Q4 | 13 - Citi UK IPB · 2018-10-17 · versus 2013. Citi analysts believe that valuations at...

Q4 | 13Europe | North America | Japan | Asia Pacific | Latin America

Global Market Analysis by Regional Consumer Banks

Opinions, forecasts, and weightings expressed by Citigroup Global Consumer Group Investments may not be attained or suitable for all investors. Past performance is no guarantee of future results. There are additional risks associated with international investments, including foreign, political, currency and economic factors to consider. Please contact your financial professional to determine what is suitable for your individual situation

GCG Outlook 01

Regional analyses 02

Guest Corner 09

Asset allocations 10

Citi OutlookA snapshot of Citi’s global market views across a select group of asset classes, regions and currencies over the next six to twelve months.

Our Market Outlook reflects our assessment of each asset class independently.

At the latest asset allocation meeting, the Global Investment Committee (GIC) has decided to decrease its position in Emerging Market debt to underweight.

The Committee decided to maintain its existing overall equity/bond asset allocation. The allocation remains moderately overweight risk assets and underweight interest rate risk.

While market interest rates have fallen slightly in recent days, they expect rate pressures to re-emerge over the tactical investment horizon of 12-18 months. U.S. equity returns looking forward seem unlikely to match 2013’s 21% year-todate total return, but should still prove solid, justifying the continued overweight. While far from uniform, equity market prospects outside the U.S. seem to be improving further.The GIC now maintains overweight in equities, with overweights in US, Japan, Asia ex-Japan and Europe. This is offset with an underweight in fixed income, concentrated in a heavy underweight in developed sovereign bonds. Within its fixed income portfolio, the GIC now has small overweight position in high-yield while positions in emerging market debt(both developed and emerging)and investment grade corporate bonds are now neutral. The GIC has no more exposure to commodities.

Data Source: Citigroup Global Markets Inc. Weighting provided by Citi EMEA Consumer Bank as of October 2013.

Global equities

Market Market outlook

Positive

US Positive

Europe Positive

Japan Positive

Latin America Neutral

Asia Pacific Positive

Emerging Europe Neutral

Global fixed income

Market Market outlook

Negative

Global Government Negative

Global Investment Grade Neutral

Developed High Yield Positive

Emerging Market Debts Negative

Global currencies

Currency Outlook

Euro Negative

Yen Negative

British Pound Positive

Standpoint Q4 | 13 2Forecasts may not be attained. Past performance is no guarantee of future results. There are additional risks associated with foreign investments.

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Citi Euro BIG (EUR)Data Source: Bloomberg as of 30 September 2013.

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DJ Stoxx 600Data Source: Bloomberg as of 30 September 2013.

Monetary Policy remains loose

European fixed income markets welcomed the (mostly unexpected) US Fed decision not to alter their monetary policy with regards to Q.E tapering, but that did not stop benchmark government bond yields creeping higher. Specifically, the German 10-year bond yield moved from 1.73% at the start of the 3rd quarter to reach 18-month high levels of 2.08%, only to finish at 1.78% at the end of that quarter.

Citi analysts have made no material changes to their Bund forecasts, anticipating German 10-year bond yields to range trade around 1.80% in coming quarters. They note that the currently subdued inflation pressure in the Euro Area and limited future prospects of a significant pick-up in inflation justifies this view, at least in the near term. Citi analysts observe that inflation has been below estimates pretty much since the

start of the year and monetary policy has struggled to contribute to growth and to raise inflation expectations, despite all-time low interest rates. They believe that given the fact that growth and inflation outlook remain subdued, despite recent improvements in the data, the ECB is likely to keep monetary policy loose for the foreseeable future, with the refinancing rate remaining at 0.5% in the quarters ahead. Citi economists also expect the first ECB hike in Q4 2016.

