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Volume 13, Issue 16

April 29, 2013

Risky assets rebound back

Last weeks Highlights Flash manufacturing PMIs were downbeat, pointing to a possibly sharp loss of momentum in global manufacturing in April. Output PMIs declined in the US, the Euro area, and China. Also the leading indicators in these reports gave a negative signal about the near future, with new orders declining and finished goods inventory rising. Performance Global equities finished the week up and the MSCI world index posted a weekly rise of 2.3%. Japan resumed its rising trend with the Nikkei and Topix gaining 4.3% and 3.1% respectively. Europe and US stocks also gained with their benchmark Stoxx Europe 600 and S&P500 up 1.7% and 3.7% respectively. Asia ex Japan is also in positive territory with the MSCI Asia ex Japan up 1.5% week on week. Most Asian markets closed up except onshore China (Shanghai Composite lost -3%) and Indonesia (JCI lost 0.4%). The Week Ahead In the US, the FOMC meeting (Wed) and key data prints including April unemployment rate, payrolls, factory orders, ISM Non-Manufacturing data (Fri), consumer confidence (Tue), housing (Mon) data will attract attention. In Europe, UK PMI data (Wed) and ECB rates decision (Thu) will be in focus along with Italys election results. In Asia, Japan will see industrial production, real household consumption expenditure and unemployment rate (Tue). And global investors will keep a close eye out for macro data from the emerging Asia such as the official Chinas manufacturing PMI (Fri), Taiwan 1Q GDP (Tue), Indonesias trade balance (Thu), and Reserve Bank of Indias (RBI) rate decision.
Apr 26 close 1582.24 295.89 1161.19 545.37 Last weeks return +1.74% +3.74% +3.06% +1.48% YTD return +10.94% +5.80% +35.05% -0.43% YTD return (USD) +10.94% +4.37% +18.72% -0.43%

S&P 500: Stoxx Europe: Topix: MSCI Asia ex Japan:

Citi Economic Surprise Index - US

40 30 20 10 0 -10 -20 -30 -40 Jan-13

Economic Outlook
Will renewed disinflation persist? Uncertainties surrounding softening in recent economic growth and inflation data should keep the Fed's accommodation efforts at full tilt near term. Citi analysts do not expect any change at this coming week's FOMC meeting. Following the first official reading on 1Q GDP, Citi analysts have raised their 2Q growth estimate from near 1% to a still lackluster 1.5% pace. The 2.5% rebound in 1Q growth confirmed that the slowing at yearend was temporary as strength in private demand eclipsed ongoing drag from declining defense spending. Nonetheless, some of the upside surprises reflected one-off snapbacks from bad weather, especially the drought, and consumer spending was buoyed in part by higher utility needs. Inflation has slowed to 1.25%, providing Fed officials with some additional near-term flexibility to err on the side of ease. But Citi analysts think policymakers' projections that inflation is likely to firm somewhat ahead are correct.




Source: Bloomberg

S&P 500 (26/1/2013 to 26/4/2013)


US stocks may overshoot in 1H13 but 2H13 could see some volatility While the US equity market has commanded premium P/E multiples in the past, possibly due to better corporate governance or returns, not to mention trading liquidity, it is no longer doing so in any meaningful way despite a somewhat better economic outlook relative to Europe, for instance. However, a few of the differences can be attributed to the composition of the various global MSCI indices.




1250 Jan-13




Source: Bloomberg

Last weeks close S&P 500 1582.24 14712.55 DJIA Nasdaq 3279.26

Last weeks return +1.74% +1.13% +2.28%

YTD return +10.94% +12.27% +8.60%

When investors consider the ways in which to partake in any sectors opportunity, index composition can be very instrumental especially compared against global MSCI weights. The Financials sector market cap weight globally is roughly 21% but captures less than 16% in the US relative to Australias 50% and Chinas 40%. Technology accounts for about 10% globally, 18% in the US, 1% in the UK and approximately 4% in the rest of Europe. The United Kingdoms 17% Energy market cap exposure is larger than Brazils 16% and 11% in the US. In light of the recent pullback for the S&P 500, tied in part to recent disappointing economic data, Citi analysts believe that a rebound is likely due to respectable earnings, credit conditions that argue for better business and revenue trends, as well as delayed tax refund checks buoying consumer activity in the next couple of months. In this context, the S&P 500 may overshoot to 1,650-75 by summer, but European related demand weakness, Fed policy concerns and possibly new fiscal battles in Washington could cause more volatility in 2H13.

