EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT - 2019 MID-YEAR OUTLOOK Citigold - Citibank Malaysia
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Citigold
2019 MID-YEAR OUTLOOK
EMBRACING UNCERTAINTY
IN A SLOWER GROWTH
ENVIRONMENTCitigold 2019 MID-YEAR OUTLOOK
CONTENTS
CITI’S TOP THEMES
1 E C O N O M Y Divergence in Global Growth 2
2 E Q U I T I E S Exploiting Late Cycle Opportunities 5
3 B O N D S Protect the Downside 8
4 C O M M O D I T I E S Pockets of Opportunities 12
5 C U R R E N C I E S
Uncertainty Could See Safe Haven
Currencies in Vogue 15
6 P O L I T I C S 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.Citigold 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.Citigold 2019 MID-YEAR OUTLOOK
1
ECONOMY
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.
GDPGrowth
GDP Growth forecasts
forecasts
• Developed Markets
(DMs) target 1.8�
growth in 2019 and %YY
1.6� in 2020, while 6.0
Emerging Markets (EMs) Forecasts
are anticipated to grow
5.0
4.4� in 2019 and 4.6�
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:CitiCiti
Source: Research. As of 22
Research. AsMay 2019.
of 22 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.Citigold 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.Citigold 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.Citigold 2019 MID-YEAR OUTLOOK
2
EQUITIES
EXPLOITING LATE CYCLE
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
Equities areoften
oftenseasonally
seasonallyweaker in May
weaker – August
in May – August
risking within equities
should be expected. MSCI Asia Ex-Japan Index returns by month (2010-18)
• As a result, Citi
Avg Monthly Returns (%) Years w/ Negative Mth (%)
analysts have tactically
reduced their global 3.0 100
equity allocation to Summer Risks
2.0
underweight. Within
75
equities, Citi still
1.0
prefers Emerging
Markets (EM), 0.0 50
particularly Asia, in the
long term. -1.0
• Cyclical stocks have 25
-2.0
rebounded in 1Q19 as
recession fears have
-3.0 0
subsided. However,
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
economies are growing
at a slower pace and
trade risks appear Asia Ex-Japan Avg Returns Hit Rate (% of negative years, Right)
elevated. Amongst
Source: Citi
Source: Private
Citi PrivateBank.
Bank.As
Asof
of20
20May
May 2019.
2019.
the defensives, Citi
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. Likewise, past performance is no guarantee of future results.Citigold 2019 MID-YEAR OUTLOOK
The US equity market has reached 55% of world equity
index market capitalization, well above the 23% share of
world GDP measured in USD. It has reached this strong
point through globalization, and trade risks pose a threat to
US US profits. Citi analysts do not believe a severe escalation
of US tariffs and retaliation measures are embedded in
current corporate earnings estimates and are tactically
underweight US equities.
Consensus estimates suggest European companies could
grow their earnings by 8% in 2019 and 10% in 2020.
However, there are downside risks to corporate earnings
forecasts as US-European trade tensions may escalate
EUROPE later in the year. Nevertheless, European equity valuations
& UK are reasonable and assuming eventual trade conflict de-
escalation, Citi analysts would seek selective opportunities
in sectors like Health Care.
Attractive valuations, 4.9% average dividend yield, and
undervalued currency, are offset by uncertainty over Brexit
and domestic politics. Citi analysts focus on selective areas
in UK such as large-cap high yielders with substantial
overseas earnings.
Citi analysts believe that consensus EPS growth of around
6% for 2019 is too optimistic and expect 1% instead.
Japanese equities are trading at 13x forward Price-to-
Earnings (P/E), a 10% discount to a 10-year average. Risk
JAPAN could come from upper house election in July, sales tax hike
in October, yen strength and escalation in trade tensions.
Citi analysts believe that an eventual US trade deal,
though with more extended negotiations, is more
likely than a complete breakdown. Whatever happens,
policymakers in China are much more ready to support
EMERGING the economy if negotiations go awry compared with 12
MARKETS (EMs) months ago. Furthermore, mildly recovering growth in
China is becoming more broad-based, leading Citi analysts
to believe that China’s economic improvements only
began in March. For longer-term investors, Asian markets
are likely to continue to outperform, especially in China,
Citi’s favoured region.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 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.Citigold 2019 MID-YEAR OUTLOOK
EXPLOITING LATE CYCLE OPPORTUNITIES / 2
Sectors to watch
Cyclical stocks have rebounded in 1Q19 as recession fears have subsided.
