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January 2017
World Investment Navigator
Investment Products: Not FDIC Insured ● Not CDIC Insured ● Not Government Insured ● No Bank Guarantee ● May Lose Value
Table of Contents
1. Tactical Outlook 3
2. Quadrant in Charts: Now, About Those Promises… 8
3. Asset Class Views in Charts 41
4. Appendix 49
2
1. Tactical Outlook
Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future events, a guarantee of future results for investment advice, and are subject to change based on market and other conditions.
4
2.0
0.0
12.0
2.0
2.0
6.9
20.9
6.9
7.0
1.9
3.9
8.5
26.1
3.5
0.5
12.0
2.3
3.7
7.9
16.9
7.0
6.7
1.7
3.9
7.9
26.1
0 10 20 30
Cash
Gold
Hedge Funds
Emerging market debt
Developed high yield
Developed IG corp
Developed sovereign
Emerging all cap equities
Developed SMID equities
Developed Asia ex. Japan
Japan Large Cap
Europe large cap equities
NAM large cap equities
GIC Level 3 Asset Allocation
Tactical
Strategic
Global Investment Committee (GIC) Views The Citi Private Bank Global Investment Committee left its asset allocation unchanged, overweighting US dollar assets while keeping a small tactical overweight in both cash and gold as a risk hedge.
The allocation to global equities remains at -1.0% and fixed income -1.0%. Within this allocation, we maintained a neutral (full) allocation to US equities, an overweight to US credit and to select emerging markets fixed income. We also maintained large underweights in European and Japanese government bonds. In international equities markets, we see currency depreciation hampering potential returns measured in US dollars over the next 12-18 months. This reflects an expected diverging path for US monetary policy vs other central banks and a variety of political risks. (Hedging forex risk remains an option, but with trade-offs that require bespoke solutions).
The 100 basis point rise in long-term US bond yields since October reflects both stronger growth and inflation expectations. Rate pressures are likely to be felt at the shorter-end of the U.S, yield curve this year. The policy backdrop in the US suggests some rise in interest rate volatility. However, the rise in yields also represents a stronger future return opportunity across the risk spectrum. US high yield debt, variable rate loans and some hybrids offer solid risk-adjusted returns, with the energy sector powering recovery. Municipal debt for US tax payers is again attractively priced. Emerging markets have been set back by prospective US monetary and regulatory policies. However, select Latin American bonds amply compensate investors for risk.
Details on US tax and trade policies are only likely to emerge piecemeal in the coming few months, which could add to global financial market volatility.
Heightened growth expectations actually leave greater vulnerability to the equity market sectors that have rallied the most in the past two months. However, underlying US profits were already recovering and tax reforms are likely to boost EPS for the majority of US firms before 2017 ends.
The possibility that the US Congress will fund domestic tax cuts with a tax on imports adds several risks to an otherwise strong stimulus effort. During an adjustment period, the policy could hamper trade flows and result in a mix of both US dollar appreciation and higher consumer price inflation. International firms domiciled in every region could be impacted.
International political risks are heightened beyond the US influence this year with several national leadership elections in Europe, Brexit negotiations, and a power transition in China. Given uncertainties over US tax, trade and monetary policies, we remain tactically underweight Euro assets and select Southeast Asian markets. Nonetheless, the GIC may take actions to allocate more or less to risk assets depending on policy developments and valuations in coming months.
Asset Allocation (level 3)
Source: Citi Private Bank, as of GIC meeting January 26, 2017. SMID = Size of companies capitalization is classified as small to mid.
5
Asset Class Tactical Positioning
Investment Rationale Underweight Neutral Overweight
North American large cap equity
The GIC maintains its neutral, fully-invested weighting on U.S. large cap equities. The sharp rotation within equity sectors sensitive to higher interest rates suggests durability, amid the many significant global risks. President Trump and the Republican controlled congress appears likely to succeed in passing sizeable U.S. corporate and personal income tax cuts. A stronger U.S. dollar will hurt multinational earnings, but attract foreign investment in the U.S. if trade relationships hold.
European large cap equity
We believe the UK referendum and U.S. presidential election highlight pending political risks in Europe, where inter-country cooperation is of greater financial importance than elsewhere. The long list of political hurdles during the coming year led us to reduce our equity allocation to underweight in the region despite central bank support and reasonable valuations.
Japan large cap equity
We remain neutral Japan large caps. Japan is one of the largest beneficiaries of U.S. policy divergence, with Fed tightening helping to weaken the yen. While this is negative for international investors in yen assets, equity gains typically far outstrip depreciation as Japanese exporter margins are boosted. The volatile outlook and domestic challenges in Japan keep us from an overweight.
