SC-Global-Market-Outlook-February-20131.pdf

7/29/2019 SC-Global-Market-Outlook-February-20131.pdf

1/14

This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank

We continue to believe in a Year of Transition dominated by

broadening economic growth and receding tail risks. This should

lead to the outperformance of equities as we move through 2013.

We believe investors who are underweight equities should not be

too patient in raising their allocation. Any weakness in equity

markets in the short term should be viewed as a bonus to those

currently underweight, but it is not something to be relied upon.

Within fixed income, our preference is Asian local currency bonds.We are also overweight commodities on a 12 month view.

US economy may temporarily weaken in Q1, China to recover

US economy expected to slow in Q1, but rebound later in the year

on strengthening consumer spending

A debt ceiling deal is likely to be concluded in the coming months

China appears to have turned the corner, based on most indicators

European economy remains in recession, but recent indicators

suggest a recovery will emerge in 2013

The ECBs commitment to do whatever it takes to keep the Euro

intact has been sufficient to reduce funding costs in the periphery

Investment strategy implications

Cash: Retain 12m Underweight

No signs that US dollar interest rates will rise through 2013/4

Bonds: Retain 12m Underweight

Asian local currency bonds our preferred pick

High yield bond returns likely capped at current yields

Short maturity profile in USD bond portfolios favoured

Equities: Retain 12m Overweight

Broadening recovery, receding tail risks and relative valuations

suggest significant equity outperformance in 2013

US and Asia remain our preferred regions

Companies with high sustainable dividend yields still favoured

Commodities: Retain 12m Overweight

Should benefit from economic recovery after a weak 2012

We favour broad exposure to the commodities asset class

Alternatives: Retain 12m Neutral

Retain preference for macro/CTA strategies to hedge against

extreme macro outcomes

Currencies: Bullish on Asia ex Japan, positive on commoditiesJPY volatility to remain high given policy uncertainty

Chinas recovery supportive of Asia ex-Japan currencies

Contents

Investment Strategy Pg 2

Economic and policy outlook Pg 2

Asset class outlook

Fixed income Pg 5

Equities Pg 6

Commodities Pg 8

Alternative strategies Pg 8

Foreign exchange Pg 9

Conclusion Pg 10

Asset allocation summary Pg 11

Economic & market calendar Pg 12

3-12 month market outlook Pg 13

Disclaimer Pg 14

Round one of fiscal cliff talks significantly reducedail risks

Fiscal cliff scenarios (% of GDP)

Baseline assumes all Bush tax cuts expireAlternative scenario assumes all extendedSource: Bloomberg, Standard Chartered

Patience is not always a virtue

GLOBAL MARKET OUTLOOKFebruary 2013

Asset allocation summary

February 2013 12-mth

Cash UW

Fixed Income UW

Equity OW

Commodities OW

Alternatives N

Note: OW = Overweight, N = Neutral, UW = Underweight.Source: Standard Chartered

Steve Brice Chief Investment Strategist

Rob Aspin, CFA Head, Equity Investment Strategy

Manpreet Gill Head, FICC Investment Strategy

Audrey Goh Investment Strategist

Suren Chelliah Investment Strategist

ictor Teo Investment Strategist

This reflects the views of the Wealth Management Group


2/14

Global Market Outlook

2

At the end of 2012, we outlined our B.R.I.D.G.E. investment framework for

2013 as follows:

B = Broadening global economic recovery

R = Receding tail risks

I = Income generation still relevant

D = Diversification of income sources increasingly important

G = Go local (bonds) and Go global (equities)

E = Equity offers the best value

If there is one theme to take out of this framework, it is that we are

increasingly confident in the outlook for the global economy and for assets

with a riskier profile. For instance, equities are our preferred asset class

given our view of the global economic environment and extremely cheap

valuations relative to investment grade and high yield bonds.

Within the fixed income universe, we continue to have a preference for Asian

local currency and, to a lesser extent, US high yield bonds, both of which

continue to offer relatively attractive yields. However, we are keen to

emphasise the need to avoid being over-reliant on one source of income.

High yield bonds were the darling of 2012, but returns are likely to be much

lower in 2013 (see page 5). Equity markets continue to offer attractive

dividend yields and are expected to generate higher total returns in 2013.

The start of the year has been consistent with this outlook. The fiscal cliff

was avoided and there are initial signs a debt ceiling deal may be reached in

the coming weeks/months. This would clearly feed into our receding tail

risks theme and markets have responded with a good start to the year. We

continue to believe there is significant upside to equity markets in 2013 and

that clients who are underweight should not be too patient in raising their

allocation to equities.

We see 2013 as a Year of Transition from a Muddle Through, policy

driven macro environment towards a more self-sustaining and

broadening global recovery with receding tail risks. The transition may

not be a smooth one indeed we expect weakness in the US economy in

Q1 but it is important in defining the investment outlook.

US: Temporary lull to be followed by period of stronger growth

We expect the US economy to start the year on a weak note as

the expiry of the payroll tax cuts hits incomes. The picture for wage

growth was already bleak, particularly for the unskilled labour force

and after taking inflation into account. The just over USD 100bn tax

increase will clearly exacerbate this situation.

However, there are several reasons to be more upbeat when

talking about the year as a whole. Most important is the impact of

positive wealth effects, in our opinion. House prices look as though

they have finally bottomed in the US. This could significantly boost

confidence with consumers used to seeing whatever equity they

Asset Performance (USD)*

* For the period 13 Dec 2012 to 24 Jan 2013. Indices are JP

Morgan US 3M Cash Index, MSCI AC World TR Net, CITI World

BIG, DJ-UBS Commodities, DXY and ADXY

Source: Bloomberg, Standard Chartered

US economy expected to rebound from a weak starto 2013

Quarterly forecasts for US/EU GDP, q/q seasonally-adjusted annualised rate (SAAR)


Rebound in housing market a significant positive forconsumersUS housing starts, Case-Shiller 20-city house price index


0.32

0.03

1.02

-0.78

5.00

0.06

-2 -1 0 1 2 3 4 5 6

Asia FX

USD

Commodities

Bonds

Equity

Cash

%

-2.0

-1.0

0.0

1.0

2.0

3.0

Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14

%

EU US

-20

-15

-10

-5

0

5

10

15

20

400

600

800

1000

1200

1400

1600

1800

2000

2200

2400

Jan-05 Jan-07 Jan-09 Jan-11

%

'000

H ou si ng star ts H om e p ri ce s (R HS )

Economic and policy outlook

Investment Strategy


3/14


3

had in their properties if they had any erode. The psychological

impact of an improving situation should not be under-estimated.