However, economies are growing at a slower pace and trade risks appear
elevated. Amongst the defensives, Citi analysts are overweight the more
growth-oriented Health Care and Communication Services sectors.
MATERIALS
Citi analysts favour Materials based on supply discipline
and free cashflow generation. Global materials sector EPS
could grow 5% in 2019 and another 7% in 2020. The sector
is trading at a 13x 2019E Price-to-Earnings, a 13% discount
to the benchmark.
COMMUNICATION SERVICES
Citi analysts retain a constructive view on the global
Telco landscape given upcoming 5G deployments and the
opportunities to improve revenue monetization. The Telco
sector also trades at 12x 2019E Price-to-Earnings, a 20%
discount to the market. Separately, with above-average
growth and fundamentals largely intact, there are still
long-term opportunities in the Internet sector. However,
valuations look expensive with sector trading at 22x 2019E
Price-to-Earnings, roughly at a 40% premium.
HEALTH CARE
Citi analysts prefer Health Care due driven by 2 trends:
Aging Population and EM Consumer growth and expect
mid to high single-digit earnings growth, with US and EU
large-caps offering 9% and 7% 5-year Earnings-Per-Share
Compound Annual Growth Rate from 2019. Health Care
firms that make products, drugs, and equipment for a
global environment could outperform.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 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 results.Citigold 2019 MID-YEAR OUTLOOK
3
BONDS
PROTECT THE DOWNSIDE
Key Takeaways With central bank policy turning dovish and core non-US rates still near
• Amid a revival of trade historical lows, Citi analysts believe that the demand for yield may likely
fears, Citi’s overweight persist.
stance on fixed-income
quality may help US fixed income markets now price in two 25 bps easing
navigate more volatile steps by the US Federal Reserve (Fed) this year and
mid-year markets further cuts in 2020. Citi analysts also see action by the
and potentially Fed dependent on trade developments. If the current
strengthening risk- weakening in financial conditions and negative trade
adjusted returns. impact spreads to overall domestic economic weakness,
the Fed could follow financial markets with interest rate
• Citi analysts remain
cuts. However, the Fed is likely to be reactive to trade news
constructive on US rather than leading in Citi’s view.
Investment Grade (IG)
bonds, as yield curves
are steeper than With short-term economic developments broadly in line
Treasury markets and with European Central Bank’s (ECB) baseline, then very
spreads are wider in little should be expected in terms of new monetary policy
longer maturities. announcements besides maintaining its dovish tone in
coming meetings. The ECB is expected to delay the timing
• Within Emerging
of a first rate hike by 18 months to 1Q21.
Market Debt (EMD),
Citi analysts prefer
to be selective and As the UK faces political tensions and more Brexit deadlines,
maintain overweights Citi analysts see a growing risk that the Bank of England (BoE)
in Asia (USD and local may signal that there will be no hike at all this year.
currency debt).
Citi analysts expect the Bank of Canada (BoC) and
Reserve Bank of New Zealand (RBNZ) to remain on hold
for now, but for the Reserve Bank of Australia (RBA) to
cut the cash rate by a total of 50bps this year.
The Bank of Japan (BoJ) may keep status quo for its
monetary policy until 2H20. But the probability of the
inaction period being extended is increasing amid slow
growth in 2020 and heightened US-China trade tensions.
In Asia: India, Indonesia and Philippines are expected to
cut rates further.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 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.Citigold 2019 MID-YEAR OUTLOOK
PROTECT THE DOWNSIDE / 3
Selective regional markets offer value
In Citi’s view, long-term US Treasury yields are likely to be constrained
by modest economic growth, political uncertainties, below target inflation
and low interest rates outside the US. While a flat yield curve limits the
opportunity to extend duration in Treasuries, Investment Grade (IG)
corporate curves offer better opportunities. Citi analysts find best values
in US IG between 5-7 years to maturity.
Within Emerging Market Debt (EMD), Citi analysts prefer to be selective
and maintain overweights in Asia (USD and local currency debt), especially
in China property and high grade State-Owned-Enterprise (SOE) credit.
