicitation if it is not subject to the rules of the CFTC (but see discussion above regarding communication subject to CFTC rules) and (iii) it is not intended as an official confirmation of any transaction. Unless otherwise expressly indicated, this Communication does not take into account the investment objectives, risk profile or financial situation of any particular person and as such, investments mentioned in this document may not be suitable for all investors. Citi is not acting as an investment or other advisor, fiduciary or agent. The information contained herein is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Recipients of this Communication should obtain advice based on their own individual circumstances from their own tax, financial, legal and other advisors about the risks and merits of any transaction before making an investment decision, and only make such decisions on the basis of their own objectives, experience, risk profile and resources. The information contained in this Communication is based on generally available information and, although obtained from sources believed by Citi to be reliable, its accuracy and completeness cannot be assured, and such information may be incomplete or condensed. Any assumptions or information contained in this Communication constitute a judgment only as of the date of this document or on any specified dates and is subject to change without notice. Insofar as this Communication may contain historical and forward looking information, past performance is neither a guarantee nor an indication of future results, and future results may not meet expectations due to a variety of economic, market and other factors. Further, any projections of potential risk or return are illustrative and should not be taken as limitations of the maximum possible loss or gain. Any prices, values or estimates provided in this Communication (other than those that are identified as being historical) are indicative only, may change without notice and do not represent firm quotes as to either price or size, nor reflect the value Citi may assign a security in its inventory. Forward looking information does not indicate a level at which Citi is prepared to do a trade and may not account for all relevant assumptions and future conditions. Actual conditions may vary substantially from estimates which could have a negative impact on the value of an instrument. Views, opinions and estimates expressed herein may differ from the opinions expressed by other Citi businesses or affiliates, and are not intended to be a forecast of future events, a guarantee of future results, or investment advice, and are subject to change without notice based on market and other conditions. Citi is under no duty to update this document and accepts no liability for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained in or derived from this Communication. Investments in financial instruments or other products carry significant risk, including the possible loss of the principal amount invested. Financial instruments or other products denominated in a foreign currency are subject to exchange rate fluctuations, which may have an adverse effect on the price or value of an investment in such products. This Communication does not purport to identify all risks or material considerations which may be associated with entering into any transaction. Structured products can be highly illiquid and are not suitable for all investors. Additional information can be found in the disclosure documents of the issuer for each respective structured product described herein. Investing in structured products is intended only for experienced and sophisticated investors who are willing and able to bear the high economic risks of such an investment. Investors should carefully review and consider potential risks before investing. OTC derivative transactions involve risk and are not suitable for all investors. Investment products are not insured, carry no bank or government guarantee and may lose value. Before entering into these transactions, you should: (i) ensure that you have obtained and considered relevant information from independent reliable sources concerning the financial, economic and political conditions of the relevant markets; (ii) determine that you have the necessary knowledge, sophistication and experience in financial, business and investment matters to be able to evaluate the risks involved, and that you are financially able to bear such risks; and (iii) determine, having considered the foregoing points, that capital markets transactions are suitable and appropriate for your financial, tax, business and investment objectives.
