2019 MID-YEAR OUTLOOK EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT Citi Priority 2019 MID-YEAR OUTLOOK CONTENTS CITI’S TOP THEMES 1 ECONOMY Divergence in Global Growth 2 2 EQUITIES Exploiting Late Cycle Opportunities 5 3 BONDS Protect the Downside 8 4 COMMODITIES Pockets of Opportunities 12 Uncertainty Could See Safe Haven 5 CURRENCIES Currencies in Vogue 15 6 POLITICS Risks Remain Elevated 18 EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | II All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results. 2019 MID-YEAR OUTLOOK EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT After a strong rebound that saw Global equities gaining 16.7% in the first 4 months of 2019, we are now entering seasonally weaker summer months. This weakness is further amplified by US-China trade risks dominating global market concerns. Citi analysts see markets as unprepared for the heightened risk of a prolonged economic struggle that could extend beyond the two economies and as a result, a period of de-risking within equities should be expected. Nevertheless, Citi analysts still expect global growth of 2.9% in 2019 paired with steady inflation of 2.5% for 2019. Global growth projections have stabilized at about the long-term average of 3%. However, this projection masks divergence between countries (slowing developed markets and recovering emerging markets). US growth is expected to moderate to 2.7% in 2019 due to fading fiscal stimulus and somewhat slower investment counterbalancing robust consumption. Meanwhile, trade tensions with US, China’s slowdown and Brexit weigh on European growth, offset to a greater extent stable consumption, with Citi analysts forecasting European GDP growth of 1.2% in 2019. In Emerging Markets, Citi anticipates GDP growth of 6.4% in 2019 on the back of China’s ongoing recovery as well as policymakers being much more ready to support the economy to offset the consequences of trade tensions. At the same time, earnings are slowing, not reversing. Citi analysts expect global Earnings-Per-Share (EPS) growth of 4% in 2019, slightly below consensus estimate of 5%. Valuations are also reasonable as the MSCI AC World benchmark trades on a trailing Price-to-Earnings of 17x, in-line with the long-run average. Importantly, financial conditions are accommodative as monetary policy is expected to be on hold in most developed markets. If the current weakening in financial conditions and negative trade impact spreads to overall domestic economic weakness, the US Federal Reserve (Fed) could follow financial markets with interest rate cuts. However, the Fed is likely to be reactive to trade news rather than leading in Citi’s view. Volatility is anticipated to remain elevated, and Citi analysts believe that a highly diversified multi-asset class portfolio approach remains essential in today’s environment. *All returns in USD as of 31 May 2019. EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 1 All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results. 2019 MID-YEAR OUTLOOK ECONOMY 1 DIVERGENCE IN GLOBAL GROWTH Key Takeaways Global growth projections have stabilized at about the long-term average of 3%. However, this projection masks divergence between countries • Citi analysts expect (slowing Developed Markets and recovering Emerging Markets). global growth of 2.9% in 2019 and 2020. Inflation may remain steady at 2.5% in 2019 and 2020. GDP Growth forecasts • Developed Markets GDP Growth forecasts (DMs) target 1.8% growth in 2019 and %YY 1.6% in 2020, while 6.0 Emerging Markets (EMs) Forecasts are anticipated to grow 4.4% in 2019 and 4.6% 5.0 in 2020, reflecting the divergence between the 4.0 2 regions. • Financial conditions, 3.0 uncertainty shocks, and the US-China trade tensions are 2.0 global factors that could negatively 1.0 affect consumption, 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 investment, trade, and GDP. Global DM EM Dashed lines show 2000-2017 average growth. Note: Dashed lines show 2000-2017 average growth. Source:Source: Citi Citi Research. Research. As of 22As May of 222019. May 2019. EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 2 All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results. 