In contrast, Citi analysts are now neutral US High Yield (HY) as valuations
became expensive. That said, Citi’s neutral view is still based on a strong
fundamental outlook for HY issuers.
Intermediate term
Intermediate termspreads
spreadsare
areattractive
attractive across
across credit qualities
credit qualities
Spread (bp)
250
213
200
200
161
150
145
141 141
110 108
115
100 102
89 88
73 76
53 63
50 51
33
0
1-3 years 3-5 years 5-7 years 7-10 years 10-20 years 20+ years
AA-rated A-rated BBB-rated
Source: Citi Private Bank. As of 20 May 2019.
Source: Citi Private Bank. As of 20 May 2019.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 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.Citigold 2019 MID-YEAR OUTLOOK
INVESTMENT GRADE (IG)
Though yield curves have flattened, US Investment Grade (IG) corporate
curves are relatively steeper than US Treasuries (UST). Additionally,
IG spread curves have steepened. Over the last 12 months, bond flows
have been primarily focused on shorter-dated IG bonds. 1-3yr IG spreads
are now near +50bp and slightly above historical tights. In turn, longer
duration bond spreads are now much more attractive. Citi analysts find
best values in US IG between 5-7 years to maturity.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 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 results.Citigold 2019 MID-YEAR OUTLOOK
PROTECT THE DOWNSIDE / 3
EMERGING MARKET DEBT (EMD)
While pockets of political volatility should be monitored, Citi analysts
believe EM is positioned to outperform longer term. However, should
seasonal volatility in the summer months add to USD strength, then this
in turn can put additional pressure on unhedged local positions. As such,
Citi analysts retain modest overweights in USD Emerging Market Debt
(EMD). In Asia, Citi analysts remain overweight in both USD and local
currency debt, and continue to believe that Chinese policymakers could
provide supportive financial conditions to cushion the impact of trade
tensions and hence remain positive on property and high grade SOE
credit.
HIGH YIELD (HY)
In contrast, Citi analysts are now neutral on US High Yield (HY) bonds.
Refinancing risks are low and default rates have declined to 2.1%, since
peaking at 5.1% during the 2015/2016 oil recession. However, valuations
have become expensive. The summer months are also typically
characterized by higher volatility, where low-quality HY could likely
underperform. Nevertheless, the demand for yield is likely to remain
longer term and Citi analysts view any pull-backs as an opportunity.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 11
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.Citigold 2019 MID-YEAR OUTLOOK
COMMODITIES
POCKETS OF OPPORTUNITIES
Key Takeaways The commodity complex is being hemmed and hawed by opposing forces
• Oil supply disruption across the spectrum and within sub-sectors. This has been triggered in part
is likely to support by slower China’s growth prospects and the US escalation of the trade and
Brent prices even if intellectual property struggle with Beijing, resulting in the erasure of some
trade tensions were to of the strength commodities experienced over 1Q19. Looking forward into
escalate. Citi analysts 2H19, Citi analysts still see pockets of opportunities within the commodity
foresee Brent prices space.
hitting a short-term
target of US$75/bbl
once again, possibly
overshooting towards
US$78/bbl.
• Citi analysts continue
to favour gold as a
way to reduce overall
portfolio volatility or
hedge geopolitical and
market tail risks, with
potential for prices to
average US$1,335/oz
in 2019.
• Escalated US-China
trade tensions have
led Citi analysts
to prefer bulk
commodities over
base metals, given
that the increased
odds of Chinese
stimulus measures is
expected to benefit
demand for steel, iron
ore and coking coal.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 12
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.Citigold 2019 MID-YEAR OUTLOOK
POCKETS OF OPPORTUNITIES / 4
Citi analysts believe that oil can outperform other commodities even if
trade tensions were to escalate. This is because supply-side factors can
be far more influential than demand changes. The outlook for demand
remains robust, with GDP numbers coming in stronger than expected,
Oil: Prices central banks shifting to a less hawkish tone, and refineries coming back
likely to remain from seasonal maintenance. Furthermore, oil demand is less sensitive to
supported global trade growth than other commodities.
On the other hand, oil supply disruptions are spreading. The situation in the
Middle East remains rife with potential military escalation that could impact
oil flows, and oil production is currently at risk in Libya, Venezuela, Iran,
and Eastern Europe due to geopolitics, US sanctions, and infrastructure
issues. OPEC+ is also staying on the sidelines for now, reluctant to add
significant volumes to markets so long as overall measures of inventories
remain adequate.
