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August 2012

Don’t get carried away with growth fears
The dominant theme of slower growth persists, but Citi analysts think the sources of growth concern has shifted West-ward amidst signs that China’s growth has stabilized in 2Q12, while focus may now be centred on persistent data disappointments in the US. Indeed, there are five reasons why Citi analysts do not expect a prolonged downturn in Asia.

but the sources of growth concern have shifted West-ward. While US growth in 2Q12 is looking weaker than expected. two more reserve requirement ratio (RRR) cuts. other segments like property/construction are still weak. this has not been enough to boost steel production given lingering excess capacities. Citi analysts think this is highly distorted because of its role as a regional financial centre not just of local banks but global banks as well . Exposures to European ex UK banks are also not very high outside of Singapore and Hong Kong.to long-term loans have fallen slightly from 35% to 32% in June. Even in Singapore and Hong Kong’s case. some upside from housing and moderately better labour gauges counterbalanced by weaker business investments ahead of the November Presidential elections could continue to keep growth in an expansionary mode. from a commodity-heavy slowdown on a China hard landing. Citi analysts think we are now moving towards a more conventional cyclical slowdown in the region led by US growth concerns.6% YoY GDP growth in 2Q12 with momentum stabilizing via help of policy easing. some relaxation of loan-deposit ratio (LDR) restrictions. Nonetheless. There are some promising signs that housing starts. Thus. Citi analysts remain concerned that the share of medium. the ability to maintain lending growth and intermediate lower real rates look relatively healthy for many as reliance on cross-border funding is relatively limited. #2 Asia’s financial system continues to function well Citi analysts do not see any signs of a “financial shock” in the region.Don’t get carried away with growth fears Growth worries migrate from China to the US The dominant theme of slower growth has not changed. cement and new loans have picked up. likely with the help of kick-starting government projects. Citi analysts expect only a shallow and short-lived slowdown for the reasons below. albeit at a slower pace. but Citi’s base case is for no double-dip recession. continued pick up in fiscal spending). which tends to prolong downturns. and even as new loans – an important leading indicator for economic activity – picks up. plus prospects for loan substation from non-European/regional bank players are high. but despite signs of infrastructure pick up. as economic data continues to disappoint. barring a major financial shock. with sharp slowing of momentum in consumption and worries that the upcoming US elections and uncertain global backdrop could point to a still weaker than expected momentum in 2H12. While leading indicators do not point to a compelling turnaround in China. While there are signs infrastructure investment pickup has helped support fixed asset investment (FAI) growth. coincident activity indicators such as the acceleration of FAI and retail sales growth for the second consecutive month in June and the lagged impact of policy easing (Citi expects one rate cut. Chinese policymakers clearly cannot be complacent. prospects for income growth supporting consumption has been somewhat dashed by the disappointing pace of non-farm payrolls. #1 No double-dip recession is expected in the US Slowdown risks in the US have risen. suggesting that some of the loan growth remains fragile to reversal without continued policy support. Asia’s local financial system appears in relatively good shape. and even amidst European bank deleveraging. could ensure some mild rebound in the second half of 2012. Despite lingering signs of European bank deleveraging. not catastrophe While Asia appears poised for a slowdown. and the outlook for industrial production and exports are still looking rather fragile. especially given weakness in the export markets. China’s growth momentum has managed to avert the worst fears producing a 7. Not only has the US ISM manufacturing index receded to sub-50 reading for the first time since mid-2009. and have been declining. Expecting a slowdown. Citi analysts think the “newer” concern now is the decelerating growth we are seeing out of the US.