End-2013 S&P500 Index Target: 1615

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Citi Economic Surprise Index - Europe

100 80 60 40 20 0 -20 -40 -60 -80 -100 Jan-13 Feb-13 Mar-13 Apr-13

Economic Outlook
Muted profits dynamics point to sub-par recovery prospects It is arguable that yesterdays profits are todays investments and tomorrows jobs. As profitability plays a key role in the analysis of investment, growth and prices, Citi analysts review this important but often overlooked macro concept and reach three main conclusions. First, Citi analysts find that signs of stabilisation in profitability dynamics resulting from containing unit labour costs could limit the risk of further disinflation pressures in the euro area. Second, they also note that the modest improvement in profit margins appears consistent with some rebound in profit growth within the next two to three quarters. However, the lack of any significant improvement in private sector employment expectations suggests that a rebound in corporate profits could be limited. This is probably consistent with a muted outlook for investment. Third, the size of the output gap, depicting a situation of excess supply, alongside weak top line growth and limits to cost cutting, argues against a faster profits recovery.

Source: Bloomberg

STOXX (26/1/2013 to 26/4/2013)

320 300 280 260 240 220 Jan-13

Overweight Health Care Health Care has been the best performing sector in Europe YTD. Despite the recent Health Care re-rating, the sector still offers investors cheap exposure to the Defensive Growth theme - currently trades on a decent 20% discount to Food & Beverage on a 12-month forward P/E basis. Additionally, Health Care has had the smallest maximum drawdown of any European sector since the end of 1989; that was -20% in 2002. It also beats Food & Beverage into 2nd place in terms of the smallest average three worst drawdowns since then. This reaffirms the sectors defensive qualities. Furthermore, Health Care has a strong cashflow surplus, robust balance sheet, almost level with Personal & Household Goods (Luxury, Tobacco) and only behind Technology in the rankings. Last, should capital movement accelerate from other asset classes to equities, then Health Care could appear attractive to various nonequity investors, such as total return, credit and bond investors. Citi analysts think there is a further leg or two to the Health Care outperformance story from here.




Source: Bloomberg


Last Last YTD weeks weeks return close return 295.89 +3.74% +5.80% 6426.42 +2.22% +8.96% 7814.76 +4.76% +2.66%

End-2013 Stoxx Index Target: 330

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Citi Economic Surprise Index - Japan

30 20 10 0 -10 -20 -30 -40 -50 -60 -70 Jan-13 Feb-13 Mar-13 Apr-13

Economic Outlook
What are possible drivers and catalysts for Japan? With significantly more aggressive-than-expected monetary easing measures now in place, financial markets may gradually shift their focus to three developments in coming months: 1) Japans economic fundamentals, 2) the growth strategy that the Abe administration plans to announce in June and 3) the Abe administrations stance on hiking the consumption tax. While Citi analysts expect more positive news from macroeconomic data such as Q1 GDP (due May 16), in part thanks to market developments since last autumn, there remain significant uncertainties surrounding whether the administration can craft a compelling growth strategy that will improve the longer-term growth potential of the Japanese economy. The government may probably aim to announce hugely impactful growth strategies that generate a positive surprise in the financial markets, with possible positive repercussions for earnings forecasts for some industrial sectors and business areas. But it seems unclear at this point whether the growth strategies that Abe administration will roll out is bold enough to trigger productivity and other macro-level improvements and lead to an improved longer-term economic outlook for Japan. Meanwhile, political discussions on whether to implement the consumption tax hike as planned may accelerate ahead of the Upper House election this summer (likely to be held on July 21). And this may be the most critical key to the outlook for the economy, prices and financial markets heading into 2014.