In credit markets, spreads have held firm, even with the presence of a series of negative news both in Europe and the US (e.g. the Italian government’s fragile political stability and the political impasse in Washington). Citi analysts see as net positive factors for European credit spreads, the redemptions of around €32bn per month which will keep net supply flat and that there are investors that are opting to wait, rather

Recovery and sentiment drive equity rerating

European equities outperformed both developed and emerging market equities during the 3rd quarter, with the DJ Stoxx 600 posting a 7.7% return. Citi analysts stay bullish on UK and European equities over the coming 12-18 months and cite several reasons for this: First, macroeconomic risks are decreasing within the Eurozone: The Euro Area peripheral current account balances have turned from big deficits in the last 2-3 years to surpluses. Also, Citi economists are finally predicting an end to the Eurozone recession, where an inflection in economic growth should be accompanied by an inflection point for corporate profits. In the banking sector, Citi analysts note that European listed banks’ capital position relative to Basel 3 capital requirements has

turned from €300bn deficit at the end of 2011 towards (expected) compliance (€0m) at the end of 2013. They expect that reduced fears about bank balance sheets and Eurozone break-up should support higher risk appetites. Moreover, the general macroeconomic picture seems brighter than before, with PMI indices rising to levels above 50 in Europe, bank lending standards continuing to ease across advanced economies and a close to 1% pick-up in European GDP growth in 2014 versus 2013. Citi analysts believe that valuations at current levels are also a factor that may draw positive attention for European equity markets, especially the UK. Their UK FTSE target (8000, currently 6420) for end-2014 is based on an expectation of a 20% cumulative 2013-15 EPS growth forecast and a re-rating to a undemanding 13.5x PE. From a macro perspective, they have

Fixed income

Equities

Europe

also recently raised their 2014 UK GDP growth forecast to 3%. For now, higher (although not stretched) valuations mean that, within European equities, Citi analysts clearly prefer the more lowly rated UK equity market.

than chase spreads at current levels, being encouraged by attractive new-issuance premia.


Taper still on the agenda

The Federal Reserve Chairman, Ben Bernanke, may feel somewhat vindicated in holding off from reducing the pace of monetary easing, despite much of the rationale for doing so focusing more on financial conditions than political risks. Following the decision on the 18th September, Citi economists expected the Fed was likely to resume ‘bond tapering’ in December, but if the data releases the Fed would base their decision upon are delayed (like September’s unemployment figures) and consumer confidence takes a hit in the meantime, it’s possible the reprieve from tapering lasts longer than expected. Such an outcome would likely be good for credit and other fixed income markets as a whole, according to Citi analysts, but if the Fed just ends up delaying the inevitable and the inflows resume

thanks to unchecked central bank liquidity, the correction when it comes is likely to prove all the more violent. Diminished liquidity and elevated volatility is likely to persist as carry trades and long positions continue to unwind, fostering choppy market conditions in the months ahead. Citi analysts prefer to maintain only short-dated positions in Treasuries and to use any rallies to shed duration.

While Citi analysts are relatively constructive in 2H13, they remain defensive. The biggest risk is a further significant rise in interest rates. Therefore, Citi analysts prefer to be selective and favour maturities in the 3-year to 7-year range.

Concerns about higher US interest rates and the potential impact on the broader macro environment have weighed heavily on valuations. Indeed, valuations

Economic data remain supportive

Recovery appears to have weathered the initial effects of fiscal tightening with growth estimated at a 1.75% annual rate in the first half of the year and tilting higher towards the end. Higher interest rates have blunted some of the massive loosening in financial conditions but the Fed’s decision to maintain peak accommodation should contain economic fallout, according to Citi analysts. The housing rebound is intact, business hiring surveys show no faltering, and new lows in jobless claims do not point to sizable second round fiscal drag.

Citi analysts think improved fundamentals and still highly supportive financial conditions could resolve the start of Fed ‘bond tapering’ – the reduction in Quantitative Easing from the current level of $85bn a month - by December, but there is a chance that the

fiscal debate could hamstring monetary policy decisions into next year. Forward guidance on QE has been scuttled and Citi analysts think rate hikes may be delayed until the jobless rate is closer to 6%.

