French Election: Round Two - Citi Bank

French Election: Round Two - Citi Bank

MONTHLY MARKET OUTLOOK 2 MAY 2017 French Election: Round Two By Florence Tan, Tae Hyon Ahn, Celestee Tan IN THIS ISSUE The turnout was high for th...

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MONTHLY MARKET OUTLOOK

2 MAY 2017

French Election: Round Two By Florence Tan, Tae Hyon Ahn, Celestee Tan

IN THIS ISSUE

The turnout was high for the first round of the French presidential election which saw Macron (23.5%) taking the lead ahead of Le Pen 22.1%, Fillon, 19.6%, Melenchon 19.3% and Hamon 7%. The two contenders progressing into the second round have different views. Macron aims to restore French influence in Europe, adapt France to a globalized world, cut corporation tax, strengthen the relationship with Germany, and create a taskforce to fight terrorism. Le Pen is anti-EU, anti-Eurozone, antiimmigration, ultra-protectionist, and wants to reduce the retirement age to 60.

US,

Industrial 1.34%,

the

Dow

Average S&P

Jones

advanced

Emerging

outperformed

in

Markets

also

April,

rising

2.04%, led by MSCI Emerging

Nasdaq

Europe (2.61%) and MSCI Asia ex

Composite jumped 2.30%. The

Japan (2.10%). In contrast, MSCI

Stoxx

Latin

while

Europe

500

MSCI

gained

0.91%,

the

the

600

What lies ahead of Trump’s 100 days? Page 3

Emerging Markets and Seasonality

USD: Modest Near Term Downside

Market Performance the

Page 1 – 2

Page 4

Read more on page 2 >

In

French Election: Round Two

increased

America

fell

slightly

Page 5

Model Portfolios Page 6

(-

1.56% despite French election

0.40%). Within Emerging Markets,

concerns while both the Nikkei

the Philippine Stock Exchange

225 and the Topix were up 1.52%

Index was the top performer,

and 1.27% respectively in April.

advancing 4.78% in April.

MARKET OUTLOOK – PAGE 1

INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.

MONTHLY MARKET OUTLOOK

French Election Race: Round Two (continued) • Uncertainty is likely to linger in the days leading up to round 2 of the election, and also after the winner is announced. There are a few key points to look out for: • French polls have proven to be reasonably robust and the polls leading to the second round vote on 7th May will be closely watched. The most recent poll showed Macron leading with 62% versus Le Pen at 38%. Expect the polls to narrow. While Macron has been immediately endorsed by Fillon, Hamon, and Juncker (President of the European Commission), Macron now needs to elaborate on his beliefs, and will be tested in the live debate with Le Pen on 3rd May. The two big variables could be how many of Melenchon’s blue-collar supporters turn to Le Pen and which way the 6.2 million undecided voters cast their vote. • Beyond the election, whoever wins is likely to face big challenges in building a majority in the Legislative Elections (11th and 18th of June). As such, Le Pen may find it difficult to implement her extreme views. Likewise, the need to build coalitions to pass legislation could compromise Macron’s proposed reforms. • The European Central Bank maintained its policy stance last week. A probable Macron win on 7th May is likely to keep it focused on the firming European economic data, and a gradual exit from its quantitative easing programme. OECD Eurozone Leading Indicator

“European assets might face less immediate downside risk and their relative attractiveness could increase slightly.” Source: Citi Research as of 22 April 2017.

• The French first round result lowers French and European political risk. Citi analysts believe that European assets might face less immediate downside risk and their relative attractiveness could increase slightly. Nevertheless some European political risk would remain, with elections in the UK, Germany, and probably Italy to navigate in the next ten months, as well as the Brexit negotiations intensifying. MARKET OUTLOOK – PAGE 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.