Developed small and mid cap equity (SMID)
To reflect our downward adjustment to the outlook for equities as noted above, we remain underweight developed market SMID, with underweights coming out of the U.K. and continental Europe, though neutral the U.S.
Emerging Asia Over the last year we reduced weightings in Asian equities given a less significant currency adjustment in China after a decade of appreciation. In anticipation of some further U.S. dollar appreciation and interest rate pressures, we keep our Southeast Asian equity weightings to underweight.
Emerging EMEA Since increasing our allocations to South Africa and Turkey in June to a neutral weighting, we kept the rest of the region unchanged at a neutral weighting.
Emerging Latin America
Latin America has been the hardest hit by a resurgent US dollar since the Trump election. This has set back early signs of recovery that were strongly priced in the region earlier in 2016. However, the sharp declines in regional asset prices from 2011-2015 leave valuations attractive now. We maintain modest overweights in the commodity-linked Andean markets of Chile, Colombia and Peru. Mexico and Brazil remain at a neutral at present.
GIC Asset Class Views: Equities
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
Source: Citi Private Bank, as of GIC meeting January 26, 2017.
6
Asset class Tactical positioning
Investment rationale Underweight Neutral Overweight
North American sovereign bonds
We remain overweight in short-term U.S. Treasuries, as an alternative to cash, and keep U.S. intermediate and long-term Treasuries at a fully invested neutral weighting. With nearly a quarter of the developed market sovereign bond universe with negative yields, higher yielding US Treasuries provide a better asset allocation alternative.
European sovereign bonds
Negative policy rates and slow economic growth have left core European bond yields low, though questions over the ECB purchase program and U.S. rates have generated a backup. Political risks remain elevated, particularly for EU periphery countries. For this reason we continue to keep Italian bonds as our largest relative underweight position.
Emerging market (EM) sovereign bonds
Though likely to remain volatile, LatAm remains cheap given the downturn in asset prices from the oil price decline over the last few years. Given our positive outlook on oil and commodities more broadly, we remain overweight Latam (hard currency and local). We are also overweight local Asian bonds, and neutral EMEA.
US Inflation-linked The rise in oil prices and high probability of fiscal stimulus out of a Republican controlled U.S. Congress have pushed up inflation expectations. The committee remains overweight U.S. Treasury Inflation Protected Securities (TIPS).
Corporate investment grade
US IG credit remains at an overweight, and we keep a neutral duration relative to it’s benchmark. Given low yields and ongoing political headwinds, we keep Euro corporates neutral.
Corporate high yield
We remain overweight both US and Euro high yield. In the US, energy bonds have bounced back sharply since the oil price lows in early 2016, but selective opportunity remains. Higher carry should drive outperformance within fixed income in a rising rate environment. In addition, last month we increased our HY exposure by adding to US variable-rate bank loans which benefit from rising LIBOR and lower price volatility relative to HY bonds. We recommend investors diversify with both.
GIC Asset Class Views: Fixed Income
Hedge Funds
Macro/CTA funds offer an opportunity to exploit greater market volatility. We retain a slight overweight in the segment while keeping our overall allocation to hedge funds at neutral. The GIC has a favorable view of very select private equity and real estate investments, but does not recommend changing these weightings over tactical time periods.
Commodities
With equities and bonds seeing an increase in correlation, the value of diversification is weakening somewhat. In contrast, gold and risk assets have maintained a significant negative correlation. While higher real interest rates and greater confidence would represent a downside risk to the gold price, the much larger part of our portfolio allocations would benefit from such a welcome trend, if it were to emerge. We keep Gold a small tactical overweight.
Source: Citi Private Bank, as of GIC meeting January 26, 2017.
GIC Asset Class Views: Alternatives
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
7
0.2
0.4
1.9
2.1
2.2
2.7
4.4
13.6
26.2
13.0
26.2
17.8
23.4
22.6
0 5 10 15 20 25 30
MSCI Japan
MSCI UK
MSCI Europe ex UK
MSCI World Small Cap
MSCI World
S&P 500
MSCI EM
Total Return (%)Last 12 monthsYTD Return
-0.9
-0.8
-0.6
-0.5
-0.44
-0.2
-0.1
0.5
0.8
1.0
1.4
0.7
8.2
4.1
2.5
0.22
-0.9
5.9
3.4
12.2
11.6
21.6
-4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24
Developed Sov
Global I-Linked
Euro HG Corp
Global Agg
US MBS
US Treasury
US HG Corp
EM (Local) Govt
Euro HY Corp
EM (USD) Govt
US HY Corp
Total Return (%)Last 12 monthsYTD Return
Market Performance
Local Currency Fixed Income index returns, YTD & last 12 mo. Local Currency Equity index returns, YTD & last 12 mo.