Job creation is expected to continue at a reasonable pace in

2013. It was interesting to see that net hiring did not taper off in the

fourth quarter, despite the looming fiscal cliff negotiations. Thissuggests the momentum should continue into 2013.

Against this backdrop, consumers are likely to gradually give

into pent-up demand. Greater job security and the wealth effect

are likely to dominate slow wage growth and higher taxes as we

move into the second half of 2013.

The turn in the housing market is also expected to be positive

as we see a pick-up in construction activity. That said, housing

construction has a much smaller weight within GDP than it did

before the crisis. Therefore, while it is a positive, it is not as

important as it was in past years.

Watch companies investment plans. We have spent six years

focused on the downside risks to global growth. This is a significant

upside risk. Once companies get clarity on the outlook for their

future tax liabilities, it is possible they will start increasing

investment. So far in the recovery, business investment has been

extremely sluggish. Should this change, it could create a much

stronger and self-sustaining economic backdrop.

The first round of fiscal cliff negotiations dealt with the

majority of fiscal tightening programmed for January 1. Clearly

the talks surrounding spending cuts and the debt ceiling are still

important, particularly from a sentiment perspective. The debtceiling discussion has been postponed to May, but the debate on

spending cuts still needs to be resolved by late February. However,

from a pure economic perspective, much of the risk of fiscal

contraction has been dealt with already.

As far as monetary policy is concerned, the Fed remains very

focused on supporting growth. We doubt further policy easing

will be required, but the Fed remains willing to act if required.

Europe: Starting to surprise on the upside

The economic news has improved slightly in recent times. The

German economy expanded 0.7% in 2012 and the latest German

ZEW investor sentiment index reading suggests the economy is

starting the year on a significantly firmer note.

Increasing optimism is being reflected at the regional level with

the EC economic sentiment indicator also starting to rebound, albeit

from very depressed levels.

This improved outlook fits in with our view that reduced fiscal

austerity and a broadening global recovery will help the

economy exit recession later this year. Indeed, recent data

releases mean this could happen quicker than we previously

anticipated (see chart on page 2 for our current forecasts).

There are also some positive developments with regards to thesustainability of the single currency. Italian and Spanish bond

yields remain near multi-month lows and the Greek authorities are

being more proactive in terms of passing legislation to meet its

bailout conditions. Increasing confidence has resulted in a 4%

Job gains expected to continue in 2013Non farm payrolls


US: Watch business investment plansEmpire State (NY) and country-wide small businessinvestment intentions indices


Europe: Signs of a recoveryEC economic sentiment indicator


-200

-100

0

100

200

300

400

500

Jan-10 Jan-11 Jan-12

'000

N onfarm P ayro ll 6M mov ing average

15

20

25

30

35

40

-20

-10

0

10

20

30

40

Jul-01 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11

Index

Index

Empire State NFIB small business (RHS)

65

70

75

80

85

90

95

100

105

110

115

Jan -07 Jan -08 Jan -09 Jan -10 Jan -11 Jan -12

Index


4/14


4

increase in Greek banking sector deposits in H2 2012. This

suggests the worst may be behind them, although further debt

restructuring further down the line cannot be ruled out.

Cyprus is likely to be more of a focus in the coming weeks. We

have reached a stalemate in bailout negotiations and are nowawaiting the forthcoming elections before a resolution is realistic.

The size of bailout (around EUR 17bn or 0.2% of Eurozone GDP)

means a deal is likely. However, three areas of contention are: 1)

the Troika is demanding greater budget savings than the

government believes is realistic; 2) the government does not want

to privatise state-owned enterprises, which Germany thinks is

critical to the success of any bailout plan; and 3) the EU is insistent

that Cyprus tightens its anti-money laundering regulations.

In theory, whether Cyprus stays in or leaves the single

currency should not be a big deal given the size of its economy.

However, any breaking of the single currency seal could test ECB

President Draghis commitment to do whatever it takes to keep the

single currency intact.

The good news is the likely winner of the Cypriot elections

appears more willing to concede to the Troikas demands.

However, the election will be key to Cyprus future and for the single

currency area as a whole.

From a policy perspective, we believe Euro area fiscal austerity

peaked in 2012 and will reduce in 2013. For monetary policy, we

do not expect to see a significant change in Europe this year.

Asia: Strengthening growth and bottoming inflation

In China, while the economic data is consistent with a

continued U-shaped recovery, it has been mixed relative to

expectations. Manufacturing PMI disappointed while the services

sector and trade data rebounded more strongly than expected.

Industrial production and retail sales data accelerated modestly, but

this was in line with analyst expectations.

This recovery is positive for the rest of Asia, which suffered from

weakening Chinese growth in 2012. Looking around the region, we

are already seeing the benefits of this recovery in industrial

production and export data.

One thing to watch out for in the region is the bottoming out of

inflation. Asia ex-Japan inflation may accelerate in 2013, likely led

by food prices. While we do not see this as much of an issue in H1,

the emphasis in the region is likely to gradually tilt away from

supporting growth in H2. Currency strength may initially help

contain these inflationary pressures, but the risks of tightening

monetary policy are likely to increase as we approach year-end.