while the pace of spending looks like it has outperformed its target. which tend to a be a significant driver of the export/manufacturing cycle in parts of Asia (especially Singapore.9% of GDP. Thailand (though this is now losing momentum) and Vietnam (various fiscal relief for industries/small and medium-sized enterprises) have announced additional fiscal stimulus. However. Citi analysts believe China still has room to increase net fiscal deficit spending by over 3% of GDP in 2H12. the recent acceleration of retail sales and FAI growth in China gives some confidence that domestic demand there may be turning. For example. especially as receding inflation pressures (so far.3% of GDP in 2011. this time around.Don’t get carried away with growth fears #3 Domestic demand drivers appear to be holding up While the manufacturing/export outlook may seem more challenging. Korea. Thailand. So. #5 Inventory overhang looks milder than last year. Despite surprisingly resilient exports. though most are still keeping their powder dry. notwithstanding softer final demand.6%). look in better shape. Philippines and Thailand – to cut interest rates and for others to keep rates on prolonged hold at low levels. up 12% YoY when the full year program has revenue growth of 10. Unlike last year when we had some inventory build-up. so far. This highlights considerable fiscal slippage. and especially in Singapore’s case. especially in electronics Even as exports/shipments could potentially slow on global growth challenges.3% YoY. Citi analysts think there is still sufficient room for central banks in the region – China. the budget balance (official definition) is still in surplus to the tune of 1. China’s industrial production growth has disappointed mostly this year. up 8. But all in all. Citi analysts believe China may still have a bit more broader inventory de-stocking to go. are particularly acute in South Asia. India. electronics leading indicators.5% of GDP versus 1. while softening. Inventory-to-shipment ratios in Korea and Taiwan do not look unusually elevated relative to history. Malaysia.3% expenditure growth target for the full year. Indonesia. barring continued oil/food price shocks) cushion real incomes. Thus. uncertainties about global demand lingers. Alongside a more accommodative monetary stance. #4 Room for counter-cyclical policy easing alive and well Despite surfacing concerns about food inflation (which many are keeping a close eye on). +21% YoY in 1H12 relative to the 9. there is room for expenditures to ramp up beyond the target. The key country to watch is China. Based on recent PMI finished goods inventory relative to new orders. Moreover. albeit only mildly. have also held up fairly well. when Citi analysts look at the broader manufacturing outlook. most of East Asia has sufficient fiscal room. however. with a budget deficit roughly about 2. While this may be a lagging indicator. In 1H12. Nonetheless. On the fiscal front. The fiscal constraints. electronics exports appear to have moved beyond production which could signal leaner inventory. only Malaysia (given pre-election spending). though this may be somewhat seasonal (1H11 saw a budget surplus of 2. Philippines and Korea). which amplified the export slowdown amidst worsening Eurozone concerns. Citi analysts do not expect a significant inventory build-up that could catalyze abrupt de-stocking. India’s budget deficit is already 27% of the fiscal year deficit target. . if revenues sustain outperformance. So far. in the first two months of fiscal year 2013. Citi analysts believe there is sufficient room for easing in many countries.5% YoY. Consumer confidence indicators in the more dynamic domestic economies of Philippines. many Asian countries have room for counter-cyclical fiscal stimulus to support growth but only a few have visibly started with “additional” fiscal spending. The good news is that revenues appear to have outperformed. Citi analysts think policymakers may not announce extra “fiscal stimulus” at this juncture. There has been a lot of “talk” that China will announce additional stimulus but Citi analysts argue that China’s fiscal stance this year is already relatively simulative. especially in the electronics cycle. Outside of South Asia. Citi analysts have yet to see signs of a material impact on labour markets that would dampen income expectations and consumption growth. unemployment rates are still close to historic lows in many countries. and even China. especially in the electronics cycle by mid-2011. risks to Asia’s electronics de-stocking cycle may be much shorter this time around.