Despite the softness in the crude oil market early in May, Citi analysts still
foresee Brent prices hitting a short-term target of US$75/bbl once again,
possibly overshooting towards US$78/bbl.
OPECCrude
OPEC CrudeProduction
Production (million
(million barrels/day)
barrels/day)
34.0
33.5
32.5
32.0
31.5
31.0
30.5
30.0
29.5
29.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2013-17 Range 2013-17 Average 2016
2017 2018 2019
Source:Citi
Source: CitiResearch.
Research.AsAsofof8 8 May
May 2019.
2019.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 13
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to
a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results.Citigold 2019 MID-YEAR OUTLOOK
4 / POCKETS OF OPPORTUNITIES
The stronger-than-expected US dollar move YTD, and
particularly since March, has been the primary driver
capping gold prices. Looking ahead, Citi analysts still
Precious Metals: project a softer US$, which may allow gold to trade the
Gold may higher US$1,300-1,400/oz range.
outperform
If US-China trade relations deteriorate, gold prices stand to
benefit from flight to quality inflows although this may be
offset by a weaker EM consumption channel and diminished
Asian demand. On the other hand, a clean resolution of
the bilateral trade spat may ultimately be positive for both
gold and risk assets via a weaker US$.
Citi analysts have downgraded base metals for 2H19, on
the back of elevated US-China trade tensions. However, Citi
analysts believe that the ongoing period of trade volatility
is unlikely to last given that President Trump may be more
Base Metals: Riding out
inclined to conclude a trade deal and gain support before
the storm as we head into
the 2020 election season.
a bullish 2020 political
backdrop
Citi analysts are most bullish on aluminium in the very
near term as tightening supply issues could support
prices. Meanwhile, absent a major escalation in the trade
dispute from here, Citi analysts are positive on copper, as
price has been disproportionately impacted by the trade
tensions relative to other cyclically exposed commodities.
In zinc, Citi analysts see a short term bounce before a
sustained move down to US$2,300/t by year end, while
nickel fundamentals look weak and should continue to
underperform.
Escalated US-China trade tensions have increased the odds
of Chinese stimulus measures. This is expected to benefit
demand for steel, iron ore and coking coal, which have
Bulk Commodities: proved more strongly correlated with China’s fixed asset
Beneficiaries of investment than base metals and energy commodities.
China’s stimulus Meanwhile, supply disruptions in Brazil may keep iron ore
measures prices elevated in the short term.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 14
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.Citigold 2019 MID-YEAR OUTLOOK
5
CURRENCIES
UNCERTAINTY COULD SEE SAFE
HAVEN CURRENCIES IN VOGUE
Key Takeaways A potential downgrading of the global growth outlook could
• The extension of the see safe haven currencies in vogue.
US-China trade dispute
together with other
unresolved geopolitical USD
concerns – Brexit, • Trade tensions have generated risk aversion sentiment
a potentially more and adding to USD support, given the greater downside
populist European risk to China, EM and the Eurozone from trade conflict
parliament and US-EU/ relative to the US.
Japan trade tensions • However, Citi analysts believe that the medium to longer
risk posing headwinds term bias is for a weaker USD, in line with the historical
to the 2H19 outlook. pattern of depreciation (vs. G10) as the long term norm,
• This is likely to occurring in bursts of around ten years. Additionally,
support safe haven as US fiscal stimulus fades and the US growth outlook
currencies such as markedly slows, this may lead to the Fed cutting rates
JPY. In contrast, the that could help weaken the USD.
commodity currencies
are more susceptible
to risk aversion though
CAD remains most
Performance of Dollar Index vs Fed Fund Rate
resilient. Performance of Dollar Index vs Fed Fund Rate
• In Asia, IDR, MYR,
SGD, KRW and THB
77’ 83’ 87’ 94’ 99’ 04’ 15’
remain vulnerable in
160 20
the short term to an
escalation in US-China 140
15
trade tensions and
CNY depreciation. 120
10
100
96.511
5
80 2.50
0
1980-1989 1990-1999 2000-2009 2010-2019
Dollar Index Fed Fund Rate
Source:
Source: Citi Research. As
Citi Research. Asof
of15
15May
May2019.