Citi analysts stress that some near-term caution is appropriate. Intra-stock correlation is not sending a tactical buy signal and the economic surprise index also argues for some wariness. The percentage of NYSE stocks at or below 52-week highs often needs to dip to around 50% to signal a new bull run while a basket of the most shorted stocks in the Russell 1000 has run up to almost two standard deviations of outperformance of late, suggesting an overbought condition. Hence, Citi analysts are reluctant to take part in the current bull chase, but the Raging Bull Thesis remains in place as we look towards the next year

Fixed income

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S&P 500 Index

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S&P 500 IndexData Source: Bloomberg as of 30 September 2013.

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Citi US Big

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Citi US BIGData Source: Bloomberg as of 30 September 2013.

North America

have become attractive given that Citi analysts expect default rates to remain low for the next several years.

Equities


Selective with Taper-Sensitive Countries

Citi analysts observe that the US Fed’s unexpected prolonged accommodation eased Emerging Markets pressures somewhat. While this reduces near-term risks for the more taper-sensitive countries, primarily Indonesia, India, Sri Lanka, Malaysia and Thailand, they think it is important to assess countries making real adjustment to better insulate themselves from future Fed-related volatility and those that don’t, especially as Fed tapering is just a matter of time. In this respect, looming election calendar in India will probably be a key hurdle for major fiscal progresses.

Citi analysts also think that Developed Markets’ trend to broader economic recovery could be more supportive of broader domestic demand growth going forward and could ease economic adjustment via exports and a more constructive environment for equity

flows. However, Asia’s export bounce has been relatively subdued so far, and within Asia, the North Asian countries saw a much bigger bounce than some in Southeast Asia. From an external liquidity standpoint, the latter needs it far more than the former. On the other hand, they think that China growth slowdown remains a risk for the region. While the near-term growth outlook has improved, prompting them to slightly upgrade their growth forecast, Citi analyst are cautious over the longer-term sustainability of China’s recent bounce on the basis of risks from financial imbalances and tighter financial conditions.

With less favourable macro developments including slower growth and tighter liquidity, which may lead to softer earnings growth, the valuation premiums that the crowded South East Asian markets have enjoyed compared to North Asian markets, do not appear to be sustainable.

Time for big decisions

After the sharp correction in May, the Japanese stock market started to recover and gained almost 10% in just 3 months, which has been accompanied by a weakening of JPY. However, the Japanese market remains very volatile and still trades range bound with no clear direction.

One of the most important market movers in the last weeks was the decision of PM Abe to go ahead with a consumption tax hike next April. Although it certainly will not impact the consumers and business in a positive way, it does show the leadership and willingness to make difficult choices of Abe and provides some relief for the budget as well. At the same time, PM announced that he will implement a new economic package to mitigate the impact of the above mentioned hike. However, it is just a prelude to a much greater challenge i.e.

to present and implement a reliable and well-rounded growth strategy, the third pillar of Abe’s plan.

Recent data suggest that the impact of Abenomics on the Japanese economy is getting more and more evident. After a strong GDP growth and surprisingly positive earnings season in Q2 latest leading indicators such as PMIs or BoJ Tankan Corporate survey revealed a continued improvement in business confidence and profit outlook.

According to Citi analysts, Japanese market stocks offer a noteworthy upside. With a target of 1375 for TOPIX index they estimate the total return to mid-2014 to be a double-digit. Japanese market should be supported by improving economic data, more favorable global environment and forecasted further weakening of JPY. Valuations are not stretched at the

Asia-Pacific equities

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NIKKEI 225 IndexData Source: Bloomberg as of 30 September 2013.

Japan and Asia Pacific

With the better growth outlook for North Asia and relatively reasonable valuations, Citi analysts remain overweight on China and South Korea and Taiwan, given that the global economy should bode well for globally cyclical markets.

moment – although Japan is traded generally with a premium to other developed markets, it is still below its long-term average on both P/E and P/BV multiples.

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MSCI F Asia Paci�c Ex-Japan

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MSCI Asia Pacific Ex-JapanData Source: Bloomberg as of 30 September 2013.

Japan equities


Be careful chasing the Q3 rally . . .

After a period of poor performance in H1 of 2013 during which Emerging Europe equities lost 11.6% 1, Q3 was a period of a rebound reflecting overall improvement in market sentiment towards emerging markets. Diminishing risk of “hard landing” in the biggest emerging economy — China seen during Q3 and FED September decision to postpone QE3 tapering contributed the most to this market trend reversal.

