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MARKET
OUTLOOK
01 China equities: Prefer H over A-shares
02 Equity Markets and Commodities
03 Bond Markets
04 Currency
February 2015
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Important Disclosure on the last page
China equities: Prefer H over A-shares
CSI300/ MXCN corrected 8%/ 5% on Jan 19 given liquidity concerns following China Securities Regulatory Commission’s (CSRC)
three-month suspension of opening new margin-trading accounts for selective brokers. We had previously highlighted the liquidity risks,
downgraded A-share to Neutral, Brokers to Underweight and upgraded Health Care to Overweight.
After the correction, we believe MSCI China (H-shares) offers a good entry point as the macro environment may stabilize given gradual
reforms, while patience is still needed for CSI300 (A-shares) given 1) CSI300 still outperformed MSCI China by roughly 45% since March 2014
trough; 2) Time is needed for CSI300 to digest/monitor the liquidity situation change, which has been the most critical driver for CSI300; and
3) Still big CSI300/MXCN valuation gap at 31% vs historical average at 21%. Citi’s end-2015 MXCN/ CSI300 index targets stands at 78/ 3,700
respectively.
Macro Overview
 US: We raised our 2015 growth forecast to 3.6%; Expect policy normalization to begin late this year.
 Europe: ECB announced €1.1tn QE plan to stimulate eurozone economy; Bolsters our overweight stance on Eurozone equities and credit.
 Japan: 2015 could be a year of solid growth; BoJ may implement additional easing measures in July.
 Asia: China may grow 6.9% in 2015; Two more rate cuts in 1H and 3-4 RRR cuts could boost growth.
Equities: Overweight
 We believe the global equity market has moved into the next phase of the cycle: Maturing Bull.
 Expect the search for yield and strong US$ to be key themes for global equities. Within sectors we prefer cyclicals/financials to defensives.
Bonds: Underweight
 High Yield: Expect further spread tightening; Retain preference for High Yield over Investment Grade in both Europe and US.
 Emerging Market Debt: Cautious on local debt given improving prospects for stronger USD.
Commodities: Neutral
 Gold: Q1 levels now projected to average $1,250/oz.
 Oil: Brent prices could return to the $60-70/bbl range by year-end.
Currencies: Volatility is back
 EUR: Much Further To Go.
 EM Asia: Lower Oil Should help.
Please note and carefully read the
Important Disclosure on the last page
Equity Markets and Commodities
Chart 1:
Chart 2:
S&P 500 Index
Dow Jones Stoxx 600 Index
60%
52.01%
50%
50%
44.27%
45%
40%
40%
35%
30%
30%
25%
20%
20%
11.92%
10%
0%
10%-
13.81%
15%
10%
-3.10%
-3.10%
1-Mth
YTD
7.16%
7.16%
1-Mth
YTD
5%
0%
1-Yr
3-Yr*
1-Yr
3-Yr*
*Denotes cumulative performance
Performance data as of 31 January 2015
Source: Bloomberg
*Denotes cumulative performance
Performance data as of 31 January 2015
Source: Bloomberg
United States
Euro - Area
Policy normalization may begin late this year
Sizeable stimulus bolsters our overweight stance
 We expect an extra lift to US growth from the decline in crude oil
prices. As a significant net oil importer, the US economy may
benefit by about $140 billion in net foreign transfers.
Consequently, we recently raised our 2015 growth forecast to
3.6% from 3.0% previously, led by a pickup in consumer
spending. We anticipate a return to a slower, albeit still
above-potential, pace in 2016.
 The ECB announced a €60-billion-a-month program of bond
purchases, including eurozone government bonds. The program
will run from March until at least September 2016—implying total
purchases of more than €1 trillion—helping to lift the ECB’s
balance sheet back toward €3 trillion.
 The Dec FOMC meeting confirmed our view that the current
"zero rate" setting is not appropriate for an economy growing
above potential. The Fed may use the temporary boost to
growth from lower oil prices to begin raising rates sooner than
our Dec-15 call.
 From an equity perspective, we remain constructive and expect
7% EPS growth in 2015 to drive markets higher. Our end-2015
target for S&P 500 is 2,200. In terms of sectors, capital
spending is expected to grow double digits in the tech space with
related strong demand for both IT products and services.
 We remain optimistic on European equities and believe that
aggressive policy action from the ECB will be a key driver,
trumping macro/earnings concerns. We expect 10% earnings
growth in 2015E, supported by: 1) ECB QE, 2) higher nominal
GDP, 3) modest operating leverage, 4) weaker euro, 5)
improving bank earnings.
 That said, we note that political risks still remain, with 2015
elections in Greece, Portugal and Spain all offering the potential
to rile the markets.