and by a further 25 bps in 4Q12. Utilities. Citi analysts have lowered the Oil & Gas sector to Underweight (from Neutral) as they continue to see an uninspiring combination of low growth and low returns. implied earnings expectations. Insurance and Diversified over the next 12 months and relative earnings trends for the sector have recently turned positive.Chart 1: Chart 2: S&P 500 Index 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1-Mth YTD 1-Yr 3-Yr* *Denotes cumulative performance Dow Jones Stoxx 600 Index 39. and Materials have demonstrated high beta over the past five years relative to low beta areas such as Telecom Services. Although Operation Twist has been extended. Citi expects the ECB to cut the refi rate to 0. the Netherlands and Luxembourg Aaa ratings on Negative Outlook imply that the core and softcore countries may also be increasingly affected by the crisis. Insurance. valuation. inflation may undershoot the  Worries about financial headwinds from Europe and the threatened 4% US fiscal cliff amid already subpar growth have pushed the Federal Reserve (Fed) closer to another major easing step. Although some softening reflects payback from temporary factors. Outside Spain. while the Media sector earnings have performed in line with Health Care over the past 12-15 months. Financials are their preferred plays for beta positioning. European Central Bank’s (ECB) target of “below. but close to 2%”.  A variety of metrics. the Media group offers exposure to defensive growth at a reasonable price.46% 1-Mth YTD 1-Yr 3-Yr* *Denotes cumulative performance Performance data as of 31 July 2012 Source: Bloomberg Performance data as of 31 July 2012 Source: Bloomberg United States Fed likely to focus on easing in coming months  Expansion’s pace appears to have slowed to a meagre 1. the pullback in hiring and retail sales has raised doubts about 2H12. Euro-Area 90% probability of a Grexit over the next 12-18 months  While market pressure is rising rapidly – especially on Spain – Moody’s decision to put Germany. and credit conditions have been instrumental to the more bullish stance outlined in late June. In their view. Finally. As such.  Citi analysts have raised Media to Overweight (from Underweight) and lowered Health Care to Neutral (from Overweight).22% 6. industry groups such as Diversified Financials. Citi analysts have increased the probability of Grexit in the next 12-18 months to about 90% from 50%-75% previously. price performance has lagged. including sentiment. Instead. Moreover.  The Utilities sector has also been raised to Neutral from Underweight.89% 4.26% 6. Pharma & Biotech. But the upside appears checked for now by economic policy uncertainty and ongoing fiscal drag. while Citi analysts believe that higher beta names could outperform.74% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 16. Citi’s base case assumes the US will avoid massive fiscal tightening in 2013 but meaningful restraint from the public sector is still likely next year and beyond. . and thus one can derive that a higher beta tilt to portfolios may be appropriate.06% -1. they do not favour Autos and Materials given European economic woes. officials are weighing a new lending effort or asset purchases as well as enhanced communications.68% 1. Autos.  With more negative news on the economy. Citi analysts see reduced earnings risk across this group  Having said that. while numerous housing indicators are pointing higher.68% 9. If we look at historical data. nearer-term triggers like the Citi Economic Surprise Index and high intra-stock realized price correlation argue for the recent rally to continue. For instance. Consumer finances have benefited from slowing inflation and easier credit.5% in 3Q12. Spain and Italy are expected to request support from the European Financial Stability Facility/European Stability Mechanism. and Food & Staples Retailing. Regarding non-standard measures. Taking into account the increasing reluctance in core countries to provide extra support to Greece and the problems of the Greek government to implement the existing programme.5% or less in 2Q12. and the ECB could then provide more multi-year long-term refinancing operations (LTROs) and also extend the eligible collateral pool. Citi analysts do not rule out an early August move but September seems more likely. Citi analysts believe there is an opportunity for that relative performance to reverse somewhat in the coming months.