Source: Bloomberg

Topix (26/1/2013 to 26/4/2013)

1200 1100 1000 900 800 700 Jan-13

More upward revisions for corporate earnings likely Citi analysts expect corporate earnings forecasts for FY3/14 along with FY3/13 results announcements to be relatively conservative leaving more upside risks. The main reason for this has been yen weakness during this time. The yen has weakened quickly, so many analysts appear to have been still using old forex assumptions that are more conservative than current rates (99/$, 130/).




Source: Bloomberg

Nikkei Topix

Last weeks close 13884.13 1161.19

Last weeks return +4.26% +3.06%

YTD return +33.56% +35.05%

Sales and RP forecasts tend to be revised up in period of economic recovery. Citi analysts believe that earnings forecasts may be revised up on the pick-up in the economy and yen weakness. Indeed, the Japan revision index has been in positive territory since the start of 2013 and forecasts have been revised upward. Aggregate forecasts for all companies in all industries put sales growth at 1.1% and RP growth at 6.4% for FY3/14. Given that aggregate April-December sales for publicly traded companies were up 3.0% and RP was up 5.9%, there seems to be more upsides for earnings revisions for FY3/14. Citi analysts forecast that the yen could weaken to 107/$ through summer and end-March 2014 TOPIX could hit 1,320.
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End-2013 Topix Index Target: 1300

Citi Economic Surprise Index Asia Pac Ex Jap

30 20 10 0 -10 -20 -30 -40 Jan-13

Economic Outlook
Chinas interest rate liberalization and its implications Interest rate liberalization may be one of top priorities on Chinas financial reform agenda as rapidly growing wealth management products (WMPs) and other shadow banking activities have also built up pressure for interest rate liberalization. Interest rate liberalization is a double edged sword. By allowing the better pricing of capital, interest rate liberalization helps improve capital allocation, leading to more efficient investments, and thus, better quality of growth. On the other hand, without adequate supervision and proper regulations and safety nets in place, interest rate liberalization could trigger a bank crisis derived from moral hazard problems in competition for deposits and excessive lending. The government is likely to set up a deposit insurance facility in the next 12 months, remove the lending rate floor and raise the upward floating band for large-sum time deposits. The largest rate hike may occur with large-sum time deposits of less than 3 months, as these deposits have been treated as demand deposits under the current interest rate regulations, and with longer-term deposits of 12 months or more.




Source: Bloomberg

Citi Economic Surprise Index China

70 60 50 40 30 20 10 0 -10 -20 -30 -40 Jan-13 Feb-13 Mar-13 Apr-13

Source: Bloomberg

MSCI AC Asia ex Japan (26/1/2013 to 26/4/2013)


May see outperformance in medium term Why is Asia-ex underperforming? To answer that, Citi analysts look at the markets that are performing, Japan and the US, and compare them to Asia-ex and GEMS. What sets Japan apart is better price momentum (stock market has gone up) and better earnings revisions (best in Asia and globally) but companies have slightly worse quality attributes (less good balance sheets and cash flows). In terms of the US, relative to the world it is a more expensive market but it offers more liquid and better quality companies. From that, it seems that investors like good price momentum and good EPS revisions, and that they also like liquidity and, in the case of the US, quality. Asia-ex and EM, on the other hand, do not have the attributes of the markets that are going up. They have weaker price and revisions momentum and they are less liquid. But they have value and higher growth. However none of those attributes currently interest investors. Citi analysts believe that the current growth scare may eventually pass. When it does, value could likely be a very rewarding attribute and equities may benefit from growth. In other words, Asia and EM could outperform medium term with investors gravitating back to value and growth of Asia-ex Japan.




500 Jan-13




Source: Bloomberg

Last weeks close MSCI AC Asia ex 545.37 Japan

Last weeks return

YTD return



End-2013 MSCI AC Asia ex Japan Index Target: 625

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Week Ahead Key Data and Events

Developed Markets

29 Apr (Monday).
US Citi analysts think the March Personal Income may be boosted as the early year drags dissipate (0.3%). Europe Despite the increase in the flash estimate of consumer confidence in April, Citi analysts expect a second consecutive fall in the headline economic confidence index to 89.3, mainly reflecting a further fall in the mood in the industrial sector.