2019.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 15
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.Citigold 2019 MID-YEAR OUTLOOK
JPY
• JPY has been the typical safe haven currency of choice in times
of volatility and a further correction in risky assets, should global
geopolitical risks intensify, may exacerbate a strengthening in Yen.
• More medium term, JPY also remains fundamentally cheap given
slower BoJ balance sheet expansion and lower yield spreads to the
US. Additionally, JPY support comes from central bank reserve asset
growth, which led JPY appreciation in late 2013/14 and 2017.
Euro bloc: EUR and GBP – Near term weakness but longer
term firmer
EUR
• EUR/USD continues to be broadly range bound. A medium term
positive for the single currency remains the fundamental support of
the improving euro area broad balance of payments and the US Fed's
dovish stance that has led to a significantly less negative spread in front
end yields between USD and EUR.
• However, significant euro centric risks remain that can cap EUR upside
for now. These include - (1) a potentially more populist European
parliament following the May 23rd elections; (2) continuing weakness
in euro zone manufacturing led by German auto production; and (3)
prospects for a more dovish ECB at the June 6th meeting to support
falling inflation expectations.
• But the longer term structural outlook for EUR remains positive,
supported by stronger Foreign Direct Investments (FDI) and reserve
manager buying versus concerns about the increased net international
liability of the US given even further increases in its twin fiscal and
current account deficits.
GBP
• A more hawkish than expected BoE at the May meeting has left sterling
broadly unperturbed. The BoE raised UK GDP expectations across the
forecast horizon with inflation forecasts also above target in 2021. This
infers that current market expectations for the Bank rate could be too
low with less than one hike priced in over the next two years.
• That said, a Brexit deal (or longer extension) is a likely precondition to
any hike in 2019 and the political backdrop clearly remains the biggest
risk to GBP, particularly if a UK general election looks likely.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 16
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.Citigold 2019 MID-YEAR OUTLOOK
UNCERTAINTY COULD SEE SAFE HAVEN CURRENCIES IN VOGUE / 5
Commodity Bloc: Vulnerable to risk aversion; CAD most
resilient
• Historically, AUD has been one of the more vulnerable during times
of heightened risk aversion and the added spectre of a more subdued
domestic outlook potentially leading to RBA rate cuts this year, makes
AUD even more vulnerable. And while Australia’s terms of trade have
performed strongly, escalating US-China trade tensions and resulting
CNY depreciation pose a risk given Australia’s strong trade linkages to
China.
• The RBNZ also seems to have changed to a more dovish tune at its March
meeting and followed up by cutting rates by 25bp to offset “placing
upward pressure on the New Zealand dollar”. With NZ rates continuing
to price a 50% probability of a further rate cut and highlighting domestic
vulnerability, coupled with escalating US-China trade tensions and CNY
depreciation, NZD also remains vulnerable given New Zealand’s strong
trade linkages to China.
• Of the 3 commodity currencies, CAD remains the most resilient given
BoC’s bias to tighten policy as the Canadian economy look likely to
pick up in the second half of this year. As a result, the BoC still sees the
next move in Canadian rates to the upside with higher oil prices also
AUD benefitting the local economy. Nevertheless, Canada is not immune to
NZD
CAD
trade tensions which will also pose a hurdle to CAD though probably not
as much as for AUD and NZD.
Asia EM: CNY - More room for RMB depreciation if trade
dispute escalates
• Increased uncertainty amidst a lower likelihood of a US-China trade
deal near term is likely to see the People's Bank of China (PBoC) revert
back to an easing bias which in turn is likely to create more room for
RMB depreciation. Citi estimates that a 4.4% depreciation of the RMB
(after adjusting for inflation) is needed to offset current tariffs (25% on
US$250bn Chinese goods) and more if the US levies tariff on all Chinese
goods. For now, the possibility of USDCNY breaking above 7.00 remains
low unless the US extends tariffs to all Chinese imports.
• EM FX is likely to remain under pressure because (1) the market’s
increasing conviction that the US-China dispute may extend beyond the
G20 meeting, and (2) as trade tensions extend beyond China to include
other US trading partners. This is likely to see pressure on EM FX across
the board (Asia, CEEMA and Latam).