In Japan, the focus has been on the outlook for monetary

policy. So far, the Bank of Japan has focused more on words than

action, but we expect policy easing to accelerate through 2013 in an

attempt to break the debt-deflation spiral of the past 15 years.

Overall, developments over the past month have reinforced our view

that the global recovery is likely to broaden as tail risks recede. In the

short term, the US recovery may weaken, but we expect this to be

followed by a strong recovery.

Europe: Still a low probability attached to Euro areabreak up

InTrade probability of a country leaving the Euro area

Source: InTrade, Standard Chartered

Asia: China growth is bottomingManufacturing and non-manufacturing business confidenceindices


Asia: Inflation expected to rise in 2013Brent crude oil prices, CRB commodity index and Asiannflation (yoy %)


5

15

25

35

45

55

65

75

Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12

%

Probabili ty of 2014 departure Probabili ty of 2013 departure

48

51

54

57

60

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

PMI mfg PMI non-mfg

-2

-1

0

1

2

3

4

5

6

7

8

-60

-40

-20

0

20

40

60

80

100

Jan-07 Jan-09 Jan-11

%%

Brent CRB Asian inflation (RHS)


5/14


5

Asia local currency bonds remain our top pick within the fixed income

asset class. We remain Overweight US high yield and expect itsoutperformance relative to investment grade bonds to extend for at

least the first part of this year, though we are watching emerging risks

closely. Absolute returns, however, are likely to be capped by current

yields. We would continue to keep maturity profiles of USD-

denominated bond portfolios short.

A supportive environment for Asia local currency bonds remains in

place. Yields in local currency government bonds remain well above inflation

and US Treasuries while currency fundamentals remain strong. Some

policymakers have expressed concern at the pace of appreciation in their

currencies, suggesting some measures may be in the offing to cap currency

gains. However, we continue to believe such measures are only likely to

slow rather than reverse currency gains. We also note these pressures are

most pronounced for the Korean Won, but less so elsewhere. There is still

room for laggards to catch up, in our view.

Current yield likely to cap 2013 high yield returns; actual returns could

be lower still if Treasury yields rise. We would re-emphasise that

investors should be realistic about their return expectations from high yield in

2013. The room for further spread tightening looks very limited while gains

from yield movements appear unlikely. What this means is that 2013 returns

are likely to be capped on the upside by the current yield (below 6% in US

high yield, for example). We note these lower yields are still reasonably

attractive as yields elsewhere remain even lower, hence our preference to

maintain an overweight in specific parts of high yield. Returns could be lower

if Treasury yields begin to move higher we map out a number of potential

scenarios in the table on the left. It is sobering to note one could conceive a

scenario where total returns are either very low, or negative.

Rising issuance of low quality debt may be a source of concern in the

future. A key emerging characteristic of the continued wave of new bond

issuance has been the gradually rising share of CCC-rated bonds.

Historically, this has tended to occur towards the end of a rally in high yield

bonds, consistent with our view that risks to the asset class are gradually

rising. There is little evidence, however, that any turn in the high yield asset

class is imminent CCC bond issuance (as a share of total issuance) has

yet to reach 2008-highs and the search for yield remains very much in place.

Nevertheless, this is one risk metric we would watch closely. We remain

overweight US high yield at this time.

Keep duration short. In our view, the key risk for any bond investor today is

the potential for higher US Treasury yields. We continue to dislike interest

rate risk and believe investors should minimise their exposure to this risk by

keeping their maturity profiles short in any USD-denominated bond portfolio.

Conclusion: Remain Overweight Asia local currency bonds and US HY,

but keep a tighter watch on risks. Stay Underweight G3 sovereigns and

mitigate interest rate risk by keeping duration short in USD portfolios.

Continue to favour corporates over sovereigns.

Room for Asian FX laggards to perform, supportingAsian local currency bonds

Asia ex-Japan currency gains from 02-Jul-2012 to 21-Jan-2013

Source: Bloomberg,Standard Chartered

High yield returns could rapidly fall if Treasury yieldsriseiBoxx Global Developed Market High Yield Index, totalreturns, based on various interest rate scenarios

*Based on a current yield of 6.0% for the HY index

Note: Implied total returns estimate is an approximation

assuming a given shift in market yields across maturities as

calculated by the Bloomberg system. Actual total returns are

likely to vary.


Rise in share ofCCC bond issuance could be asource of concernCCC bond issuance as a share of total bond issuancein US high yield markets


9.25

8.257.9

6.06

3.65 3.583.24 3.16

0.25 0.2

0

1

2

3

4

5

6

7

8

9

10

KR W IN R THB MYR TWD CN Y PHP SGD HKD IDR

%

Change in interest

rates

Estimated HY

returns*

+0% 6.0%

+1% 2.1%

+2% -2.1%

+3% -6.8%

10%

15%

20%

25%

30%

2H2007

1H2008

2H2008

1H2009

2H2009

1H2010

2H2010

1H2011

2H2011

1H2012

2H2012

%

Fixed Income Underweight


6/14


6

We remain overweight equities for a number of reasons: within our

B.R.I.D.G.E. framework of a broadening economic recovery, receding

tail risks and benign inflation, equities should be well supported both

on an absolute basis and relative to other asset classes. While they are

less cheap from a historical perspective given the recent run up, they

are certainly not expensive. The asset class is still extremely cheap

relative to bonds, both G3 sovereign and high yield.

While US fiscal/debt ceiling discussions are very likely to be heated, we

believe a sharp spending cut or a US default is unlikely. We would

thus suggest underweight investors should not be too patient in raising

their equity allocation. We believe the allocation to equities is more

important than the allocation within equities.

Our key preferences:

Overweight the US: Valuations are still fair and the market should continue

to benefit from lower labour and energy costs, supportive to margins.

Corporates are also in relatively healthy shape and a number of them have a

significant proportion of revenues (c.30%) coming from emerging markets.