2019 MID-YEAR OUTLOOK DIVERGENCE IN GLOBAL GROWTH / 1 Expectations are that US growth would be restrained at 2.7% in 2019, with a still robust consumption slightly counterbalancing a fading fiscal stimulus and somewhat US slower investment. Trade tensions with US, China’s slowdown and Brexit weigh on growth, offsetting to a greater extent stable consumption, with Citi analysts forecasting 1.2% GDP EUROPE growth in 2019. GDP growth is expected to remain weak at 0.7% in 2019 and the looming Value Added Tax (VAT) hike (if not delayed again), has scope to further weaken growth at a JAPAN time when the trade outlook remains uncertain. Asia is expected to grow 5.7% in 2019 and business cycle expansion is likely to last beyond this year. However, renewed US-China trade risks poses downside risks. Government policy effectiveness in China is key to offset Asia / China the consequences of trade tensions and Citi anticipates 2019 GDP growth of 6.4% in China. The recovery in Emerging Markets depends on a range of effective policies amidst challenging political climates in Latin America (Argentina and Brazil), although on balance these economies are less exposed to the US-China trade dispute. Mexico, on the other hand, remains vulnerable to EMERGING trade tensions with the US. In EMEA, recovery in Turkey MARKETS (EMs) and more solid growth in Russia are also important underpinnings of the EM growth recovery. EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 3 All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results. 2019 MID-YEAR OUTLOOK 1 / DIVERGENCE IN GLOBAL GROWTH Risks to the global growth outlook include: • Rising protectionism and • China and/or trade tensions. US slowdown. • Heightened political risks. (See “6. Politics – Risks Remain Elevated”) Citi analysts expect inflation of 1.5% in Developed Markets and 4.0% in Emerging Markets in 2019 Upside risks to global inflation include: Tightening Higher Escalation of labour commodity/ trade tariffs. markets. energy prices. EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 4 All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results. 2019 MID-YEAR OUTLOOK EQUITIES EXPLOITING LATE CYCLE 2 OPPORTUNITIES Key Takeaways Financial markets weakened over the course of May as investors came to • Given a strong 1Q19 see a lower probability of a quick resolution of trade disputes. In light of rally, seasonally weaker trade fears revival, Citi analysts have scaled back on risk allocations by summer months and tactically reducing global equities to underweight. re-emergence of trade tensions, Citi analysts believe a period of de- Equities are are often often seasonally seasonally weaker weaker in May in May – August – August risking within equities should be expected. MSCI Asia Ex-Japan Index returns by month (2010-18) • As a result, Citi analysts have tactically Avg Monthly Returns (%) Years w/ Negative Mth (%) reduced their global 3.0 100 equity allocation to Summer Risks underweight. Within 2.0 equities, Citi still 75 prefers Emerging 1.0 Markets (EM), 0.0 50 particularly Asia, in the long term. -1.0 • Cyclical stocks have 25 rebounded in 1Q19 as -2.0 recession fears have -3.0 0 subsided. However, JAN FEB MAR AP MAY JUN JUL AUG SEP OCT NOV DEC economies are growing R at a slower pace and trade risks appear Asia Ex-Japan Avg Returns Hit Rate (% of negative years, Right) elevated. Amongst the defensives, Citi Source:Source: Citi Citi Private Private Bank. Bank. As As of of 20 20 May May 2019.2019. analysts are overweight the more growth- Earnings Slowing, not Reversing oriented Health Care Citi analysts expect global EPS growth of 4% in 2019, slightly below and Communication consensus estimate of 5%. Markets will start looking towards global EPS Services sectors. prospects in 2020, where consensus currently forecasts 11% growth. This could be vulnerable if the global economy continues to slow. However, EPS downgrades are not fatal - since 1989, consensus initial forecasts have been too high in 21 years. But in 15 of those years, global equities have still made gains despite earnings downgrades. Reasonable Valuations; US Looks Expensive while EM Offers Value The MSCI AC World benchmark now trades on a trailing Price-to-Earnings of 17x, in-line with the long-run average. Within regions, US looks most expensive, while EM offers best value. EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 5 All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market and other factors.