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 17
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.Citigold 2019 MID-YEAR OUTLOOK
6
POLITICS
RISKS REMAIN ELEVATED
Key Takeaways Some of the main political signposts and geopolitical
• Political and policy risks that could move markets in 2019 include:
uncertainty affecting
trade, sanctions and
regulation is generating
increased levels of
investor concern, with
impact on the global
economy and financial
markets. US
• With volatility
anticipated to remain
elevated, Citi analysts
believe that a highly
diversified multi-asset
class portfolio approach US UK
remains essential in • On 7 June, President Trump • Prime Minister May
today’s environment. announced the signature of announced she will step down
an agreement with Mexico as Conservative Party leader
that “indefinitely suspended” on 7 June, paving the way
the 5% tariffs scheduled for a contest to decide a new
to be implemented by the Prime Minister.
US beginning 10 June. The • The UK is scheduled to leave
deal came with Mexico’s the EU on 31 October, so
commitment to a series of the new PM needs to decide
measures aimed at curbing quickly whether to try and
migration across the US- leave with or without a deal.
Mexico border. However, an anti-EU leader
• In Citi’s view, while this may struggle to hang on to
removes the immediate a parliamentary majority,
trade threat and its potential which makes it difficult to
consequences, the risk of the pass any kind of Brexit,
US continuing to threaten or any other legislation.
Mexico (and other trade Hence, Citi analysts expect
partners) with protectionist the PM to call a general
measures remains. Citi election to get a mandate
analysts also continue to for Brexit and other policies.
believe that US-EU trade A second Brexit referendum
tensions have not peaked is a possible alternative, but
despite the delay in the without control of Parliament
implementation of the auto would be risky in terms of
tariffs on the EU and Japan the question on the ballot. It
(for 6 months in exchange of would not produce a majority
a deal to restrict exports to in Parliament for other
the US). policies.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 18
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.Citigold 2019 MID-YEAR OUTLOOK
RISKS REMAIN ELEVATED / 6
UK
ITALY
NORTH KOREA
ITALY
• Updated forecasts from the CHINA
European Commission in
May showed a cut in Italy’s MIDDLE EAST
GDP growth projections for
2019 down to 0.1%, with a
projected widening in the CHINA
Italian fiscal deficit to 3.5% of
• On 6 May, the People's Bank • On 10 May, the US
GDP, breaching EU’s 3% limit.
of China (PBoC) announced announced the imposition of
• Euro zone’s third-largest a Reserve Requirement tariffs of an additional 15%
economy could be hit with Ratio (RRR) cut for small on $200bn of imports from
a fine of 3 billion euros by and medium-size banks. If China. China retaliated by
the European Commission necessary, the RRR could be increasing the punitive tariff
for accumulating debt and further lowered, and more rate on US$60bn of imports
deficits that break EU rule. aggressive easing measures from the US.
such as interest rate cuts
MIDDLE EAST
could also be expected. On the
• On April 22, the United States fiscal front, government bond NORTH KOREA
announced it would no longer issuance accelerated earlier
grant waivers to buyers of this year, and infrastructure • The US and North Korea
Iranian crude that are expired spending has started to talks have again hit an
in May. Iran has threatened rebound. Citi analysts believe impasse following the Hanoi
retaliation over the US the next round of fiscal policy summit in February 2019 as
decision to remove sanctions stimulus could focus on Pyongyang is demanding
waivers by closing the Strait durable consumption. If the sanctions relief before it
of Hormuz, a key waterway various tax cuts were to fail to begins to denuclearize,
in the Middle East which boost growth, the authorities while the US insists that
carries a fifth of the world’s might revert to the old ways, Pyongyang relinquish its
traded oil. All oil exports of namely more infrastructure nuclear weapons before any
Iraq, Kuwait, UAE, Qatar and investment. Given that the economic pressure is eased.
Bahrain pass through the scope for fiscal and monetary
narrow passage, as well as stimulus remains large in
some exports from Saudi the near term, Citi analysts
Arabia. Any attempt by Iran believe the negative impact
to block this would heighten from additional tariffs may be
regional geopolitical tension. managed better this time.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 19
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.Citigold 2019 MID-YEAR OUTLOOK
6 / RISKS REMAIN ELEVATED
Current global trade tensions remain elevated as focus remains on
political headlines rather than on economic fundamentals. Citi analysts
believe that diversified high-quality portfolios can provide buffer in times
of uncertainty.