MONTHLY MARKET OUTLOOK

What lies ahead of Trump’s 100-days? As President Trump’s “First 100 Days” in White House draw to a close, markets will be watching closely as much uncertainty remains about the policy outlook in the US. • Less risk of a significant US-induced trade war. Concerns over a very aggressive US stance on international trade have receded somewhat, in part because the US Treasury did not label China a currency manipulator, even though Citi analysts caution that it is still ‘early days’. • But selective trade measures remain likely. The US Administration has taken a number of protectionist measures recently, including countervailing duties on Canada, investigations on steel and likely aluminum industries, as well as a potential executive action notifying of the US intent to withdraw from the North American Free Trade Agreement (NAFTA). We note that such announcements could be part of a negotiating strategy to achieve a more beneficial trade arrangement for the US. • Indeed, President Trump has indicated in recent days that he does not intend to withdraw from NAFTA “at this time”, with all three parties agreeing to start renegotiation of the deal.

“Congress may pass

Goals of “Major” Tax Reform

tax reform in late 4Q17/1Q18 which may have a modest positive impact on

the US economy” Source: Citi Research as of 26 April 2017.

• The primary focus of the US administration is now on tax reform. The Trump administration released a rough framework regarding its tax-reform plan on 26 April. It is aimed at reducing the corporate tax rate to 15.0% and trimming the number of individual tax brackets to three from seven, with the top rate expected to be 35%. • Citi analysts continue to expect Congress to pass tax reform in late 4Q17/1Q18 which is expected to have a modest positive impact on the US economy of 1-1.5pp of GDP over 2018-2021. MARKET OUTLOOK – PAGE 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.

MONTHLY MARKET OUTLOOK

Emerging Markets and Seasonality The MSCI Emerging Markets index peaked around March 20 and has since lost about 2.5%. While seasonal factors may weigh on returns in the short term, Citi analysts remain positive on the outlook for Emerging Market equities over the next 6-12 months. • Entering a less-favourable season: Since 2000, the returns from Emerging Markets tend to improve from January to the end of April. May to September appear to be difficult months while the last 3 months of the year have generally seen the strongest performance. GEMs Seasonality Since 2000

“History shows that the MaySept period delivers weaker returns for EM.” Source: Citi Research as of 20 April 2017.

• Earnings revisions continue to remain favourable: Earnings revisions for EM were positive in 2016, a first in six years. Asia enjoyed the strongest revisions, followed by EMEA and LatAm, helped by stronger commodity prices and an export pick-up. Citi analysts believe that these factors could ensure continued earnings recovery in 2017. • Attractive valuations: EM equities are currently trading at a historically large discount of 45% to US equities, when measured by the cyclically-adjusted price to earnings ratio. • While Fed rate hikes and potential US border tax policy could still cause a setback, robust domestic economic growth and attractive valuations lead Citi to overweight the region.

• Citi analysts expect the MSCI Emerging Market index to reach 1050 by year-end 2017 and 1200 by mid-2018. In terms of sectors, Cyclicals and Financials are preferred.

MARKET OUTLOOK – PAGE 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.

MONTHLY MARKET OUTLOOK

USD: Modest Near Term Downside Citi analysts expect modest near term USD downside over 0-3 months followed by a bounce of 2-3% over 6-12 months. • The USD has been broadly trading a range since early last year and Citi analysts believe this may continue. Over the short term, delayed tax reform/ fiscal stimulus and associated lower yields may see modest USD losses over 0-3 months. As US fiscal issues return to the fore later this year, the USD may gain some ground again. DM & EM – Forecasts Paths

“Modest near term USD downside over 03 months followed by a bounce of 2-3% over

6-12 months.” Source: Citi Research as of 21 April 2017.

• Citi analysts forecast EUR/$ at 1.10 over 0-3 months assuming that Macron wins the French Presidential Election. A tail risk scenario of a Le Pen victory would be much more bearish EUR near term. Over 6-12 months, Citi analysts see EUR returning to a 1.001.05 range reflecting mainly a stronger USD though a risk-off event surrounding an unexpectedly hard taper by the European Central Bank could hurt EUR too. • Sterling gains can probably continue near term as UK political uncertainty drops with a probable significant increase in PM May’s Parliamentary majority after 8 June. But Brexit negotiations are unlikely to be easier after this poll and could still hurt Sterling medium term. • Commodities generally continue to trade poorly since mid-February and more recently geopolitical risk has increased whilst the global reflation trade has waned somewhat. As such, the risks for the CAD, AUD and NZD are skewed a little lower in the shorter term. • EM FX is likely to weaken slightly medium term, in Citi’s view. A debate on the US border adjustment tax may resurface later this year and could put downward pressure on the EM FX. Citi analysts see USD/CNY at 7.09 in 6-12 months. MARKET OUTLOOK – PAGE 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. Likewise, past performance is no guarantee of future results.