53 Important Information
This material may mention options regulated by the US Securities and Exchange Commission. Before buying or selling options you should obtain and review the current version of the Options Clearing Corporation booklet, Characteristics and Risks of Standardized Options. A copy of the booklet can be obtained upon request from Citigroup Global Markets Inc., 390 Greenwich Street, 3rd Floor, New York, NY 10013 or by clicking the following links, http://www.theocc.com/components/docs/riskstoc.pdf or http://www.theocc.com/components/docs/about/publications/november_2012_supplement.pdf. If you buy options, the maximum loss is the premium. If you sell put options, the risk is the entire notional below the strike. If you sell call options, the risk is unlimited. The actual profit or loss from any trade will depend on the price at which the trades are executed. The prices used herein are historical and may not be available when you order is entered. Commissions and other transaction costs are not considered in these examples. Option trades in general and these trades in particular may not be appropriate for every investor. Unless noted otherwise, the source of all graphs and tables in this report is Citi. Because of the importance of tax considerations to all option transactions, the investor considering options should consult with his/her tax advisor as to how their tax situation is affected by the outcome of contemplated options transactions. None of the financial instruments or other products mentioned in this Communication (unless expressly stated otherwise) is (i) insured by the Federal Deposit Insurance Corporation or any other governmental authority, or (ii) deposits or other obligations of, or guaranteed by, Citi or any other insured depository institution. Citi often acts as an issuer of financial instruments and other products, acts as a market maker and trades as principal in many different financial instruments and other products, and can be expected to perform or seek to perform investment banking and other services for the issuer of such financial instruments or other products. The author of this Communication may have discussed the information contained therein with others within or outside Citi, and the author and/or such other Citi personnel may have already acted on the basis of this information (including by trading for Citi's proprietary accounts or communicating the information contained herein to other customers of Citi). Citi, Citi's personnel (including those with whom the author may have consulted in the preparation of this communication), and other customers of Citi may be long or short the financial instruments or other products referred to in this Communication, may have acquired such positions at prices and market conditions that are no longer available, and may have interests different from or adverse to your interests. IRS Circular 230 Disclosure: Citi and its employees are not in the business of providing, and do not provide, tax or legal advice to any taxpayer outside Citi. Any statement in this Communication regarding tax matters is not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Neither Citi nor any of its affiliates can accept responsibility for the tax treatment of any investment product, whether or not the investment is purchased by a trust or company administered by an affiliate of Citi. Citi assumes that, before making any commitment to invest, the investor and (where applicable, its beneficial owners) have taken whatever tax, legal or other advice the investor/beneficial owners consider necessary and have arranged to account for any tax lawfully due on the income or gains arising from any investment product provided by Citi. This Communication is for the sole and exclusive use of the intended recipients, and may contain information proprietary to Citi which may not be reproduced or circulated in whole or in part without Citi’s prior consent. The manner of circulation and distribution may be restricted by law or regulation in certain countries. Persons who come into possession of this document are required to inform themselves of, and to observe such restrictions. Citi accepts no liability whatsoever for the actions of third parties in this respect. Any unauthorized use, duplication, or disclosure of this document is prohibited by law and may result in prosecution. The views expressed in this document by the Global Investment Committee do not constitute research, investment advice or trade recommendations, and are not tailored to meet the individual investment circumstances or objectives of any investor. Recipients of this document should not rely on the views expressed or the information included in this document as the primary basis for any investment decision. Investors are urged to consult with their financial advisors before buying or selling securities. Some or all of the content of this document, including expressions of opinion and data, may be provided to other businesses within Citigroup Inc. or affiliates of Citigroup Inc. for their own use and benefit or for the benefit of their customers prior to dissemination to the recipients of this document. If such other businesses and affiliates act on the information before the recipients of this document, the actions of these businesses may minimize or negate certain investment opportunities of the recipients of this document. Other businesses within Citigroup Inc. and affiliates of Citigroup Inc. may give advice, make recommendations, and take action in the interest of their clients, or for their own accounts, that may differ from the views expressed in this document. All expressions of opinion are current as of the date of this document and are subject to change without notice. Citigroup Inc. is not obligated to provide updates or changes to the information contained in this document. The expressions of opinion are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future results. Real results may vary. Although information in this document has been obtained from sources believed to be reliable, Citigroup Inc. and its affiliates do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use. Throughout this publication where charts indicate that a third party (parties) is the source, please note that the attributed may refer to the raw data received from such parties. No part of this document may be copied, photocopied or duplicated in any form or by any means, or distributed to any person that is not an employee, officer, director, or authorized agent of the recipient without Citigroup Inc.’s prior written consent.