30 Apr (Tuesday).
US Citi analysts expect that 1Q employment cost index was slightly higher than recent trends, based on the pickup in average hourly earnings (0.6%). US Citi analysts figure that the Chicago purchasing managers index remained in a low but positive range in April (53.0). US Consumer confidence likely increased mildly in April to 62.0following a collapse in March. Europe After the larger than expected increase in Germany unemployment in March, Citi analysts expect a fall in April (-12K). Japan Real spending of all households probably increased 1.2% YoY and 1.7% MoM in March. Japan March unemployment rate likely remained flat at 4.3%. Japan March industrial production likely remained flat at 0%, undershooting the official projection (+1.0% MoM) on the back of a slow export recovery and limited momentum in the high-tech sector. Japan Retail sales probably increased 0.2% YoY in March. Already available industry statistics were generally strong with department store sales increasing 3.9% YoY, a third consecutive monthly gain, and chain store sales rising 1.7% YoY, the first gain in 13 months. Japan March housing starts may stand at 906k (+7.4% YoY) on a seasonally adjusted annualized basis.

1 May (Wednesday)
US Citi analysts think the ISM manufacturing index edged down to 50 in April, reflecting the let-up in the economy as the inventory cycle ebbed. US Construction spending probably posted another solid increase in March, led by the rapidly improving residential sector (0.7%). Europe Citi analysts expect UK Manufacturing PMI index to remain weak at 48.0 in April, capped by the continued recession in the euro area and sluggish business investment in the UK.

2 May (Thursday)
US Initial jobless claims for the week ending April 27 probably were virtually unchanged at 340K. Europe Citi analysts expect a confirmation of the Manufacturing PMI flash estimate showing a second consecutive decline in April to 46.5.

3 May (Friday)
US Citi analysts expect another lackluster reading on payroll employment in April (140K). US Factory orders likely fell sharply in March (-3.3%) on the already reported drop in durable goods, and a price driven decline in nondurable goods. Europe In line with the seasonal pattern, Citi analysts expect Norway registered jobless rate to fall 0.1pp to 2.6% in April.

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Week Ahead Key Data and Events

Asia ex-Japan

29 Apr (Monday)
Singapore Jobless rate probably remained stable at 1.8% s.a. in 1Q as the sequential economic contraction was likely offset by tightening labour supply.

30 Apr (Tuesday)
Taiwan 1Q GDP growth may come in slower at 3.0%, below the 3.7% growth seen during the previous quarter as indicated by disappointing data on exports and IP in March. Korea March IP growth (YoY) likely remained in a negative territory (-1.2%YoY).

1 May (Wednesday)
China The official manufacturing PMI for April likely edged up to 51.1 mainly due to residual seasonality. Korea April headline inflation likely edged higher to 1.4% YoY after a decline in the previous month. Korea Export growth likely rose to 3% YoY in April on higher prices of export goods plus more working days than April 2012.

2 May (Thursday)
Hong Kong Citi analysts expect double-digit growth in retail sales to continue in March (val: 14.4% YoY; vol: 13.2% YoY) despite the end of the festive season. Indonesia Headline inflation for April likely fell slightly to 5.8%YoY on normalizing food prices. Indonesia Exports likely to decline further to -11.9% YoY in March amid weakening coal prices and lower palmoil exports. Thailand April Headline inflation likely ticked higher to 2.8% YoY on fading base effects.

3 May (Friday)
India Citi analysts expect RBI to cut 25 bps as lower commodity prices could provide more leeway for monetary easing.