MONTHLY MARKET OUTLOOK

2Q17 Model Portfolios Defensive Seeking primarily capital preservation over time and only willing to accept very minor portfolio value fluctuations from month to month. Income Oriented Seeking growth of wealth over time but unwilling to accept significant fluctuations in the value of portfolio from month to month.

Growth And Income Seeking long-term capital growth foremost but unwilling to accept significant losses on value of portfolio over the medium term.

Growth Oriented Seeking long-term capital appreciation and willing to tolerate measured medium-term volatility in order to enhance longer-term performance.

Cash

23%

Developed Govt Bonds

46%

Global IG Corp Bonds

21%

Global Equities

10%

Developed Govt Bonds

36%

Global IG Corp Bonds

26%

HY Bonds

6%

US Equities

9%

European Equities

3%

Global Equities Global REITs

13% 5%

Developed Govt Bonds

21%

Global IG Corp Bonds

19%

HY Bonds

5%

Emerging Market Debt

4%

US Equities

19%

European Equities

10%

Pacific Equities

8%

EM Equities

5%

Global REITs

8%

Developed Govt Bonds Global IG Corp Bonds HY Bonds Emerging Market Debt

8% 14% 6% 6%

US Equities

24%

European Equities

13%

Pacific Equities

10%

EM Equities

8%

Global REITs

10%

Aggressive Growth

Seeking long-term capital appreciation and can accept potentially large losses on portfolio over the near-to-medium term in order to maximise long-term performance.

Global IG Corp Bonds

5%

HY Bonds

6%

Emerging Market Debt

6%

US Equities

29%

European Equities

19%

Pacific Equities

12%

EM Equities

10%

Global REITs

10%

MARKET OUTLOOK – PAGE 6

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.

MONTHLY MARKET OUTLOOK

World Market at a Glance Historical Returns (%)

Last price

52-Week

52-Week

30-Apr-17

High

Low

1 week

1 month

1 year

Year-to-date

Dow Jones Industrial Average

20940.51

21169.11

17063.08

1.91%

1.02%

17.82%

5.96%

S&P 500

2384.20

2400.98

1991.68

1.51%

0.68%

15.44%

6.49%

NASDAQ

6047.61

6100.73

4574.25

2.32%

2.25%

26.64%

12.34%

MSCI Europe

439.63

442.24

353.59

4.24%

2.86%

7.85%

9.89%

Stoxx Europe 600

387.09

388.88

307.81

2.37%

1.74%

13.36%

7.10%

FTSE100

7203.94

7447.00

5788.74

1.26%

-2.25%

15.41%

0.86%

US / Global

Europe

CAC40

5267.33

5296.52

3955.98

4.11%

3.49%

18.93%

8.33%

DAX

12438.01

12486.29

9214.10

3.23%

1.48%

23.90%

8.34%

NIKKEI225

19196.74

19668.01

14864.01

3.09%

0.70%

15.18%

0.43%

Topix

1531.80

1578.51

1192.80

2.90%

0.28%

14.27%

0.87%

Japan

Emerging Markets MSCI Emerging Market

977.96

986.26

780.68

1.68%

0.88%

16.40%

13.42%

MSCI Latin America

2600.69

2719.09

2010.63

-0.07%

-2.18%

13.47%

11.11%

MSCI Emerging Europe

150.67

153.21

116.92

4.26%

0.61%

14.91%

2.69%

Brazil Bovespa

65403.25

69487.58

48066.67

2.58%

0.21%

21.32%

8.59%

Russia RTS

1114.43

1196.99

873.58

2.79%

-2.01%

17.17%

-3.29% 15.53%

Asia MSCI Asia ex-Japan

594.22

597.22

474.10

1.94%

1.56%

18.27%

Australia S&P/ASX 200

5924.06

5956.52

5051.00

1.19%

0.47%

12.79%

4.56%

China HSCEI (H-shares)