While S&P500 is approaching its all time high, we need to be cognisant that

this is in nominal terms and we have had significant earnings growth since

prior market tops. This is reflected in valuations with the market (S&P500)

trading at c.13.5 forward P/E which is well below the levels of prior tops of

Aug 2000 and Oct 2007.

Our outlook on the Financial sector is a little more positive, given the

relaxation of Basel III regulatory requirements and a strengthening housing

market. Key beneficiaries of these developments are banks, financial

services (brokers), real estate and asset managers.

We are in the middle of earnings season in the US and, so far, results are

coming in ahead of market expectations, particularly in the case of

Consumer Goods and Financials. A number of the larger banks beat

expectations, including JP Morgan and Wells Fargo. In the case of the

brokers and investment banks, Morgan Stanley and Goldman Sachs also

beat expectations with a general theme of better volumes and advisory, but

weak underwriting. Citibank and Bank of America, both large international

banks which were affected by the global financial crisis, have continued to

struggle with legacy issues with the latter including a settlement payment to

Fannie Mae and other housing related charges.

Overweight Asia ex-Japan we like China, Hong Kong, Korea and

Thailand: We have liked China for some time with the market (MSCI China)

being one of the better performing markets last year. Hong Kong is expected

to benefit from Chinas improved growth outlook and liquidity flows. Earnings

revisions have also improved substantially which are now increasingly being

priced in. While both markets have performed well, particularly in the last few

months, and there is a risk of consolidation, we believe that earnings growth

will be supportive.

Neutral Europe: Tail risks across Europe have significantly declined and we

have seen some of the more stressed parts of the equity market perform well

Equity market performance

* For the period 13 Dec 2012 to 24 Jan 2013.Source: Bloomberg, Standard Chartered

Majority of US company earnings surprising to theupsideS&P500 earnings relative to expectations

As of 25 Jan 2013Source: Bloomberg, Standard Chartered

US equities less cheap after recent run, but are farrom expensive

MSCI US 12M forward P/E

Source: Datastream, Standard Chartered

4.67

2.18

5.63

5.59

2.96

5.30

0 2 4 6

MSCI Japan TR Index

MSCI Asia ex Japan TR Index

MSCI EMU TR Index

MSCI US TR Index

MSCI Emerging Markets TRIndex

MSCI World TR In dex

%

0 5 10 15 20 25 30 35 40

Oil & Gas

Basic Materials

Industrials

Consumer Goods

Health Care

Consumer Services

Telecommunications

Utilities

Financials

Technology

No. of companies

P ositi ve In lin e N egative

7

9

11

13

15

17

19

21

23

25

27

Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12

12mF

orwardP/Ex

MSCI US 13.102 P/Ex Median +- 1SD

Equity Overweight


7/14


7

as a result. The peripheral markets (for example Italy, Spain, Portugal and

Greece) have all outperformed year-to-date. While such outperformance

may continue in the current bullish environment, there is still substantial risk

of negative surprises and thus heightened volatility. Greek banks, for

example, have rallied significantly since June 12, but are still vulnerable toruns in the deposit base should the macro environment deteriorate again.

Given these tail risks, we prefer those areas of the market that are less likely

to surprise on the downside and continue to offer strong earnings growth

and/or attractive valuations, such as Energy, Healthcare and Industrials in

the core markets.

Underweight Japan and other EM: Being overweight the US and Asia ex-

Japan, we need to underweight a number of markets. While Japan is an

underweight, in our opinion, it is a very interesting trade at the moment.

We highlighted a tactical trade idea (Weekly Market Watch 7/12/12) to go

long Japanese equities and short the currency on the expectation the BoJ

would target 2% inflation. The trade has worked very well and, as the market

may retrace in the short term following the BoJ announcement, we are

closing the trade at this time. We will look to revisit the trade at better levels.

Our reason for underweighting Japan within our asset allocation framework

(USD based) is due to our view that Yen weakness, a result of likely

accelerated QE, would mitigate USD returns.

In the case of other EM, we continue to believe that Asia ex-Japan offers

more upside and has greater exposure to the broadening economic

recovery theme we have within the B.R.I.D.G.E. framework.

Two key themes:

Burgeoning consumer growth in emerging markets: Stronger

growth, particularly in Asia, is likely to be positive for Consumer

Discretionary (especially those focused on the emerging markets

and China); Energy (where valuations remain attractive, particularly

in Europe and Chinas coal sector) and Technology, particularly

the space focused on the smartphone market. The sector should

also benefit from increased capex within our expected higher

growth environment. The Materials sector is also likely to be a

beneficiary of stronger growth and many parts of the market such

as iron ore and copper, which were sold down through much of 11

and 12, should perform better. Precious metal miners have

significantly underperformed and are thinly held by institutional

investors.

Yield: With the low yield environment expected to remain in place

through 2013, investors are likely to continue searching for income.

Given high yield bonds have performed so well last year, investors

may increasingly focus on equities for yield. We find some of the

highest yield in the European markets which have an average

yield of 4% and in Asia-ex Japan Financials and Industrials.

Conclusion: While we acknowledge this is increasingly becoming a

consensus view, we expect equities to significantly outperform in 2013.

Therefore, underweight investors should not be too patient in raising

their allocation to equities.

Japan Topix and JPY*TOPIX Index vs. USD/JPY

*7 Dec 2012 Weekly Market ViewSource: Bloomberg, Standard Chartered

Smartphone shipments continue to growSmartphone shipments


Search for yield has pushed market yields lower,

hough they remain high in EuropeDividend yields (%)

Source: MSCI, Bloomberg, Standard Chartered

75

77

79

81

83

85

87

89

91

700

750

800

850

900

950

Oct-12 Nov-12 Dec-12 Jan-13

JPYIn

dex

Topix JPY (RHS)

Japan trade idea:Long Nikkei or Topix while

hedging out currency risk

1

2

3

4

5

6

7

8

Jan-07 Apr-08 Jul-09 Oct-10 Jan-12

%

Stoxx 50 MSCI AxJ Fin an ci als MSCI AxJ In du stri als


8/14


8

The improving global economic outlook and expectations of aggressive

monetary easing by the Bank of Japan (BoJ) are two key factors for

commodities in the medium term. We expect some some volatility incommodity prices as we approach the US fiscal/debt ceiling debates,

but this is likely to be temporary given our belief that the issue will be

resolved relatively smoothly. We retain an overweight commodity

stance, but without a strong preference between the different sectors.