While the region’s PE multiple of 8.7x (2014E) is at a discount to the rest of EM, Citi analysts are neutral on Emerging Europe equities. While the FED decision clearly benefited the region in the short term, Citi economists believe that the decision can be a source of the extra volatility in the region going forward. The outlook for a stronger export-led recovery remains uncertain and a number of

countries in the region (Russia, Turkey) have uncomfortably high inflation. Furthermore Turkey is running one of the widest current account deficit (6,9% of GDP) among major EM economies.

According to Citi analysts, the brightest spot in Emerging Europe continues to be Central Europe, where the benefits of the Eurozone’s stabilisation are felt most directly. The main story for the biggest market in the region — Poland — has been the reform of the private pension system. As the market is digesting the pension fund changes, the focus has shifted to the rebound of the domestic economy (recent economic data releases confirm that Poland is in a recovery mode. Citi economists look for GDP acceleration 3.1% next year. Interest rates which are at record low 2.5% are likely to stay there for a while as inflation pressure is low). The market is clearly not cheap trading at around

14x on 2013E earnings which is the main obstacle for being more constructive on Polish equities.

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MSCI F EM EMEA

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MSCI EM EMEAData source: Bloomberg as of 30 September 2013

Emerging Europe and Latin America

Positive Signs Emerging Amid Poor Earnings Trend

In recent months, exports and foreign investment-sensitve Latam countries have been caught between downside growth risks from China and financial stability-related risks from the prospect of early Fed tapering. Citi analysts believe that these risks have diminished after FX devalued and yields jumped across the region although they still expect the Fed to begin tapering fairly soon. Nevertheless, many countries face fresh challenges from market pressure for higher interest rates, external and fiscal imbalances, plus risks that the advanced economy rebound may not generate much recovery in exports while the China-dependence of countries like Brazil is more likely to be a curse than a blessing in the coming months. In particular, Citi analysts continue to see growth decelerating in the coming

quarters in Brazil. On the back of increased inflationary pressures, they expect the Selic rate reach 9.75% by 2013 yearend. In Mexico, sluggish activity growth and a benign inflation outlook should lead Banxico to cut the policy rate by 25bps in October. In Venezuela and Argentina, the scarcity of foreign currency continues to be the main macroeconomic problem.

Citi analysts observe that the underperformance Latam equities came out in line with the sharply negative earnings revisions. Indeed, in Q2, Mexico has had the worst EPS revisions within EM; Brazil third-worst. Relative to EM, Latam has the worst revision profile, but Citi analysts think the lows from which historically earnings have recovered haven’t been hit yet. However, positive signs are emerging. Investors are more risk averse in Latam than in any other EM region. Indeed, the relative price

performance of risk vs. quality has been pushed beyond what we saw in Asia during the 1997/98 crisis. What’s also good is that economic data is no longer missing estimates as much as in the past.

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MSCI F EM Latin America

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MSCI EM Latin AmericaData source: Bloomberg as of 30 September 2013

Latin America equities


One of the most surprising economies has been the UK. Citi forecasts economic growth of 1.4% in 2013 and 3.0% in 2014, resulting in one of the strongest outlooks within the developed countries. The commitment from the Bank of England to a Fed style threshold of 7% unemployment was intended to put a floor on near to medium term rates. Most significantly, is the recent scheme to provide government backed mortgage lending of up to 20%. This credit easing has had the desired effect of driving down rates and boosting the housing market.

A resurgent housing market in the UK is a strong driver of consumption as the net worth of most households is increased. Historically this has coincided with a near equal increase in consumption. Furthermore the boost to construction, which has been a drag on growth, is also likely to add

to economic growth. Consequently, for now, the picture is increasingly rosy and this will further help the government generate the sort of tax revenues required to significantly bring down the fiscal deficit.

Since the peak in 2007 real wages are down 7%, declining the cost of labour. Our analysts expect this cheaper labour force to weigh on unemployment figures and expect the Bank of England’s threshold to rate rises of 7% to be hit by the end of 2014. This is well before the August forecast of 2016 and consequently our analysts’ central scenario is for a 0.25% rate rise in early 2015.