Source: Citi Private Bank using Bloomberg, as of January 26, 2017. Source: Citi Private Bank using Bloomberg, as of January 26, 2017. *Global Aggregate, Global inflation linked and Local EM index are in hedged USD terms.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
2. Quadrant in Charts: Now, About Those Promises…
9
Like Brexit, Warnings of Doomsday Swirled in the US Election
• Pre-election Trump plan would reduce U.S. taxes by nearly 3 percentage points of GDP.
• Infrastructure spending could also rise. Tax cuts seem more likely, and a larger immediate impact.
• Corporate tax and investment reforms look promising, but dovetail with the risks of trade conflict.
1.0
0.5
0.0
0.5
1.0
'12 '13 '14 '15 '16 '17
Yie
ld (%
)
10yr US TIPS yield
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017.
US 10yr US Treasury (TIPS) yield US 10yr breakeven rate
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
'12 '13 '14 '15 '16 '17
Rat
e (%
)
10yr US breakeven rate
Post Trump victory, both real economic growth and inflation expectations have risen.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
10
List of Larger Budget Items from Latest Trump Plan as Candidate Cut U.S. personal income taxes: 3 brackets ranging from 12%-33% vs 5 brackets ranging from 10%-39.6%. Repeals Alternative Minimum Tax. Limits deductions for upper incomes. Eliminate “Obamacare”(ACA) taxes. Statutory corporate tax rate cut to 15% from 35% (loopholes make current effective rates much lower). Pass through entities can choose 15% rate vs paying individual income tax rate with no special deductions. Foreign profits held abroad can be repatriated at 10% rate vs 35%.
Full and immediate expensing for business equipment outlays.
Stepped up infrastructure investment: $550 billion over 10 years. Private? Public?
Large list of unknowns, but expect productive US Congress pre-Nov. 2018 elections
Congressional Wish List • Possible change of entire U.S. corporate tax system to Territorial/VAT system • ****Border Adjustment Tax**** • Reforms of Medicare/Medicaid • Complete repeal of Obamacare (Affordable Care Act or ACA) • Personal Tax Simplification
Source: Citi Private Bank as of January 2017.
For illustrative purposes only.
11
Border Adjustment Taxes: How do they work
• Hurts retailers, especially for low margin imported goods. Even a low corporate income tax rate that applied without the deduction of import costs would eradicate the profit of importers.
• Due to the effect of a rising dollar exporters would likely not benefit significantly, but also are unlikely to be harmed materially.
• A traditionally VAT tax is charged wherever a product is consumed.
• In contrast the border adjustment tax is dependent on the location of production.
• US Production = Tax Free, Non-US Production = Taxed.
Imports would be taxed at 20%
Imports (including intermediate inputs) would no longer be deductible from corporate income
Exports would be deductible from corporate income
Source: Citi Private Bank as of January 2017.
For illustrative purposes only.
12
Border Adjustment Taxes
Pros / Who is helped Cons / Who is hurt P
rior t
o E
nact
men
t Stronger Dollar in Anticipation • US Importers/ non-US manufacturing • Domestic manufacturers with foreign
inputs • Holders of USD Assets (especially non-
US holders) • US consumers of imported goods • Workers at plants which anticipate the tax
and delay moves offshore
Stronger Dollar in Anticipation • US Exporters • US holders of non-USD denominated
Assets • Non-US consumers of US goods and
services
Afte
r Ena
ctm
ent • US manufacturers for US consumption
(especially ones without non-US inputs) • Holders of USD Assets (especially non-
US holders) • Workers at plants which now make
economic sense • US Industrial real estate • Robotics manufacturers
• US Retailers who depend on foreign products
• US manufacturers who depend on foreign inputs
• Non-US manufacturers • Non-US labor / consumers • US Consumers who face higher prices
Surprising Results: US exporters should experience little benefit as the stronger dollar should offset tax benefits.
Investors reaching for higher yield in foreign markets who seek stability through USD denominated bonds would face higher default rates as the stronger dollar increases repayment costs. Source: Citi Private Bank as of January 2017.
For illustrative purposes only.