We remain neutral gold despite lower prices over the last couple of months

as we believe this softness is likely to be temporary. Growing consumer and

central bank demand for physical gold is likely to support prices going

forward. In addition, we believe gold has some upside as it catches up with

inflation expectations.

Given increased investor risk appetite, there have been outflows from global

gold ETFs. Nevertheless, we believe the factors mentioned above should

likely outweigh the downside risks to gold prices in the medium term.

Though expectations of aggressive monetary easing by the BoJ have led to

higher gold prices in JPY terms, we seek clearer evidence of increased

demand by Japanese investors before having greater conviction around

significantly higher gold prices in USD terms.

We remain neutral oil despite the rise in energy prices as demand factors

are expected to catch up to earlier excess supply that we had witnessed in

the oil market. In addition, recent events in Algeria continue to highlight the

potential impact of an escalation in geo-political risks on oil prices. As such,

we highlight the importance of having exposure to oil as a hedge against

geopolitical risk as well as a stand-alone commodity sub-asset class offering

attractive returns.

Conclusion: We remain positive on commodities. From a sub-asset

class perspective, we are Neutral across the board to highlight our

equal preference with a positive bias.

We remain Neutral towards Alternative Strategies due to their ability to

provide relatively low volatility returns in a broadening recovery.

A combined basket of alternative strategies is likely to remain a key

component of a well-diversified portfolio. The characteristic of such a

basket that stands out is, despite having a relatively high correlation with

equities, it has lower level of volatility. This can help investors take

advantage of a broadening recovery while owning at least some protection

against volatility. Our bias towards CTA strategies stems not only from likely

performance as economic trends become more pronounced, but also from

the downside protection they likely offer to a well-diversified portfolio.

Conclusion: Hold neutral allocation towards alternative strategies, with

a bias towards CTA strategies, due to their role in helping manage

volatility of a diversified investment portfolio.

Gold prices likely to catch up to inflationexpectationsGold vs US 5yr breakeven


Some outflows from gold ETFsCumulative global gold ETF flows from beginning of2012 and rolling total of 5 day flows (USD mn)


Alternative strategies offer lower volatility than simpleglobal equity exposureStandard deviation of daily returns


1.5

1.6

1.7

1.8

1.9

2

2.1

2.2

2.3

2.4

1500

1550

1600

1650

1700

1750

1800

1850

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

%

USDperoz

Gold price US 5yr breakeven (RHS)

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

MSCI AC World Equal weight of Macro/CTA, Equity Hedge, Event driven, Relative Value strategies

Alternatives Neutral

Commodity Overweight


9/14


9

The USD has been broadly flat thus far in 2013, given the combination of

downside (global economic recovery and optimism in the Euro area) and

upside (uncertainty over the US fiscal position) factors impacting investorsrisk appetite. In the medium term, we believe the outcome of the US fiscal

debates, developments in Japans monetary policy and the strength of

recovery of Chinas economy are key factors influencing currencies. Our

medium term views across selected currencies are outlined below:

EUR-USD We are medium-term neutral on the EUR

The EUR has strengthened considerably since Q3 2012 on optimism of

expected recovery in the Euro area economy towards H2 2013 and receding

tail risks surrounding the Euro area debt crisis. This is further evidenced by

the significant fall in speculative short EUR positions and the strengthening

of the EUR against safe-haven currencies such as GBP and CHF. However,there remain a number of political and economic events over the year that

could trigger a downside in EUR. We reiterate that, in the short term, the

EUR is likely to be more elastic to the upside on positive developments and

inelastic to the downside on negative developments.

USD-JPYWe are medium-term neutral on the JPY with a negative bias

The recent monetary policy announcement by the Bank of Japan (BoJ) to

increase the inflation target to 2% from 1% and to undertake a delayed open

ended asset purchase program affirmed our views of policy uncertainty likely

to be faced until the new BoJ Governor is appointed in April 2013. We

maintain our stance of staying neutral in the short term given increased

volatility. As such, we believe using JPY as a funding currency to implement

carry strategies at this time is unattractive from a risk-return perspective.

GBP-USD We remain medium-term neutral on the GBP

We believe a neutral stance remains appropriate given opposing drivers. On

one hand, optimism surrounding the Euro area growth recovery has been

positive for GBP. On the other hand, the receding tail risks surrounding the

Euro area debt crisis has resulted in lower safe-haven demand for GBP.

Though the domestic economy remains weak, signs that earlier monetary

policy actions are having some positive effects are likely to pare back

expectations of further easing by the Bank of England (BoE).

AUD-USD We are medium-term neutral on the AUD with a positive bias

The AUD is expected to be well supported through the year, barring shocks

to the market, on the back of stronger demand for Australias commodities

and ongoing pursuit for higher yielding assets. Going forward, the

developments surrounding Japans monetary policy is key for AUD given its

strong characteristics as a carry currency. Though we believe there is likely

to be further upside to AUD-JPY from April 2013 onwards, the interim period

is likely to be highly volatile. In addition, we believe slower y/y growth in

Australias private sector credit growth and well contained inflation levels

have raised the probability of an interest rate cut by the Reserve Bank of

Australia (RBA) in Q1 2013. This is likely to fuel higher volatility given market

expectations that the RBAs interest rate cycle has bottomed. A minor

correction in the AUD is likely, something reinforced by the fact that the

market already had huge speculative long positions.