Overall, the growth prospects are strong and our strategists have a favourable view on UK equities.

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FTSE 100Data Source: Bloomberg as of 30 September 2013.


REITs Can profit of sustainable income flow

The last quarter was a positive one for REITs, which registered returns of +2.36% mainly on the back of the surprise September Fed decision to keep QE on hold for now. Citi analysts note that one of the main worries on investors’ minds in the field is based on REITs high earnings and cash flow multiples, which remain above the broad market and historical averages. However, they also observe that the spread to the broad market has been narrowing as the broad market’s multiple has been rising. Moreover, Citi analysts highlight that simply ignoring REITs because “their multiples are too high” overlooks two very important drivers: low cap rates and a high and growing amount of non-income producing

assets, such as construction in progress, land and cash. Citi analysts estimate that normalizing REIT multiples for these two variables results in a large drop to headline multiples and helps explain why the sector trades where it does. Additionally, they also believe that while REITs’ growth rate is negatively impacted by longer lease duration, REIT earnings are also more secure and durable, which is another positive consideration when making comparisons to the broad market. Moreover, Citi analysts note that the percentage of cash in REIT balance sheets is high. While this creates a near-term earnings drag, it also positions companies to move quickly on acquisitions and move forward on development projects without relying on external financing. This not only provides an advantage in the current

market, but also positions companies to take advantage of potential dislocations by having capital when others do not.

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EPRA/NAREIT Global IndexData source: Bloomberg as of 30 September 2013

No rebound expected in Precious Metals

Stronger macro data, adverse weather forecasts and geopolitical fodder during 3Q’13 buttressed a meaningful commodity price risk reversal during the northern hemisphere summer against expectations of only modest seasonal strength. Some gains were probably overdue, due to Citi analysts, given a precipitously weak 1H’13—grains, base and precious metals depreciating 10-30 percent during those six-months amid a record $30Bn of net investment redemptions across passive indices and commodity-linked exchange traded funds over the period.

But the uncertainty going forward rests more on whether higher commodity prices today can stay elevated for the balance of the year and in the medium-term, according to Citi analysts, after a marked rise in investor net length in the past few months. While recent strength across the petroleum complex, gold and cocoa have prompted a

modest increase in the Citi base-case price outlook for some commodities, on the whole, our analysts maintain a

bearish-to-neutral view on most complexes; noting longer-term structural headwinds that have reinforced the general thrust of a ‘commodities super cycle’ unwind.

According to Citi analysts, more supply in most commodities amid tepid demand should continue to weigh on prices, especially heading into a seasonally softer period for both agriculture and petroleum. Gold prices seem unable to sustain price gains even after the ‘dovish’ Federal Reserve surprise. Our analysts observe Improvement in Chinese economic indicators and trade data and local copper consumption looks weak despite a short-term surge in headline figures. Easing of Syrian tensions and a return of Libyan barrels whilst US crude output continues at 25-year highs can cap oil price

cheer despite the extreme level of global supply disruptions this year.

The only major commodities where there could be more potential upside than downside risk in our view: nickel, palladium and cocoa, based on individual rather than structural supply/demand issues in those markets.

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Golds US$/troy oz.Data source: Bloomberg as of 30 September 2013

Global REITs and commodities

Commodities


Euro Yen Pound sterling

While the EUR could remain supported against the USD and JPY after the Fed’s no taper in September, the direction against other G10 currencies seems less clear. Citi analysts suspect that recent EUR strength has been driven by the persistent weakness in Emerging Markets FX and G10 smalls. As risk recovers however, they think that EUR strength could fade somewhat, especially if seen alongside less supportive data. In regard to policy, President Draghi reiterated his cautious assessment of the Eurozone’s growth outlook and potentially signaled growing concerns about the liquidity situation. However, in absence of significant dovish surprises from the ECB the single currency need not come under sustained selling pressure across the board. In an environment of persistent market uncertainty, the ‘safe haven’ EUR could remain resilient, especially against less liquid G10 currencies. Citi analysts forecast EURUSD at 1.30 in a 6 to 12 months horizon.