10219.89

10698.28

8175.96

1.69%

-1.31%

14.32%

8.78%

China Shanghai Composite

3154.66

3301.21

2780.76

-0.58%

-1.73%

7.36%

1.64%

Hong Kong Hang Seng

24615.13

24773.80

19594.61

2.38%

1.29%

16.84%

11.88%

India Sensex30

29918.40

30184.22

25057.93

1.88%

0.91%

16.84%

12.36%

Indonesia JCI

5685.30

5726.53

4690.56

0.37%

1.65%

17.50%

7.34%

Malaysia KLCI

1768.06

1776.12

1611.88

0.68%

1.08%

5.70%

7.69%

Korea KOSPI

2205.44

2229.74

1892.75

1.87%

1.88%

10.60%

8.83%

Philippines PSE

7661.01

8118.44

6499.00

1.09%

4.48%

7.01%

11.99%

Singapore STI

3175.44

3207.62

2703.48

1.13%

0.07%

11.87%

10.23%

Taiwan TAIEX

9872.00

9976.61

7999.98

1.59%

0.24%

17.83%

6.68%

Thailand SET

1566.32

1600.79

1343.13

-0.24%

-0.86%

11.51%

1.52%

Commodity Oil Gold spot

49.33

55.24

39.19

-0.58%

-2.03%

7.43%

-8.17%

1268.29

1375.45

1121.03

-1.23%

2.06%

-1.91%

10.07%

Source: Citi Research as of 30 April 2017.

MARKET OUTLOOK – PAGE 7

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 res ults.

MONTHLY MARKET OUTLOOK

Currency Forecasts

Last price

Forecasts

Currency

30-Apr-17

Jun-17

Sep-17

Dec-17

Mar-18

Euro

EURUSD

1.09

1.09

1.07

1.05

1.04

Japanese yen

USDJPY

112

110

113

117

118

British Pound

GBPUSD

1.30

1.33

1.28

1.23

1.23

Swiss Franc

USDCHF

0.99

0.98

1.00

1.02

1.03

Australian Dollar

AUDUSD

0.75

0.75

0.76

0.76

0.76

New Zealand

NZDUSD

0.69

0.71

0.69

0.68

0.68

Canadian Dollar

USDCAD

1.37

1.34

1.35

1.35

1.35

Chinese Renminbi

USDCNY

6.89

6.91

6.99

7.07

7.05

Hong Kong

USDHKD

7.78

7.77

7.78

7.78

7.78

Indonesian Rupiah

USDIDR

13,329

13,365

13,516

13,666

13,670

G10-US Dollar

EM Asia

Indian Rupee

USDINR

64.2

65.2

65.5

65.9

66.4

Korean Won

USDKRW

1,138

1,154

1,163

1,173

1,171

Malaysian Ringgit

USDMYR

4.34

4.42

4.43

4.45

4.43

Philippine Peso

USDPHP

50.0

50.0

49.9

49.9

49.5

Singapore Dollar

USDSGD

1.40

1.41

1.40

1.39

1.39

Thai Baht

USDTHB

34.6

35.1

34.9

34.7

34.6

Taiwan Dollar

USDTWD

30.2

30.9

30.8

30.8

31.0

Czech Koruna

USDCZK

24.63

24.26

24.46

24.66

24.60

Hungarian Forint

USDHUF

287

288

295

302

304

Polish Zloty

USDPLN

3.88

3.93

3.98

4.03

4.03

Israeli Shekel

USDILS

3.62

3.66

3.69

3.72

3.73

Russian Ruble

USDRUB

56.9

56.0

56.8

57.6

58.8

EM Europe

Turkish Lira

USDTRY

3.55

3.72

3.76

3.80

3.85

South African Rand

USDZAR

13.37

13.56

13.87

14.18

14.36

Brazilian Real

USDBRL

3.18

3.07

3.10

3.14

3.17

Chilean Peso

USDCLP

667

654

658

663

666

Mexican Peso

USDMXN

18.8

18.9

19.1

19.3

19.4

Colombian Peso

USDCOP

2940

2867

2895

2924

2910

EM Latam

Source: Citi Research as of 30 April 2017.