Lower safe haven demand for GBP and CHFEUR-GBP vs EUR-CHF


Investors are long AUDCFTC AUD non-commercial net long positions


Carry strategy still risky nowAUD-JPY vs AUD-JPY 2 week implied volatility


1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.90

0.92

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

EUR-CHF

EUR-GBP

EUR-GBP EUR-CHF

-60

-40

-20

0

20

40

60

80

100

120

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

Noo

fcontracts000

75

80

85

90

95

7

9

11

13

15

17

19

Jun-12 Aug-12 Oct-12 Dec-12

AUD-JPY

Vol

AUD-JPY 2 week implied volatility AUD-JPY

Foreign Exchange


10/14


10

USD-SGD We remain medium-term bullish on the SGD

We believe the current monetary policy stance of a steady appreciation of

the SGD trade weighted basket is likely to remain. However, weakness in

Singapores industrial production cycle is likely to weigh on the SGD. Given

this, we believe some sideways trading will likely continue in Q1 2013 or atleast until we get further guidance from the Monetary Authority of Singapore

(MAS) in April 2013. Continued inflation pressures, however, are a key

upside risk to the currency.

USD-CNH We are medium term bullish on the CNH

The recovery in China is expected to provide firm support for the Renminbi

over 2013 as Chinas twin surpluses return. In addition, greater convertibility

and deregulation of the onshore Renminbi (CNY) is also positive for the CNY

in the long run. Aside from the CNY, the fast development of the offshore

Renminbi market (CNH) has also attracted significant funds in the likes of

increased Dim Sum bond issuances, offshore deposits and Renminbi tradesettlement. This is expected to intensify in 2013 as Chinese authorities

gradually implement new development measures. We believe the rate of

appreciation of the Renminbi is l ikely to moderate, but with limited pullbacks.

We remain medium term bullish on Asia-ex Japan currencies as the

global economic environment continues to show signs of a firm recovery and

the pursuit for yield intensifies. Our strongest conviction comes from the

rebound in Chinas economy and thus on the appreciation of the Re nminbi.

Given the regional dynamics involving trade competitiveness, a stronger

Renminbi is likely to lead to further appreciation in Asia ex-Japan currencies

albeit at a moderate pace. A temporary correction remains possible, but our

longer term conviction on Asia ex-Japan currencies remains.

Conclusion: In line with our 2013 Outlook framework of broadening

economic growth and reduced tail risks, we remain neutral on EUR,

GBP and JPY while being bullish on Asia ex-Japan in the medium term.

We retain our positive bias on commodity currencies.

We believe our B.R.I.D.G.E. lens is still appropriate. Developments over

the past month have reinforced the outlook for a broadening globaleconomic recovery with receding tails risks. Against this backdrop,

2013 is viewed as a Year of Transition from a shorter-cycle, policy-

driven economic environment to one that is stronger and more

sustainable. Naturally, this will not be a smooth process, but we believe

the economy will be much more stable by the end of the year than it

appeared at the beginning.

Against this backdrop, equities are our preferred asset class. We

believe underweight investors should not be too patient in terms of

increasing their allocation. The risk is we either do not see better entry

levels from here, or even if we do it will be extremely short-lived and

most investors would miss the opportunity to significantly increase

their exposure.

USD-SGD likely to trade sidewaysUSD-SGD


CNY trade settlement increasingChinas CNY trade settlement, CNY bn and %


Still riding on Asia ex-Japan currenciesDXY and ADXY Indices


Note: DXY Index comprises of the weighted performance of the USD

against the EUR, JPY, GBP, CAD, SEK and CHF.

ADXY Index comprises of the weighted performance of the CNY, HKD,INR, IDR, KRW, MYR, PHP, SGD, TWD and THB against the USD.

1.21

1.22

1.23

1.24

1.25

1.26

1.27

1.28

1.29

1.3

1.31

Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13

USD-SGD

78

80

82

84

113

114

115

116

117

118

119

120

Jan -12 Ma r-12 Ma y-1 2 Ju l-12 S ep-12 N ov-12 Jan -13

Index

Index

ADXY In dex DXY Cu rncy (RH S)

Conclusion


11/14


11

Asset Allocation Summary

Source: Standard Chartered

All figures are in percentages Currency : USD

Summary View vs. SAA

Cash UW 22 0 0 0

Fixed Income UW 37 37 18 5

Equity OW 21 40 59 80

Commodities OW 10 13 13 10

Alternatives N 10 10 10 5

Asset Class Region View vs. SAA Conservative ModerateModerately

Aggressive

Aggressive

Cash & Cash Equivalents USD Cash UW 22 0 0 0

IG Developed World UW 27 15 0 0

IG Emerging World N 5 10 2 0

HY Developed World OW 0 7 6 0

HY Emerging World N 5 5 10 5

North America OW 7 12 16 22

Europe N 5 8 12 17

Japan UW 0 1 2 3

Asia ex-Japan OW 7 15 24 30

Other EM UW 2 4 5 8

Commodities Commodities OW 10 13 13 10

Hedge FoF/CTAs N 10 10 10 5

Emerging Market Equity

Tactical Asset Allocation - February 2013 (12M)

Investment Grade

High Yield

Developed Market Equity


12/14


12

Economic & Market Calendar

25 January 2013


Next Week: January 28 - February 1 This Week: January 21 - January 25

Event P eri od Expected P ri or Event P eriod Actual P rior

MON

US Durable Goods Orders Dec 2.00% 0.70% TA Export Orders (YoY) Dec 8.50% 11.10%

US Pending Home Sales YoY Dec -- 8.90% HK CPI - Composite Index (YoY) Dec 3.70% 3.70%

US Dallas Fed Manf. Activity Jan -- 6.8 MU CPI - Composite (YoY) Dec 5.83% 5.72%

UK Nat'w ide House prices nsa(YoY) Jan -- -1.00%

EC Euro-Zone M3 s.a. (YoY) Dec -- 3.80%

TH

(YoY) Dec -- 83.3

TUE

US S&P/CS Composite-20 YoY Nov 5.55% 4.31% JN All Industry Activity Index (MoM) Nov -0.30% 0.20%