Markets were recently disappointed by the 5 trillion Yen stimulus package and the ambivalent comments on a corporate tax cut in September. This caused Yen to strengthen post-announcement. Citi analysts think that the Bank of Japan may need to announce further easing measures in order to achieve a 2% inflation target. While exporter flows could represent a short term headwind for USDJPY, they expect the cross to move higher on potential further easing measures and a delay in the Fed’s tapering. Going forward, they expect fundamental drivers for USD/JPY to remain the same. Over time, the Fed is likely to be withdrawing monetary accommodation via tapering, even given the 18 September surprise “no taper” announcement. This will be consistent with further moderate upwards pressure on US 10y yields and similarly on yield spreads to Japan. But, given that this removal of Fed accommodation is now expected to proceed more slowly than when Citi analysts first made the 110 forecast at 12 month, they have lowered their target this time round to 105.

Sterling has rallied sharply recently and drivers of this rebound have been the recent improvement in the economic outlook and the associated upside surprises to UK data prints. Furthermore, the upwards pressure on UK yields has been another driver of recent sterling strength. In an environment of higher US Treasury yields, Bank of England forward guidance has so-far not been able to anchor UK rates markets. In fact, UK rate differentials have widened ever since Carney took the helm at the BoE and interestingly, GBP is still lagging these rates markets developments. September BoE minutes presented a reduced case for further monetary easing. The most notable change for the September minutes was that no Monetary Policy Committee members saw the need for additional stimulus. Citi’s forecasts for EUR/GBP are at 0.83 and 0.82 in 0-3 months and 6-12 months respectively. Against the dollar, they see cable at 1.66 over the next 12 months.

Euro-Dollar (USD/EUR)Data source: Bloomberg as of 30 September 2013

Dollar-Yen (JPY/USD)Data source: Bloomberg as of 30 September 2013

Pound-Dollar (USD/GBP)Data source: Bloomberg as of 30 September 2013

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Euro

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Currencies


On the Right Track to Be Tomorrow’s Emerging Markets Maria Gratsova, Citi Frontier Markets Strategist

In a Citi GPS report titled Call of the Frontier: The Search for a New Generation of Emerging Markets, Citi’s Equity Strategy team focused on the characteristics that drove the 24-year outperformance of emerging overdeveloped markets and questioned whether it was possible for this asset class to repeat the consistent growth rate that it achieved in the past few decades (from 1988 to 2011, emerging markets grew at a compound annual growth rate of 12.7%). In the end, the team concluded that while emerging markets were expected to continue to do well in the coming years, replicating their outperformance of the past quarter century would be difficult. Instead, they suggested investors should look to new geographies — the frontier markets — arguing that these markets had many of the same characteristics that emerging markets did when they were first identified as an investable group back in 1988.

Fast forward nearly two years and the frontier market story has matured with frontier equity markets outperforming both their larger emerging market peers and developed markets, accompanied by strong fund inflows with assets under management nearly doubling in that time period. As investor interest continues to increase, we thought it was timely to revisit the original arguments as to why frontier markets would be the new generation of emerging markets.

The long-term catch-up and convergence story for frontier markets remains intact. These countries tend to be less economically developed than their emerging peers, have a higher degree of political risk, and

despite recent performance, their stock markets are smaller than they should be given the size of the population and potential economic output of the countries in which they are based.

There are three sets of drivers that have been identified as underpinning the frontier markets story: economic, financial and business. Economic growth in frontier markets is being helped by favourable demographics and rising productivity while foreign direct investment, an improvement in institutional quality, and debt levels which have not been inflated are helping to drive expansion.

Whether economic growth has a direct impact on stock market returns is far from certain. The position we take on the economic growth versus stock market returns issue is that faster economic growth creates, at the very least, an environment conducive to earnings growth in the corporate sector (be the rate of that growth the same, higher or lower than GDP growth). Not forgetting that economic growth goes hand-in-hand with broader development and wealth creation, which is what much of the frontier story is about. As things stand today, the growth outlook for frontier economies is reasonably good in the medium term, and very good in the long term. The companies operating in these markets should benefit, as should equity investors, although this was not always the backdrop.