Please note and carefully read the
Important Disclosure on the last page
Equity Markets and Commodities
Chart 3:
Chart 4:
Topix Index
MSCI Emerging Markets Index
100%
87.36%
90%
80%
1.0%
0.0%
1.0%-
70%
60%
50%
30%
15.93%
20%
0%
0.54%
0.54%
1-Mth
YTD
1-Yr
2.68%
0.55%
0.55%
1-Mth
YTD
2.0%3.0%4.0%-
40%
10%
4.0%
3.0%
2.0%
3-Yr*
5.0%6.0%7.0%-
-5.67%
1-Yr
*Denotes cumulative performance
Performance data as of 31 January 2015
Source: Bloomberg
*Denotes cumulative performance
Performance data as of 31 January 2015
Source: Bloomberg
Japan
Emerging Markets
(Asia, CEEMEA and Latam)
2015 could be a year of solid growth
 We expect 2015 to be a year of solid growth. Japanese
companies and consumers may likely enjoy an improvement in
the terms of trade, driven by sharply lower oil prices in 2015.
Most notably, consumer spending, the main culprit behind the
technical recession of 2014, is likely to recover at a relatively
solid pace, with steady growth in employment.
 The halving of oil prices is a complete game changer for the
inflation outlook. Core inflation may approach 0% and turn
negative, albeit temporarily, depending upon oil prices and the
yen/dollar rate in coming months. In this context, we continue to
expect the Bank of Japan (BoJ) to implement additional easing
measures in July 2015.
 In terms of themes, we believe that auto related and industrial
sectors are likely to be supported by the yen depreciation.
Financials are a big laggard and are likely to benefit from
increases in asset prices caused by the policies to get Japan out
of deflation.
3-Yr*
Asia continues to stand out
 We expect decent gains from EM equities in 2015. However, we
think that it is now less appropriate to see EM equities as a single
asset class. Instead, we prefer Asian equities versus LatAm and
CEEMEA.
 Indeed, given current account surpluses, Asian markets are less
exposed to further US$ strength than their LatAm or CEEMEA
peers. Similarly, the EM Asian economies are generally
commodity importers and so they should benefit from
commodity price weakness.
 Within the region, we favour China, Taiwan and Singapore. Citi’s
end-2015 target for the MSCI Asia x Japan index stands at 630.
In terms of sector, the more cyclical sectors such as IT,
Financials and Consumer Discretionary are preferred.
Please note and carefully read the
Important Disclosure on the last page
Equity Markets and Commodities
Chart 5:
Chart 6:
GOLDS Commodity Index
Brent Oil
15.0%
10.0%
8.35%
0.0%
8.35%
- 10.0%
3.15%
5.0%
0.0%
-7.57%
-20.0%
5.0%-
- 30.0%
10.0%-
-40.0%
15.0%20.0%-
-50.0%
25.0%30.0%-
-7.57%
-26.12%
1-Mth
YTD
1-Yr
3-Yr*
-60.0%
1-Mth
YTD
-50.20%
-52.25%
1-Yr
3-Yr*
*Denotes cumulative performance
Performance data as of 31 January 2015
Source: Bloomberg
*Denotes cumulative performance
Performance data as of 31 January 2015
Source: Bloomberg
Gold
Oil
Q1 levels now projected to average $1,250/oz
Brent prices could return to the $60-70/bbl range
by year-end
 Gold prices saw a significant step-up in their trading range in the
second week of January to the mid-$1,200s level despite a
stronger US dollar and the ongoing collapse in developed
economies inflation expectations. At the same time, the
de-pegging of the Swiss Franc from the Euro on January 15 also
added to upside gold momentum.
 Going forward, extreme yield compression and growth concerns
continue to support yellow metal prices as investors have now
shifted expectations of an FOMC rate lift-off out to 4Q15.
 We have therefore lifted our 2015 gold price expectations, with
Q1 levels now projected to average $1,250/oz. versus the
year-to-date average price of $1,220/oz.
 After December’s 19% decline, oil prices fell another 15% YTD,
and are finding some support at $50/bbl; yet market sentiment
remains overwhelmingly bearish. $50/bbl oil is unsustainable in
our view; corporate capital expenditures are being slashed,
petrostate government revenues nearly halved and almost
50% of future upstream projects are facing questionable
economics.
 Having said that, the question is not “if” but “when” markets will
balance, and Citi’s base case expectation is that this occurs in
2H15, with a rebound in store for winter 2015-16 or early 2016.
 Brent prices could return to the $60-70/bbl range by year-end
or into early 2016 – with further weakness in the interim.
Please note and carefully read the
Important Disclosure on the last page
Bond Markets
Favour high yield credit over longer duration exposures
US Treasuries
 We expect the US rates curve to flatten in excess of forwards, with the long end outperforming in an environment of low inflation risk
premium and lower term premiums.
 The front end of the curve is expected to sell off in excess of forwards.
 The selloff is likely to be tempered by expectations of a more gradual pace of hikes.
US Corporates
 Potential total returns in high grade corporate bonds are likely to be modest.
 Indeed, low absolute yields and fully-valued spreads – especially in the US – are unlikely to sufficiently offset declines in principal value as
interest rates rise.