US Consumer Conf idence Jan 65.3 65.1 GE ZEW Survey (Econ. Sentiment) Jan 31.5 6.9

IN India REPO Cutoff Yld 29-Jan 7.75% 8.00% US Chicago Fed Nat Activity Index Dec 0.02 0.27

IN Cash Reserve Ratio 29-Jan 4.25% 4.25% US Richmond Fed Manufact. Index Jan -12.0 5.0

NZ Trade Balance Dec -- -700M US Existing Home Sales Dec 4.94M 4.99M

JN BOJ Target Rate 22-Jan 0.10% 0.10%

TA Unemployment Rate - sa Dec 4.22% 4.27%

WED

EC Euro-Zone Economic Confidence Jan -- 87 JN

Bank of Japan Monthly Economic

Report f or January

US ADP Employment Change Jan 163K 215K UK Bank of England Minutes

US GDP QoQ (Annualized) 4Q A 1.30% 3.10% UK Jobless Claims Change Dec -12.1K -8.9K

US GDP Price Index 4Q A 1.50% 2.70% US House Price Index MoM Nov 0.36% 0.60%

JN Retail Trade YoY Dec -- 1.30% EC Euro-Zone Consumer Conf idence Jan A -23.9 -26.3

SK Industrial Production (YoY) Dec -- 2.90% US

IMF Releases World Economic

Outlook Update

AU Consumer Prices (Y oY) 4Q 2.2 2.00%

SI CPI (YoY) Dec 4.30% 3.60%

TA Industrial Production (YoY) Dec 2.39% 5.87%

MA CPI YoY Dec 1.20% 1.30%

THU

R

US FOMC Rate Decision 30-Jan 0.25% 0.25% EC ECB Euro-Zone Current Account SA Nov 14.8B 8.0B

GE Unemployment Rate (s.a) Jan -- 6.90% EC PMI Manufacturing Jan A 47.5 46.1

JN Vehicle Production (YoY) Dec -- -8.40% EC PMI Services Jan A 48.3 47.8

CA Gross Domestic Product YoY Nov -- 1.10% US Initial Jobless Claims 19-Jan 330K 335K

US Initial Jobless Claims 27-Jan -- 335K US Markit US PMI Preliminary Jan 56.1 54

US Chicago Purchasing Manager Jan 51.5 51.6 NZ Business NZ PMI Dec 50.1 48.8

NZ RBNZ Off icial Cash Rate 31-Jan 2.50% 2.50% SK GDP (YoY) 4Q P 1.50% 1.50%

JN Industrial Production YOY% Dec P -- -5.50% CH HSBC Flash Manufacturing PMI Jan 51.9 51.5

TA GDP - Constant Prices (YoY) 4Q P 3.00% 0.98% PH Overnight Borrow ing Rate 24-Jan 3.50% 3.50%

PH Annual GDP (YoY) 2012 6.40% 3.70% VN CPI (YoY) Jan 7.07% 6.81%

AU Private Sector Credit YoY% Dec -- 3.50%

MA Overnight Rate 31-Jan 3.00% 3.00%

FRI

UK PMI Manufacturing Jan -- 51.4 US Kansas City Fed Manf. Activity Jan -2 -1.0

EC Euro-Zone Unemployment Rate Dec -- 11.80% JN Natl CPI YoY Dec -0.1 -0.20%

US Change in Nonfarm Payrolls Jan 160K 155K UK GDP (YoY) 4Q A 0.00%

US Unemployment Rate Jan 7.80% 7.80% US New Home Sales Dec 377K

US U. of Michigan Conf idence Jan F 71.3 71.3 SI Industrial Production YoY Dec 3.10%

US ISM Manufacturing Jan 50.5 50.7 TA Money Supply M2 Daily Avg YoY Dec 3.26%

SK Consumer Price Index (YoY) Jan -- 1.40%

CH Manufacturing PMI Jan -- 50.6

CH HSBC Manufacturing PMI Jan -- 51.5

ID Inflation (YoY) Jan -- 4.30%

TH Consumer Price Index (YoY) Jan -- 3.63%

ID Total Trade Balance Dec --

ID Annual GDP 2012 -- --

Previous data are for the preceding period unless otherwise indicated Previous data are for the preceding period unless otherwise indicated

Data are % change on preivous period unless otherwise indicated Data are % change on preivous period unless otherwise indicated

p- preliminary data, f- f inal data, sa - seas onally adjus ted p- pr eliminar y data, f- final data, sa - s eas onally adjus ted

YoY - year on year, MoM - month-on-month YoY - year on year, MoM - month-on-month


13/14


13

3 -12 Month Market OutlookCentral bank policy rates

Spot Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014

US 0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 -

Europe 0.75 0.75 0.50 0.50 0.50 0.50 -

UK 0.50 0.50 0.50 0.50 0.50 0.50 -

Japan 0.10 0.10 0.10 0.10 0.10 0.10 -

Australia 3.00 3.00 3.00 3.00 3.25 3.75 -

China 6.00 6.00 6.00 6.00 6.25 6.75 -

Taiwan 1.88 1.88 2.00 2.13 2.25 2.38 -

Malaysia 3.00 3.00 3.00 3.00 3.25 3.25 -

Indonesia 5.75 5.75 5.75 6.00 6.25 6.25 -

South Korea 2.75 2.50 2.50 2.50 2.50 2.75 -

India 8.00 7.75 7.50 7.25 7.00 7.00 -

Philippines 3.50 3.50 3.50 3.50 4.00 4.00 -Thailand 2.75 2.75 2.50 2.50 2.50 2.50 -