management sentiment has since improved. With  Citi analysts believe capex and in particular. China and Thailand. . 2) the yen is strong at around ¥80/$. Overall investor positioning remains very cautious with the relative performance or risk versus quality only having been worse in 1997/98. and capex is likely to rise. resulting in capex being held below depreciation costs. In the BoJ’s Tankan survey. manufacturers say they plan to increase capex by 7. Compared to historical revisions versus price-to-book. in-out M&A numbers would hit a record level in 2012. Others are likely to remain on prolonged hold. Taiwan Dollar (TWD) and Philippine Peso (PHP) are expected to face the largest downside risks. Citi analysts think risks are now tilted towards Philippines.49% -4. Taiwan and Thailand are all pricing in a significant worsening of revisions. Management sentiment deteriorated in the wake of the March 2011 disaster. the worst near term revisions have been with the Material and Energy  Indeed. Institutional Brokers' Estimate System (IBES) expectations still running at 13.Chart 3: Chart 4: Topix Index 5% 1. But the most likely measure may be to raise the ceiling for short.06% 0% -5% -10% -15% -20% -25% 1-Mth YTD 1-Yr -22.39% MSCI Asia ex Japan Index 20% 16.55% 7. As such. 9/11 and SARS. and 3) the emergency facility to combat yen strength set up by the government in August 2011 is being used. Citi analysts see three main reasons for the increase in in-out M&A: 1) management sees the need to make forays overseas from the standpoint of long-term growth as the domestic population is declining. The latest revisions have taken on the same pattern as in prior years. Real Estate and Technology are pricing in worse revisions than what we have currently. space. in-out merger and acquisition (M&A) are likely to increase in FY12.27% *Denotes cumulative performance *Denotes cumulative performance Performance data as of 31 July 2012 Source: Bloomberg Performance data as of 31 July 2012 Source: Bloomberg Japan Growth may slow in 2014 due to tax hike  Economic growth in this year and next could be pushed up to an above 2% pace by reconstruction demand from the earthquake and frontloaded spending ahead of the consumption tax hike.  Asian exporters have kept their currencies broadly stable against both USD and CNY but this is unlikely to be sustained if domestic data continues to weaken and USD strengthens as expected over the  Citi expects additional Bank of Japan (BoJ) easing in late October. and the hurdle for extending the maturity of JGBs that the BoJ purchases also appears high.16% 15% 10% 5% 0% -5% -10% -15% 1-Mth YTD -12.2% in FY12. which could in turn make the second tax hike slated for October 2015 less likely.49% 1-Yr 3-Yr* 3. Asia Pacific Most central banks likely to remain on hold  The theme of slower growth continues to dominate. medium term. But markets already appear to be pricing in much weaker earnings revisions than we have seen thus far. Citi expects a sharp contraction in GDP right after the tax hike in April 2014. However. If the pace seen since the start of the year continues.8% for this year. in particular the Korean Won (KRW). After rate cuts by China and Korea.and longer-term JGB purchases under the asset purchase programme. But GDP growth in 2014 will inevitably slow sharply due to a payback to frontloaded spending and erosion in real household disposable income driven by tax hikes. while Consumers are priced for significantly better revisions.  The worst revisions are in Taiwan. though the source of growth worries appears to be shifting from China to the US. They expect earnings-per-share (EPS) growth to come in between 4-8% for this year.  August and September have historically been the heaviest months of corporate earnings revisions post the mid-year results. export intensive Asian currencies. Citi analysts see room for disappointment. Singapore and Thailand to ease monetary policy. A reduction in the interest rate on excess reserve appears unlikely given the Governor’s stance. Singapore. in part as a rebound after previous curtailment. the number of in-out M&A by Japanese firms appears to be recovering. Hong Kong.51% 3-Yr* -12. Banks. By sector.