13
US Stimulus: Trump makes Tax Cuts of 2001-2003 look timid Trump, Ryan Tax Plans Would Slash Taxes by 3% of GDP. Spending is Key Question
U.S Federal Deficit as % of GDP Total US Government Spending (inflation adjusted) in Recovery Periods
3.0
3.5
4.0
4.5
5.0
2015 2016 2017 2018 2019 2020 2021
Fisc
al D
efic
it as
a S
hare
of G
DP Current Forecast
Pre-Election Forecast
One Time Corporate Tax Repatriation
90
95
100
105
110
115
120
125
130
135
0 +4 +8 +12 +16 +20 +24 +28 +32 +36
Exp
ansi
on S
tart
= 10
0
Quarters from Expansion Start
1971
1975
1983
1991
2002
2009
Source: Citi Research, Citi Private Bank as of January 2017. Source: Citi Private Bank as of January 2017.
• The historically large size and scope of tax cuts suggests a 1 percent acceleration of real economic growth and higher inflation by late in 2017 through 2018, even if a large portion is “saved.”
• This stimulus can shift the likely timing of a future US downturn beyond the next two years and have a large impact on all global asset prices. It creates larger “bust” risks beyond.
For illustrative purposes only.
14
0
0
0
0
0
0
0
0
0
0
1
75
80
85
90
95
100
105
110
'82 '87 '92 '97 '02 '07 '12 '17Small Business Confidence
Revived Animal Spirits
National Federation of Independent Business (NFIB) Small Business Confidence has soared
Source: Haver Analytics as of January 2017.
For illustrative purposes only.
15
0
0
0
0
0
0
0
0
0
0
1
0
5
10
15
20
25
30
35
40
45
'82 '87 '92 '97 '02 '07 '12 '17% of small business planning to expand capex
0
0
0
0
0
0
0
0
0
0
1
-15
-10
-5
0
5
10
15
20
'82 '87 '92 '97 '02 '07 '12 '17% of small business planning to increase employment
Despite soaring headline, hiring plans increased more modestly
NFIB Small Business hiring plans
Source: Haver Analytics as of January 2017.
NFIB plans to expand capital expenditures
Source: Haver Analytics as of January 2017.
For illustrative purposes only.
16
0
0
0
0
0
0
0
0
0
0
1
0
5
10
15
20
25
30
'82 '87 '92 '97 '02 '07 '12 '17% of small business saying regulation is biggest problem
0
0
0
0
0
0
0
0
0
0
1
0
5
10
15
20
25
30
35
'82 '87 '92 '97 '02 '07 '12 '17% of small business saying now is a good time to expand
What else is showing up in small business surveys?
Percent of Small Businesses saying “Now is a good time to expand”
Source: Haver Analytics as of January 2017.
Percent of Small Businesses saying “Regulation is single biggest problem”
Source: Haver Analytics as of January 2017.
For illustrative purposes only.
17
-4
-3
-2
-1
0
1
2
3
4
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16
Yea
r-to-
Yea
r P
erce
nt C
hang
e
ADP non-farm privateemployment, Small Business
-50
-40
-30
-20
-10
0
10
20
30
40
50
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16
Yea
r-to-
Yea
r P
erce
nt C
hang
e
Job Openings
Will positive survey sentiment show up in hard data?
Job Openings and Labor Turnover Survey (JOLTS): Job Openings
Source: Haver Analytics as of January 2017.
ADP Small Businesses
Source: Haver Analytics as of January 2017.
For illustrative purposes only.
18
Consumer Confidence has run up in the wake of Trump’s election
0
0
0
0
0
0
0
0
0
0
1
0
20
40
60
80
100
120
140
160
'81 '86 '91 '96 '01 '06 '11 '16
U.S. ConsumerSentiment
Consumer Confidence showing signs of improvement
Source: Haver Analytics as of January 2017.
For illustrative purposes only.
19
US equities lead data in anticipation of growth and tax cuts
S&P 500 EPS and Industrial Production S&P 500 vs Industrial Production
-20
-15
-10
-5
0
5
10
-80
-60
-40
-20
0
20
40
'85 '88 '91 '94 '97 '00 '03 '06 '09 '12 '15Y
ear-t
o-Y
ear
Per
cent
Yea
r-to-
Yea
r P
erce
nt
EPS (Left)
Industrial Production (Right)-20
-15
-10
-5
0
5
10
-80
-60
-40
-20
0
20
40
'85 '88 '91 '94 '97 '00 '03 '06 '09 '12 '15
Yea
r-to-
Yea
r P
erce
nt
Yea
r-to-
Yea
r P
erce
nt
S&P 500 (Left)
Industrial Production (Right)
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
20
0
25
50
75
100
125
0
400
800
1,200
1,600
2,000
2,400
'86 '90 '94 '99 '03 '07 '12 '16
Ear
ning
s $/
Sha
re (E
PS
)
Inde
x P
rice
S&P 500 Index Price and Citi Price Target (Left)
EPS ($, Right)
2017 EPS Citi Research Estimates ($, Right)
-50
-40
-30
-20
-10
0
10
20
30
40
50
'86 '90 '94 '99 '03 '07 '12 '16
Year
-to-Y
ear
Per
cent
Cha
nge
S&P 500 Index Price and Citi TargetEPS2017 EPS Citi Research Estimates
There are good reasons to expect decent returns in 2017
S&P 500 & consensus EPS (Y/Y%) S&P 500 and consensus EPS
Source: Thompson Reuters, FactSet and Haver Analytics as of January 2017. All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market, and other factors.