54 Important Information
Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer’s credit rating, or creditworthiness, causes a bond’s price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made. Mortgage-backed securities ("MBS"), which include collateralized mortgage obligations ("CMOs"), also referred to as real estate mortgage investment conduits ("REMICs"), may not be suitable for all investors. There is the possibility of early return of principal due to mortgage prepayments, which can reduce expected yield and result in reinvestment risk. Conversely, return of principal may be slower than initial prepayment speed assumptions, extending the average life of the security up to its listed maturity date (also referred to as extension risk). Additionally, the underlying collateral supporting non-Agency MBS may default on principal and interest payments. In certain cases, this could cause the income stream of the security to decline and result in loss of principal. Further, an insufficient level of credit support may result in a downgrade of a mortgage bond's credit rating and lead to a higher probability of principal loss and increased price volatility. Investments in subordinated MBS involve greater credit risk of default than the senior classes of the same issue. Default risk may be pronounced in cases where the MBS security is secured by, or evidencing an interest in, a relatively small or less diverse pool of underlying mortgage loans. MBS are also sensitive to interest rate changes which can negatively impact the market value of the security. During times of heightened volatility, MBS can experience greater levels of illiquidity and larger price movements. Price volatility may also occur from other factors including, but not limited to, prepayments, future prepayment expectations, credit concerns, underlying collateral performance and technical changes in the market. MLPs. MLPs are publicly traded stocks. Investing in stocks, ETFs and ADRs entails the risks of market volatility. The value of all types of bonds, stocks, ETFs and ADRs may increase or decrease over varying time periods. With respect to fixed income securities, please note that in general, as prevailing interest rates rise, fixed income securities prices will fall. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. To the extent the investments depicted herein represent international securities; you should be aware that there may be additional risks associated with international investing, including foreign economic, political, monetary and/or legal factors, changing currency exchange rates, foreign taxes and differences in financial and accounting standards. International investing may not be for everyone. These risks may be magnified in emerging markets. Small capitalization companies may lack the financial resources, product diversification and competitive strengths of larger companies. The securities of small capitalization companies may not trade as readily as, and be subject to higher volatility than, those of larger, more established companies. Funds that invest a large percentage of assets in only one industry sector (or in only a few sectors) are more vulnerable to price fluctuation than funds that diversify among a broad range of sectors. With respect to real estate investments, property values can fall due to environmental, economic or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. Real Estate Investment Trusts (REITs) are subject to special risk considerations similar to those associated with the direct ownership of real estate. Real estate valuations may be subject to factors such as changing general and local economic, financial, competitive, and environmental conditions. REITs may not be suitable for every investor. Dividend income from REITs will generally not be treated as qualified dividend income and therefore will not be eligible for reduced rates of taxation. Alternative investments referenced in this report are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in the fund, potential lack of diversification, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and advisor risk. Asset allocation does not assure a profit or protect against a loss in declining financial markets. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity. Factors affecting commodities generally, index components composed of futures contracts on nickel or copper, which are industrial metals, may be subject to a number of additional factors specific to industrial metals that might cause price volatility. These include changes in the level of industrial activity using industrial metals (including the availability of substitutes such as man-made or synthetic substitutes); disruptions in the supply chain, from mining to storage to smelting or refining; adjustments to inventory; variations in production costs, including storage, labor and energy costs; costs associated with regulatory compliance, including environmental regulations; and changes in industrial, government and consumer demand, both in individual consuming nations and internationally.