As investor interest grows, frontier financial markets’ depth and breadth should continue to converge towards emerging market levels. Opportunities

for corporates tend to be greater in frontier markets due to lower penetration levels of a range of goods and services, the rising demand for infrastructure and the significant barriers to entry in many industries.

But of course an investment in frontier markets comes with substantially higher risks than an investment in developed or emerging markets. Political risk in particular has been a defining characteristic of frontier markets and the report takes a close look at how shifting and more volatile public opinion — Vox Populi — poses a new and powerful risk to the investment environment. Finally, the report revisits two major economies — Nigeria and Vietnam — which represent the best of what the frontier markets have to offer but also face what we believe are fairly typical challenges for the asset class.

Guest corner


EUR Cash 20%EUR Government Bonds 45%EUR Corporate Bonds 20%European Equities 9%Global Equities 6%

Cash 20%Developed IG Government Bonds 45%Global IG Corporate Bonds 20%Global Equities 15%

EUR Government Bonds 33%EUR Corporate Bonds 25%EUR High Yield Bonds 6%European Equities 18%Global Equities 13%Global REITs 5%

Developed IG Government Bonds 33%Global IG Corporate Bonds 25%High Yield Bonds 5%European Equities 7%US Equities 12%Global Equities 13%Global REITs 5%

EUR Government Bonds 18%EUR Corporate Bonds 18%EUR High Yield Bonds 5%Emerging Market Debt 2%European Equities 28%US Equities 12%Pacific Equities 6%Emerging Markets Equities 3%Global REITs 8%

Developed IG Government Bonds 18%Global IG Corporate Bonds 18%High Yield Bonds 5%Emerging Market Debt 2%European Equities 14%US Equities 22%Pacific Equities 9%Emerging Markets Equities 4%Global REITs 8%



EUR Corporate Bonds 4%EUR High Yield Bonds 6%Emerging Market Debt 3%European Equities 42%US Equities 17%Pacific Equities 11%Emerging Markets Equities 7%Global REITs 10%

Global IG Corporate Bonds 4%High Yield Bonds 6%Emerging Market Debt 3%European Equities 23%US Equities 32%Pacific Equities 13%Emerging Markets Equities 9%Global REITs 10%

Asset allocationsEuro-tilted model portfolios

Final word

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.

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.


Spotlight on allocations

EUR Cash 20%EUR Government Bonds 45%EUR Corporate Bonds 20%European Equities 9%Global Equities 6%

Cash 20%Developed IG Government Bonds 45%Global IG Corporate Bonds 20%Global Equities 15%

EUR Government Bonds 33%EUR Corporate Bonds 25%EUR High Yield Bonds 6%European Equities 18%Global Equities 13%Global REITs 5%

Developed IG Government Bonds 33%Global IG Corporate Bonds 25%High Yield Bonds 5%European Equities 7%US Equities 12%Global Equities 13%Global REITs 5%





EUR Corporate Bonds 4%EUR High Yield Bonds 6%Emerging Market Debt 3%European Equities 42%US Equities 17%Pacific Equities 11%Emerging Markets Equities 7%Global REITs 10%

Global IG Corporate Bonds 4%High Yield Bonds 6%Emerging Market Debt 3%European Equities 23%US Equities 32%Pacific Equities 13%Emerging Markets Equities 9%Global REITs 10%

About the Citi Asset Allocation ProcessThe Citibank tactical portfolio allocations are based on the work of the Global Investment Committee (GIC) of Citi Private Bank. The membership of the committee is comprised of experienced investment specialists from across Citi. The GIC deliberates on the macroeconomic and financial market environment in order to formulate an outlook across multiple asset classes and is responsible for maintaining tactical model portfolios based on this outlook. The tactical weights that are applied to the Citibank portfolios are aligned to the decisions of the GIC.

Allocation to bond and equity markets•The Global Investment Committee (GIC) has decided to bring

down its position in Emerging Markets Debt. In counterpart the GIC increased its exposure to European and Asian equities.

Overall the GIC now stays overweight on equities, neutral on commodities and underweight on fixed income. •The GIC believes that medium term outlook for equities is likely

brightening and equities may offer better risk/reward than credit this year while both returns are likely to be below last year‘s gains.