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Previous Week's Close UNITED STATES Dow Jones Industrial Average S&P 500 Nasdaq EUROPE DJ Euro STOXX FTSE 100 DAX JAPAN Nikkei 225 TOPIX ASIA MSCI Asia ex Japan Hong Kong Hang Seng Shanghai Composite Index Taiwan Weighted Index Korea KOSPI Mumbai Sensex Singapore Straits Times Index Kuala Lumpur Composite Thai Stock Exchange Jakarta Composite Index Philippines Stock Exchange Index Australia All Ordinaries EMEA Russia MICEX Index South Africa JSE All Shares Index Turkey ISE National 100 Index LATIN AMERICA Mexico Bolsa Index Brazil Bovespa Index COMMODITIES Gold Oil FIXED INCOME Citigroup World Government Bond Index
Source: Bloomberg (As at April 26, 2013)

52-Week High 14887.51 1597.35 3306.95 298.90 6533.99 8074.47 13983.87 1176.36 562.40 23944.74 2453.73 8089.21 2042.48 20203.66 3361.59 1718.08 1601.34 5026.92 7120.48 5174.40 1566.42 41047.72 86787.15 46075.04 63472.55 1796.05 106.43

52-Week Low 12035.09 1266.74 2726.68 233.48 5229.76 5914.43 8238.96 692.18 449.40 18056.40 1949.46 6857.35 1758.99 15748.98 2698.90 1526.60 1099.15 3635.28 4863.42 4033.40 1241.62 32730.92 53997.64 36756.08 52212.92 1321.95 77.28

Weekly Return +1.13% +1.74% +2.28% +3.74% +2.22% +4.76% +4.26% +3.06% +1.48% +2.43% -2.97% +1.15% +1.98% +1.42% +1.66% +0.29% +2.42% -0.40% +0.98% +3.24% +2.51% +1.72% +2.19% -2.13% +0.60% +4.15% +5.67%

YTD Return +12.27% +10.94% +8.60% +5.80% +8.96% +2.66% +33.56% +35.05% -0.43% -0.48% -4.02% +4.19% -2.63% -0.72% +5.74% +1.32% +13.72% +15.33% +20.86% +8.96% -6.96% -0.43% +8.83% -4.14% -10.99% -12.73% +1.29%

YTD Return (USD) +12.27% +10.94% +8.60% +4.37% +3.82% +1.08% +17.41% +18.72% -0.43% -0.65% -2.93% +2.46% -6.49% -0.02% +4.48% +1.95% +18.97% +14.36% +20.35% +7.94% -9.70% -7.37% +8.04% +1.93% -9.08% -12.73% +1.29%

14712.55 1582.24 3279.26 295.89 6426.42 7814.76 13884.13 1161.19 545.37 22547.71 2177.91 8022.06 1944.56 19286.72 3348.87 1711.29 1582.93 4978.51 7025.44 5082.65 1372.04 39082.42 85112.29 41897.00 54252.04 1462.09 93.00







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G10-US Dollar Euro Japanese yen British Pound Swiss Franc Australian Dollar New Zealand Canadian Dollar Dollar Index G10 Crosses Japanese yen Swiss Franc British Pound Swedish Krona Norwegian Krone Norwegian Krone Australian Dollar Australian Dollar EM Asia Chinese Renminbi Hong Kong Indonesian Rupiah Indian Rupee Korean Won Malaysian Ringgit Philippine Peso Singapore Dollar Thai Baht Taiwan Dollar EM Europe Czech Koruna Hungarian Forint Polish Zloty Israeli Shekel Russian Ruble Russian Ruble Turkish Lira South African Rand EM Latam Brazilian Real Chilean Peso Mexican Peso Colombian Peso USDBRL USDCLP USDMXN USDCOP EURCZK EURHUF EURPLN USDILS USDRUB Basket USDTRY USDZAR USDCNY USDHKD USDIDR USDINR USDKRW USDMYR USDPHP USDSGD USDTHB USDTWD EURJPY EURCHF EURGBP EURSEK EURNOK NOKSEK AUDNZD AUDJPY EURUSD USDJPY GBPUSD USDCHF AUDUSD NZDUSD USDCAD DXY