and Russian Ruble (RUB) are forecast to remain under pressure. or by any local government or insurance agency. The information in this document has been obtained from reports issued by CGMI. *Denotes cumulative performance Performance data as of 31 July 2012 Source: Bloomberg Emerging Markets Outlook for CEEMA equities appears challenging  CEEMEA1 remains hostage to growth and deleveraging risks from the Eurozone. financial situation. General Disclosure “Citi analysts” refers to investment professionals within Citi Research (“CR”). Citibank does not provide legal and/or tax advice and is not responsible for advising an investor on the laws pertaining to his/her transaction.300 on the MSCI Latam index. financial situation. particularly UK Gilts are likely to be well-supported.94% 12. stability appears to be still the name of the game when it comes to monetary policy (except in Brazil). Citibank N. If an investor changes residence.28% 1. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives. CGMI. are not obligations of. Meanwhile in Latam. or place of work. In fact. others. Emerging Market Debt Increased corporate bond issuance in emerging markets may present opportunities to pick up yield while benefiting from stronger domestic growth. 1. or guaranteed or insured by Citibank N. like the Czech Koruna (CZK) and Turkish Lira (TRY). Information in this document has been prepared without taking account of the objectives. Some investment products (including mutual funds) are not available to US persons and may not be available in all jurisdictions. high quality government bonds in safe haven markets. large cash balances. citizenship.  While Citi analysts expect some CEEMEA currencies. low default rates. and prefer the Financials. Meanwhile.62% 3. however. Citigroup Inc. to regain some lost ground. including the possible loss of the principal amount invested. reflecting weak European demand and retrenchment by European banks. Citi’s preferred market is South Africa thanks largely to its strong and resilient earnings growth outlook.Chart 5: MSCI Emerging Markets Index 15% 10% 5% 0% -5% -10% -15% -20% 1-Mth YTD 1-Yr 3-Yr* -16. double-B rated issuers and select single-B rated issuers with strong fundamentals. the Chilean Peso (CLP) is expected to weaken in the medium term given that its currency is intimately linked to both copper prices and the weakening Chinese economy. and should seek independent advice on the suitability or otherwise of a particular investment. Although earnings-per-share (EPS) growth appears to be slowing. and for gains to be potentially generated in the intermediate. Israeli Shekel (ILS).A. This document is for general information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. Citi Global Markets Inc. Middle East and Africa. or needs. they selectively favour high quality. Investments are not deposits. Euro Bonds As global growth slows further and heightened uncertainties persist. Ukraine and Kazakhstan have all been taken down slightly for 2012/13.to longer-dated maturity range. Past performance is not indicative of future performance. Such information is based on sources CGMI believes to be reliable. CEEMEA is the collective term for Central and Eastern Europe. and a smaller universe of safe haven assets continue to remain supportive. Resilient growth has kept most central banks in "wait-and-see" mode but Citi analysts continue to expect easing later in the year. Citi analysts remain cautious due to festering concerns in Europe and expectations that global growth will continue to slow. All opinions and estimates constitute CGMI's judgment as of the date of the report and are subject to change without notice. particularly the Hungarian Forint (HUF). nationality. Telecoms and Consumer Discretionary sectors. policy flexibility implies that the region can weather the European economic slowdown. Citi’s growth forecasts for the Czech Republic..  While the CEEMEA region is attractively valued.  In Latam. . and are subject to investment risk.. Slovakia. there is reason for continued caution given relatively weak growth and higher exposure to the Euro Area. As such. Their end-2012 target for the MSCI EM EMEA index stands at 350. it is his/her responsibility to understand how his/her investment transactions are affected by such change and comply with all applicable laws and regulations as and when such becomes applicable. although high yield valuations have become more attractive. decreasing net issuance. and the central bank has turned more dovish recently. (“CGMI”) and voting members of the Citi Global Investment Committee.  Citi analysts have an end-2012 target of 4. Under such conditions. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. Investors should be aware that it is his/her responsibility to seek legal and/or tax advice regarding the legal and tax consequences of his/her investment transactions. Investors investing in funds denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss of principal.A.A. US Corporates A strengthening technical backdrop. No part of this document may be reproduced in any manner without the written consent of Citibank N. does not guarantee its accuracy and it may be incomplete or condensed.85% Positive on High-grade corporates and Emerging market debt US Treasuries Citi analysts expect yield curves to flatten. They favour Brazil and Peru. or any of their affiliates or subsidiaries. or needs of any particular investor. prices can go up or down.

5% 30% 25% 20% 15% 11. 2012   Historically. we take a peek at how the S&P 500 index historically performed during the Presidential cycle. 2012   The Presidential election cycle typically argues for a good year in equities in both the third and fourth year of a President’s term.2% Average after incumbent wins re-election Average following an incumbent loss Notes: Franklin D. .2% 10% 5% 1. Singapore Branch. Thus far in 2012. the S&P 500 is up around 6% year-to-date 24 July. Datastream and Citi Investment Research and Analysis. Health Care. while Environmental and Generic Pharmaceuticals tend to fare better under Democrats. in the year following an election. Years in Nixon's and McKinley's 2nd terms are not included in the incumbent averages if they did not serve for more than half of the year in question.7% 13. Source: Citibank N. Energy. challenger wins tend to be more rewarding and this tends to be nonpartisan. even though it did not hold true in 2008 (-38.2% 0% -0. Average S&P 500 Performance by Year in Presidential Cycle Since 1900 Source: Haver and Citi Research – US Equity Strategy. But in general terms.US Presidential Elections and Equity Market Performance The US Presidential elections are just three months away (November) and the race remains tight between incumbent Barack Obama and challenger Mitt Romney. As of July 24.7% 2.A. Coal Miners and Defence sectors tend to fare better under Republicans. As of June 13.. Utilities.0%). Regional Wealth Management.4% 8. The time served by their successor was counted as the successor's first term Source: MSCI.3% -5% Year 1 Year 2 Year 3 Year 4 7. In this month’s issue. Average S&P 500 Performance after Incumbent Re-Election/Loss by Year in Presidential Cycle Since 1900 35% 30.5%) and 2011 (0. Roosevelt's last term is counted as Truman's first term and is not included in any incumbent averages.

Spotlight on Allocations .

Spotlight on Allocations .

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