Allocation to regional equity markets•The GIC maintained itsoverweight in US, Europe and Japan and

Asia ex-Japan. Emerging Market equities continue to be neutral.

•Within the equity universe, the GIC has the largest overweight positions to US equities with a brightening outlook given signs of growing corporate capital expenditure combined with improving housing and job markets feed through into economic growth. Exposure to Asian equities has been maintained on the basis of valuation not reflecting the strong earnings growth momentum in the region.

•And the GIC believes that Japan may continue to grind higher even though at a slower pace supported by new political leadership taking a more aggressive stance on fiscal and monetary policy. Also the GIC maintains its position in Europe equities given still attractive valuations and improving sentiments. Meanwhile the GIC remains neutral position in emerging markets and suggest selectiveness with regards to country allocation.

Allocation to government and credit markets•The GIC is heavily underweight sovereign bonds and Emerging

Market debt on the back of increasing yields and currency risks. They have small overweight position in High yield bonds. Investment grade allocation of the GIC are now neutral on the basis of narrower spreads capping the scope for gains in a period of rising yields.

Global model portfolios

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 Financial Professional to determine their allocation needs based on their risk tolerance, suitability and goals.

Data Source: Citibank NA as of October 2013

Important Disclosure

This document is based on information provided by Citigroup Investment Research, Citigroup Global Markets, Citigroup Global Wealth Management and Citigroup Alternative Investments. It is provided for your information only. It is not intended as an offer or solicitation for the purchase or sale of any security. Information in this document has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the information, consider its appropriateness, having regard to their objectives, financial situation and needs. Any decision to purchase securities mentioned herein should be made based on a review of your particular circumstances with your financial adviser. Investments referred to in this document are not recommendations of Citibank or its affiliates. Although information has been obtained from and is based upon sources that Citibank believes to be reliable, Citi analysts do not guarantee its accuracy and it may be incomplete and condensed. All opinions, projections and estimates constitute the judgment of the author as of the date of publication and are subject to change without notice. Prices and availability of financial instruments also are subject to change without notice. Past performance is no guarantee of future results. The document is not to be construed as a solicitation or recommendation of investment advice. Subject to the nature and contents of the document, the investments described herein are subject to fluctuations in price and/or value and investors may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal the amount invested. Certain investments contained in the document may have tax implications for private customers whereby levels and basis of taxation may be subject to change. Citibank does not provide tax advice and investors should seek advice from a tax adviser.

Other Sources: Reuters, Bloomberg, CIRA.

Products are (i) not insured by any government agency; (ii) not a deposit or other obligation of, or guaranteed by, the depository institution; and (iii) subject to investment risks, including possible loss of the principal amount invested

Citi Investment Research & Analysis (CIRA) is a division of Citigroup Global Markets Inc. (the “Firm”), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For more information, please refer to https://www.citigroupgeo.com/geopublic/Disclosures/FSAConflicts.html.

Citibank N.A., London Branch 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. Our firm reference number with our UK regulators is 124704. Citibank International plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Our firm reference number with our UK regulators is 122342. Citibank N.A., London Branch and Citibank International plc are licensed by the Office of Fair Trading with licence numbers 0001486 and 0482552 respectively to extend credit under the Consumer Credit Act 2006. Citibank N.A., London Branch is registered as a branch in the UK at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. Registered number BR001018. Citibank International plc has its registered office at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. Registered number 01088249. Citibank N.A., Jersey Branch is regulated by the Jersey Financial Services Commission under the Financial Services (Jersey) Law 1998 for the conduct of investment business and under the Banking Business (Jersey) Law 1991 for the conduct of deposit taking business. Citi International Personal Bank is registered in Jersey as a business name of Citibank N.A. The address of Citibank N.A., Jersey Branch is P.O. Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank N.A. is incorporated with limited liability in the USA. Head office: 399 Park Avenue, New York, NY 10043, USA. © Citibank N.A. 2013. CITI, CITI and Arc Design are registered service marks of Citigroup Inc. Calls may be monitored or recorded for training and service quality purposes.

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