1.30 98 1.55 0.94 1.03 0.85 1.02 82.31

1.310 107 1.51 0.94 1.05 0.87 1.02 83.49

1.28 106 1.47 0.96 1.03 0.86 1.03 84.85

1.25 105 1.43 0.98 1.00 0.85 1.03 86.26

1.24 105 1.42 1.00 0.99 0.84 1.02 86.82

1.23 105 1.41 1.02 0.99 0.83 1.01 87.26

1.22 105 1.41 1.04 0.98 0.82 1.00 87.71

1.21 105 1.40 1.06 0.97 0.81 0.98 88.17

1.2 105 1.40 1.08 0.96 0.80 0.97 88.62

1.21 105 1.41 1.08 0.96 0.80 0.97 88.15

127 1.23 0.84 8.55 7.63 1.12 1.21 100.6

139 1.23 0.86 8.35 7.51 1.11 1.21 111.7

135 1.23 0.87 8.36 7.43 1.12 1.19 108.6

132 1.23 0.88 8.37 7.36 1.14 1.18 105.4

130 1.24 0.88 8.38 7.33 1.14 1.18 104.3

129 1.26 0.87 8.38 7.31 1.15 1.19 103.4

128 1.27 0.87 8.39 7.29 1.15 1.19 102.6

127 1.28 0.86 8.39 7.27 1.15 1.19 101.7

126 1.30 0.86 8.40 7.25 1.16 1.20 100.9

126 1.30 0.86 8.40 7.25 1.16 1.20 100.1

6.17 7.76 9723 54.4 1107 3.03 41.2 1.23 29.2 29.6

6.17 7.76 9830 54.9 1168 3.12 41.3 1.24 29.3 30.3

6.14 7.76 9886 55.7 1145 3.08 41.2 1.23 29.4 30.4

6.10 7.76 9943 56.4 1123 3.04 41.2 1.23 29.5 30.4

6.08 7.76 9900 56.3 1099 3.04 41.1 1.22 29.6 30.2

6.06 7.76 9842 56.1 1074 3.04 41.1 1.22 29.6 29.9

6.04 7.75 9784 55.9 1048 3.05 41.0 1.21 29.7 29.6

6.02 7.75 9725 55.7 1023 3.05 40.9 1.20 29.8 29.3

6.00 7.75 9668 55.5 998 3.05 40.8 1.19 29.9 29.0

6.00 7.75 9648 55.4 994 3.04 40.7 1.19 29.8 28.9

25.72 302 4.16 3.60 31.3 35.5 1.80 9.09

25.86 292 4.12 3.63 31.8 36.2 1.83 9.18

25.97 296 4.16 3.69 32.5 36.6 1.86 9.33

26.09 300 4.20 3.74 33.2 37.0 1.89 9.48

25.83 298 4.15 3.83 33.5 37.1 1.90 9.53

25.51 296 4.09 3.92 33.7 37.2 1.92 9.57

25.18 294 4.03 4.01 33.9 37.3 1.94 9.61

24.86 292 3.97 4.10 34.1 37.4 1.95 9.66

24.54 290 3.91 4.19 34.4 37.5 1.97 9.69

24.39 290 3.89 4.14 34.3 37.5 1.97 9.72

2.00 473 12.1 1834

1.96 472 12.0 1808

1.97 476 11.9 1823

1.98 480 11.8 1838

1.99 482 11.8 1833

2.01 484 12.0 1825

2.02 486 12.1 1817

2.03 488 12.2 1809

2.05 490 12.3 1801

2.06 490 12.3 1800

Source: CR, Bloomberg (As at April 29, 2013; Forecasts as of April 12, 2013)

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Citi analysts refers to investment professionals within Citi Research (CR), Citi Global Markets Inc. (CGMI) and voting members of the Citi Global Investment Committee. Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. The information in this document has been obtained from reports issued by CGMI. Such information is based on sources CGMI believes to be reliable. CGMI, however, does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute CGMI's judgment as of the date of the report and are subject to change without notice. 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. No part of this document may be reproduced in any manner without the written consent of Citibank N.A. Information in this document has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Investments are not deposits, are not obligations of, or guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance, prices can go up or down. Some investment products (including mutual funds) are not available to US persons and may not be available in all jurisdictions. 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. If an investor changes residence, citizenship, nationality, or place of work, 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. 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.

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