55 Important Information
Index components concentrated in futures contracts on agricultural products, including grains, may be subject to a number of additional factors specific to agricultural products that might cause price volatility. These include weather conditions, including floods, drought and freezing conditions; changes in government policies; planting decisions; and changes in demand for agricultural products, both with end users and as inputs into various industries. The information contained herein is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Readers interested in the strategies or concepts should consult their tax, legal, or other advisors, as appropriate. Citi Private Bank is a business of Citigroup Inc. (“Citigroup”), which provides its clients access to a broad array of products and services available through bank and non-bank affiliates of Citigroup. Not all products and services are provided by all affiliates or are available at all locations. In the U.S., investment products and services are provided by Citigroup Global Markets Inc. (“CGMI”), member FINRA and SIPC, and Citi Private Advisory, LLC (“Citi Advisory”), member FINRA and SIPC. CGMI accounts are carried by Pershing LLC, member FINRA, NYSE, SIPC. Citi Advisory acts as distributor of certain alternative investment products to clients of Citi Private Bank. CGMI, Citi Advisory and Citibank, N.A. are affiliated companies under the common control of Citigroup. Outside the U.S., investment products and services are provided by other Citigroup affiliates. Investment Management services (including portfolio management) are available through CGMI, Citi Advisory, Citibank, N.A. and other affiliated advisory businesses. These Citigroup affiliates, including Citi Advisory, will be compensated for the respective investment management, advisory, administrative, distribution and placement services they may provide. In Hong Kong, this document is issued by CPB operating through Citibank N.A., Hong Kong branch, which is regulated by the Hong Kong Monetary Authority. Any questions in connection with the contents in this document should be directed to registered or licensed representatives of the aforementioned entity. In Singapore, this document is issued by CPB operating through Citibank, N.A., Singapore branch, which is regulated by the Monetary Authority of Singapore. Any questions in connection with the contents in this document should be directed to registered or licensed representatives of the aforementioned entity. To the extent this document is provided to clients who are booked and/or managed in Hong Kong: No other statement(s) in this document shall operate to remove, exclude or restrict any of your rights or obligations of Citibank under applicable laws and regulations. Citibank, N.A., Hong Kong Branch does not intend to rely on any provisions herein which are inconsistent with its obligations under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, or which mis-describes the actual services to be provided to you. In the United Kingdom, Citibank N.A., London Branch (registered branch number BR001018), Citigroup Centre, Canada Square, Canary Wharf, London, E14 5LB, is authorised and regulated by the Office of the Comptroller of the Currency (USA) and authorised by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The contact number for Citibank N.A., London Branch is +44 (0)20 7508 8000. Citibank Europe plc is regulated by the Central Bank of Ireland. It is authorised by the Central Bank of Ireland and by the Prudential Regulation Authority. It is subject to supervision by the Central Bank of Ireland, and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request. Citibank Europe plc, UK Branch is registered as a branch in the register of companies for England and Wales with registered branch number BR017844. Its registered address is Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. VAT No.: GB 429 6256 29. Citibank Europe plc is registered in Ireland with number 132781, with its registered office at 1 North Wall Quay, Dublin 1. Citibank Europe plc is regulated by the Central Bank of Ireland. Ultimately owned by Citigroup Inc., New York, USA. In Jersey, this document is communicated by Citibank N.A., Jersey Branch which has its registered address at PO Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank N.A., Jersey Branch is regulated by the Jersey Financial Services Commission. Citibank N.A. Jersey Branch is a participant in the Jersey Bank Depositors Compensation Scheme. The Scheme offers protection for eligible deposits of up to £50,000. The maximum total amount of compensation is capped at £100,000,000 in any 5 year period. Full details of the Scheme and banking groups covered are available on the States of Jersey website www.gov.je/dcs, or on request. In Canada, Citi Private Bank is a division of Citibank Canada, a Schedule II Canadian chartered bank. Certain investment products are made available through Citibank Canada Investment Funds Limited (“CCIFL”), a wholly owned subsidiary of Citibank Canada. Investment Products are subject to investment risk, including possible loss of principal amount invested. Investment Products are not insured by the CDIC, FDIC or depository insurance regime of any jurisdiction and are not guaranteed by Citigroup or any affiliate thereof. CCIFL is not currently a member, and does not intend to become a member of the Mutual Fund Dealers Association of Canada (“MFDA”); consequently, clients of CCIFL will not have available to them investor protection benefits that would otherwise derive from membership of CCIFL in the MFDA, including coverage under any investor protection plan for clients of members of the MFDA.
56 Important Information
This document is for information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities to any person in any jurisdiction. The information set out herein may be subject to updating, completion, revision, verification and amendment and such information may change materially. Citigroup, its affiliates and any of the officers, directors, employees, representatives or agents shall not be held liable for any direct, indirect, incidental, special, or consequential damages, including loss of profits, arising out of the use of information contained herein, including through errors whether caused by negligence or otherwise. © Copyright 2019, Citigroup Inc. Citi, Citi and Arc Design and other marks used herein are service marks of Citigroup Inc. or its affiliates, used and registered throughout the world.
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