Forex

Spot Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014

EUR/USD 1.34 1.29 1.27 1.30 1.35 - -

GBP/USD 1.58 1.55 1.55 1.59 1.63 - -

USD/JPY 90.54 88.00 91.00 92.00 93.00 - -

USD/CAD 1.00 0.99 1.00 0.98 0.98 - -

USD/CHF 0.93 0.95 0.98 0.96 0.93 - -

AUD/USD1.04 1.03 1.04 1.06 1.07 - -

NZD/USD 0.84 0.82 0.83 0.86 0.89 - -

USD/CNY 6.22 6.21 6.18 6.14 6.10 - -

USD/SGD 1.23 1.23 1.22 1.21 1.20 - -

USD/MYR 3.05 3.02 3.00 2.97 2.90 - -

USD/IDR 9760 9,950 10,100 9,800 9,500 - -

USD/KRW 1070 1,055 1,050 1,045 1,025 - -

USD/INR 53.69 54.50 55.00 53.50 53.00 - -

USD/THB 29.86 29.50 30.25 29.75 29.50 - -

USD/PHP 40.64 40.00 41.00 40.50 39.00 - -

Commodities*

Spot Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014^ Q2 2014^

Gold 1,666 1,725 1,800 1,800 1,900 2,107 2,107

Silver 32 32 34 34 35 39 39

Brent Oil 113 109 109 114 115 114 114

WTI Oil 96 94 97 104 106 109 109

Copper 8,096 8,000 8,250 8,250 8,800 9,500 9,500

Aluminium 2,076 2,100 2,100 2,100 2,200 2,300 2,300

Corn 724 800 780 760 780 790 800

Soybeans 1,434 1,550 1,500 1,450 1,500 1,350 1,400

Wheat 769 920 880 800 850 880 850

Source: Bloomberg, Standard Chartered Research (25 January 2013 Economics Weekly)* Period averages for each quarter.

^ Q4 2013 Commodity forecasts from the 7 Dec 2012 Commodity Roadmap


14/14


Disclosure Appendix

This document is not research material and it has not been prepared in accordance with legal requirements designed to promote theindependence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investmentresearch. This document does not necessarily represent the views of every function within the Standard Chartered Bank, particularlythose of the Global Research function.

Standard Chartered Bank is incorporated in England and Wales with limited liability by Royal Charter 1853, Reference number ZC18. The Principal Office of the Company is situated in England at 1 Aldermanbury Square London EC2V 7SB. Standard CharteredBank is authorised and regulated by the Financial Services Authority under FSA register number 114276.

In Dubai International Financial Centre (DIFC), the attached material is circulated by Standard Chartered Bank DIFC on behalf of theproduct and/or Issuer. Standard Chartered Bank DIFC is regulated by the Dubai Financial Services Authorit y (DFSA) and is authorisedto provide financial products and services to persons who meet the qualifying criteria of a Professional Client under the DFSA rules.The protection and compensation rights that may generally be available to retail customers in t he DIFC or other jurisdictions will not beafforded to Professional Clients in the DIFC.

Banking activities may be carried out internationally by different Standard Chartered Bank branches, subsidiaries and affiliates(collectively SCB) according to local regulatory requirements. With respect to any jurisdiction in which there is a SCB entity, thisdocument is distributed in such jurisdiction by, and is attributable to, such local SCB entity. Recipients in any jurisdiction shouldcontact the local SCB entity in relation to any matters arising from, or in connection with, this document. Not all products and services

are provided by all SCB entities.

This document is being distributed for general information only and it does not constitute an offer, recommendation, solicitation toenter into any transaction or adopt any hedging, trading or investment strategy, in relation to any securities or other financialinstruments. This document is for general evaluation only, it does not take into account the specific investment objectives, financialsituation, particular needs of any particular person or class of persons and it has not been prepared for any particular person or classof persons.

Opinions, projections and estimates are solely those of SCB at the date of this document and subject to change without notice. Pastperformance is not indicative of future results and no representation or warranty is made regarding future performance. Any forecastcontained herein as to likely future movements in rates or prices or likely future events or occurrences constitutes an opinion only andis not indicative of actual future movements in rates or prices or actual future events or occurrences (as the case may be).

This document has not and will not be registered as a prospectus in any jurisdiction and it is not authorised by any regulatory authorityunder any regulations.

SCB makes no representation or warranty of any kind, express, implied or statutory regarding, but not limited to, the accuracy of thisdocument or the completeness of any information contained or referred to in this document. This document is distributed on theexpress understanding that, whilst the information in it is believed to be reliable, it has not been independently verified by us. SCBaccepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental orconsequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arisingfrom, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associatedservices, or due to any unavailability of the document or any part thereof or any contents.

SCB, and/or a connected company, may at any time, to the extent permitted by applicable law and/or regulation, be long or short anysecurities, currencies or financial instruments referred to on this document or have a material interest in any such securities or relatedinvestment, or may be the only market maker in relation to such investments, or provide, or have provided advice, investment bankingor other services, to issuers of such investments. Accordingly, SCB, its affiliates and/or subsidiaries may have a conflict o f interest thatcould affect the objectivity of this document.

This document must not be forwarded or otherwise made available to any other person without the express written consent of SCB.

Copyright: Standard Chartered Bank 2013. Copyright in all materials, text, articles and information contained herein is the property of,and may only be reproduced with permission of an authorised signatory of, Standard Chartered Bank. Copyright in materials createdby third parties and the rights under copyright of such parties are hereby acknowledged. Copyright in all other materials not belongingto third parties and copyright in these materials as a compilation vests and shall remain at all times copyright of Standard CharteredBank and should not be reproduced or used except for business purposes on behalf of Standard Chartered Bank or save with theexpress prior written consent of an authorised signatory of Standard Chartered Bank. All rights reserved. Standard Chartered Bank2013.

THIS IS NOT A RESEARCH REPORT AND HAS NOT BEEN PRODUCED BY A RESEARCH UNIT.

SC-Global-Market-Outlook-February-20131.pdf

Documents

Transcript of SC-Global-Market-Outlook-February-20131.pdf