MARKET OUTLOOK – PAGE 8

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.

MONTHLY MARKET OUTLOOK

EMEA Model Portfolio This section shows the revisions to asset allocations decided by Citibank EMEA Model Portfolio Committee on 23 March 2017. Citibank’s EMEA Model Portfolios provide a guide to possible diversification of investment portfolios and serve as an asset allocation reference tool both for periodic evaluation and prospective investments. Citibank Model Portfolios are developed by Citibank’s inhouse Global and Regional investment specialists to cater to investors with various risk profiles (based on Citibank’s risk assessment) and provide them with: • Diversified asset allocations, made uniquely relevant for EMEA investors • Up-to-date asset allocations which are reviewed and revised periodically by Citibank’s Research teams to reflect changing market conditions in respect of relevant asset classes • Access to our best-in-class research from the Global Investment Committee It is important to note that while Citibank Model Portfolios represent Citibank’s best thinking in terms of asset allocation and diversification, they serve only as a guideline for investors based on certain risk profiles. Market movements, changing market views, time horizons and liquidity constraints (among others) may result in a portfolio’s asset allocation deviating from the model allocation. Citibank does not monitor and/or manage individual customer portfolios. For a long term investor, it is advantageous to diversify his/her investment portfolio and consider using Citibank Model Portfolios as a reference in diversification reviews. The suggested allocations are intended to be general in nature and are not to be construed as specific investment advice. Investors are encouraged to consult with their Relationship Managers to determine their allocation needs based on their risk tolerance, suitability and goals.

Model Portfolio Disclaimers Investment products are (a) not insured by any government agency; (b) not a deposit or other obligation of, or guaranteed by, the depository institution; and (c) subject to investment risks, including possible loss of the principal amount invested. Past performance is not indicative of future results: prices can go up or down. This is neither an offer nor solicitation to purchase or sell any security, other investment or service or to attract any funds or deposits. This document does not constitute the distribution of any information or the making of any offer or solicitation by any one in any jurisdiction in which such distribution or offer is not authorized or to any person to whom it is unlawful to distribute such document or make any offer or solicitation. Investors investing in investment products denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Investment products are not available to US Persons and may not be available in all jurisdictions. Portfolio diversification is an important element for an investor to consider when making investment decisions. Concentrated positions may entail greater risks than a diversified portfolio. Certain factors that affect the assessment of whether your overall investment portfolio is sufficiently diversified may not be evident from a review of only your account with Citibank. It therefore is important that you carefully review your entire investment portfolio to ensure that it meets your investment goals and is within your risk tolerance, including your objectives for asset and issuer diversification. To discuss your asset allocations and potential strategies to reduce the risk and/or volatility of a concentrated position, please contact your personal banker/relationship manager. Citibank’s Model Portfolio is not a program or offering, but is a diversification tool that is meant for reference purposes only. Model Portfolios are: (i) not binding on the part of the customers; (ii) not monitored by Citibank with respect to customers’ individual investment holdings; and (iii) not personalized to the specific needs of any individual customer. Citibank’s Model Portfolios are not available to US Persons and may not be available in all jurisdictions.

MARKET OUTLOOK – PAGE 9

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.

MONTHLY MARKET OUTLOOK

Disclaimer “Citi analysts” refers to investment professionals within Citi Investment Publication and Analysis and Citi Global Markets (CGM) and voting members of the Global Investment Committee of Global Wealth Management. Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. Investment products are not available to US persons and not all products and services are provided by all affiliates or are available at all locations. This document is for general informational purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security, currency, investment, service or to attract any funds or deposits. Information in this document has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Therefore, investment products mentioned in this document may not be suitable for all investors. 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Investments are not deposits or other obligations of, guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Neither Citigroup nor 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 Citigroup. 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MARKET OUTLOOK – PAGE 10

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 res ults.