Following the sharp equity rally in 1Q19, it makes sense to de-risk portfolios
ahead of the seasonally weaker summer months and the ongoing volatility.
However, Citi analysts caution against broad-based selling and market
timing. In the past two decades, missing just 20 days out of 10 years would
have produced negative returns on average for US equities, for what was
otherwise the best performing asset class.
The costs
The costs of poor
poor market
market timing
timing are
are severe
severe
(%)
20
15 17.6
10 11
8.5
5 5.9
0
-2.5 -2.8
-5
Decade 1988 - 1997 Decade 1998 - 2007 Decade 2008 - 2017
Annualized S&P Total Return Annualized return missing the 20 best days
Source: Citi
Source: Citi Private
Private Bank.
Bank.As
Asof
of2121May
May2019.
2019.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 20
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.Citigold 2019 MID-YEAR OUTLOOK
ECONOMIC GROWTH & INFLATION FORECASTS
GDP Inflation
2018 2019 2020 2018 2019 2020
Global 3.2% 2.9% 2.9% 2.7% 2.5% 2.5%
US 2.9% 2.7% 2.0% 2.0% 1.7% 1.9%
Europe 1.8% 1.2% 1.3% 1.8% 1.3% 1.4%
Japan 0.8% 0.7% 0.1% 1.0% 0.5% 0.6%
Latin America 1.4% 1.6% 2.4% 7.5% 8.3% 6.1%
Emerging Europe 3.1% 1.6% 2.7% 5.9% 6.7% 5.9%
Middle East & North Africa 2.4% 2.7% 3.6% 4.6% 3.6% 4.8%
Asia 5.9% 5.7% 5.6% 2.3% 2.6% 2.6%
China 6.6% 6.4% 6.0% 2.1% 2.6% 2.3%
Hong Kong 3.0% 2.1% 2.1% 2.4% 2.0% 2.3%
India 6.9% 7.0% 7.4% 3.4% 3.8% 4.2%
Indonesia 5.2% 5.0% 4.9% 3.2% 3.3% 3.9%
Malaysia 4.7% 4.7% 4.7% 1.0% 1.4% 2.5%
Philippines 6.2% 6.2% 6.5% 5.2% 2.8% 3.0%
Singapore 3.2% 2.2% 2.5% 0.4% 0.7% 1.2%
South Korea 2.7% 2.4% 2.2% 1.5% 1.0% 1.5%
Taiwan 2.6% 2.1% 1.9% 1.3% 0.8% 1.3%
Thailand 4.1% 3.5% 3.7% 1.1% 1.2% 0.9%
Vietnam 7.1% 6.7% 6.7% 3.5% 3.0% 3.0%
Source: Forecasts from Citi Research. As of 22 May 2019.
EXCHANGE RATE FORECASTS (VS. USD)
3Q19 4Q19 1Q20 2Q20
Europe 1.14 1.15 1.17 1.20
Japan 106 105 103 101
UK 1.31 1.34 1.37 1.40
Australia 0.70 0.71 0.72 0.73
China 6.91 6.84 6.75 6.65
Hong Kong 7.84 7.83 7.82 7.81
India 69.4 68.5 68.4 69.2
Indonesia 14425 14275 14269 14409
Malaysia 4.16 4.15 4.11 4.04
Philippines 52.4 52.5 52.6 52.6
Singapore 1.36 1.35 1.35 1.34
South Korea 1197 1186 1174 1162
Taiwan 31.2 31.0 30.8 30.7
Thailand 31.7 31.6 31.6 31.7
Source: Forecasts from Citi Research. As of 22 May 2019.
INTEREST RATE FORECASTS
Current 3Q19 4Q19 1Q20 2Q20
US 2.50% 2.50% 2.50% 2.50% 2.50%
Europe 0.00% 0.00% 0.00% 0.00% 0.00%
Japan -0.10% -0.10% -0.10% -0.10% -0.10%
Australia 1.25% 1.25% 1.00% 1.00% 1.00%
UK 0.75% 1.00% 1.00% 1.00% 1.25%
Source: Forecasts from Citi Research. As of 22 May 2019, current rates as of 14 June 2019.
EMBRACING UNCERTAINTY IN A SLOWER GROWTH ENVIRONMENT | 21
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.Citigold 2019 MID-YEAR OUTLOOK
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