 We prefer European investment grade debt over US corporate bonds, and financial over non-financial credits.
US High-Yield
 Recent sell-off provides attractive entry point for new exposures.
 In particular, we favour Single-B credits in US and Europe as they appear poised to generate relatively impressive returns in 2015 as stable
fundamentals, low default rates and the demand for higher yields support further gains.
Emerging Market Debt
 Favour hard currency sovereigns/corporates over local debt given improving prospects for stronger USD.
 Prefer manufacturing vs. commodity exporters, and surplus over deficit countries.
Euro Bonds
 We continue to see a very mild rise in Bund yields for 2015 (0.65% by Dec 15), reflecting both the negligible risk of a spike in inflation as well
as the weak potential growth environment.
 Other factors such as demographics, productivity trends, real interest rates and political risks may likely contribute to our medium-term
scenario ("low-for-longer"), despite a short-term expectation of a post- QE sell off in core EGBs.
Japan Bonds
 We remain bullish on JGBs for the near term, due to a lack of sellers.
 Domestic investors are likely to keep unrealized profits until the next fiscal year (starting in April) so that the BoJ’s purchases may keep
squeezing the market.
 In addition, the market is likely to price in additional easing by the BoJ if equities lose the gains since QE2 that was announced last October.
Asia Bonds
 Higher yielding local markets - especially those without external vulnerabilities linked to falling oil prices or a weaker EUR – may outperform.
 We are now more constructive on duration in Indonesia, where we find a larger potential for inflows amidst a gradually improving macro
backdrop.
 Finally, we think it is too early to add duration exposure in Malaysia, and expect seasonally tight liquidity to restrain rates in China from dipping
lower.
Please note and carefully read the
Important Disclosure on the last page
Currency
Volatility Is Back
Broader policy divergence, with the Fed and BoE still expected by Citi economists to raise interest rates over the year while the ECB and BoJ
likely to ease further via balance sheet expansion to continue the broad trend of USD gains through 2016 but more against G10 than EM with
intermittent corrections quite likely.
EUR: Much Further To Go
 Significantly more downside in EUR/USD seen medium term both because of generalized USD strength and due to EUR weakness as a result
of ECB monetary easing via balance sheet expansion.
 Ultimately, the spot is seen heading below parity as Europe continues to suffer from weak real growth, slack labour markets and weak and
falling inflation/ inflation expectations.
GBP: Nothing Near term, mixed Bag Medium Term
 After an impressive acceleration, a variety of UK economic indicators now appear to have levelled off albeit from a high base and likelihood
of negative readings on the Citi UK surprise indices have risen.
 Thereafter, UK political risk (General Election in May 2015), the EU referendum (currently tabled for 2017 if conservatives win) and sizeable
current account/budget deficits to continue to cap cable.
JPY: Consolidation After QE “News” – Again
 USD/JPY seems to have entered another consolidation range, with the pull-back so far to just over 115 but recent moves in relative rates and
the 2013 precedent suggest a pull-back as far as 109-111.
 Medium to long term, however, much further upside is seen, driven partly by expectations that further US economic outperformance will raise
front end yields and promote generalized USD strength.
 Additional BoJ QE as core CPI hits close to zero and GPIF (and other related) asset allocation rebalancing are also expected to promote capital
outflows to foreign bond and equity markets.
AUD, NZD & CAD: Medium Term Weakness To Persist
 AUD: The Citi Terms of Trade has fallen 70% since the start of 2014 and is expected to decline further and AUD still remains overvalued,
currently 20% above its historical mean. Continued jawboning from Governor Stevens echoes this, with the Governor offering 0.75 as a
broad guide to end of year
 NZD: NZD weakness, less than AUD so far, was primarily led by the drop in milk prices and paring back of expectations on RBNZ hikes. Citi
economists feel the RBNZ can maintain its on-hold policy stance until Q4 2015, with risks that this is pushed out to H1 2016 given subdued
inflation. This is likely to see a lower trajectory on NZDUSD
 CAD: Citi economists attribute some weakness in the currency to Canadian economic weakness as well as the decline in oil prices that could
cut as much as a half percentage point from 2015 GDP. With the BoC now also having cut interest rates and possibly signalling more to come,
the 0-3m forecast is raised to 1.19 while the medium-term forecast remains at 1.25.
EM Asia: Lower Oil Should Help
 Slower global growth, divergent monetary policies, lower for longer oil and strengthening USD should see EM currencies as a whole weaken.
 EM Asia however should fare better due to the impact of lower oil on the current account and a more benign outlook for US rates.
 CNY still remains the outperformer within Asia. CNY’s short to medium-term macro trends remain supportive due to improving trade balance
even as the capital account faces pressure.
 However, low inflation and a highly levered corporate sector could see China regarding a weaker CNY as a potential policy tool.
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“Citi analysts” refers to investment professionals within Citi Investment Research and Citi Global Markets (CGM) and voting members of the Global Investment
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