Source: Thompson Reuters, FactSet and Haver Analytics as of January 2017. All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market, and other factors.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
The end of the energy-sector recession has left US EPS rising back at its underlying trend, in excess of 6% and independently of either corporate tax rate cuts of new macro stimulus steps
21
-80
-60
-40
-20
0
20
40
60
80
85
90
95
100
105
110
115
Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17
Leve
l
Jan
4, 2
016
= 10
0
S&P 500 (Left) CESI (Right)
Various assets have rallied in highly correlated trade A key consideration is what part is related to the already stronger U.S. growth data versus what part is policy hope to be delivered sometime later.
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017.
Correlation between stocks and bonds has broken down
S&P 500 & USD Citi Economic Surprise Index (CESI)
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
'01 '04 '07 '10 '13 '16
Cor
rela
tion
90-Day 1-Year
22
Economic surprises tend to peak in the winter months
Source: Haver Analytics as of January 2017.
Average USD CESI, by Month of Year USD Citi Economic Surprise
-50
-40
-30
-20
-10
0
10
20
30
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Ave
rage
Ind
ex L
evel
by
Mon
th
-100
-80
-60
-40
-20
0
20
40
60
80
100
'10 '11 '12 '13 '14 '15 '16 '17
Inde
x Le
vel
Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
23
Sector rotations show stronger cyclical activity expected
Industry beneficiaries/losers diverge
Source: Haver Analytics as of January 2017.
60
80
100
120
140
160
180
200
'11 '12 '13 '14 '15 '16 '17
Jan
3 20
11 =
100
Industrials
Financials
Utilities
Telecom
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
Cyclical sectors
Defensive sectors
24
The challenge to US consumer incomes will precede tax cuts We believe that its possible for US CPI to reach above +4% Y/Y within 1Q 2017
-120
-90
-60
-30
0
30
60
90
120
150
-3
0
3
6
9
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18Ye
ar-to
-Yea
r Per
cent
Year
-to-Y
ear P
erce
nt
CPI (Left)Crude oil (Right)
Estimates
Crude Oil Price vs U.S. Inflation
-4
-2
0
2
4
6
8
10
'05 '07 '09 '11 '13 '15
Year
-to-Y
ear P
erce
nt C
hang
e
Nominal disposable US Income, Y/Y%
Last Oil Surge
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017. All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market, and other factors.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
25
0
20
40
60
80
100
120
140
'12 '13 '14 '15 '16 '17 '18
Dolla
rs P
er B
arre
l
BrentCiti Research ForecastFutures Price
0
20
40
60
80
100
120
'12 '13 '14 '15 '16 '17 '18
Dol
lars
Per
Bar
rel
WTI
Citi Research Forecast
Futures Price
Stay bullish energy, though OPEC hopes pulled gains forward
Source: Haver Analytics as of January 2017.
WTI Crude oil price Brent oil price
Source: Haver Analytics as of January 2017.
All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market, and other factors. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes
only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
-60
-40
-20
0
20
40
60
'86 '91 '96 '01 '06 '11 '16
Year
-to-Y
ear P
erce
nt
Future supply boom
Future supply bust
U.S. Capital Investment Spending In Energy Sector
Source: Haver Analytics as of January 2017.
26
USD drivers are strengthening, but so is investor positioning • Focus on reflation and renewed policy divergence between U.S., Europe, Japan. Some EM weak, some strong. Large valuation divergences within many asset markets offer opportunity.
• New worries: Market expectations for stronger growth might run ahead of the slow timing for fiscal action. (mid or late 2017). Be wary of a greater role for politics choosing industry winners and losers. Diversify broadly.
US Yield Premiums, USD Index Surge So Does the USD Long Book
60
70
80
90
100
110
120
130
-300
-200
-100
0
100
200
300
400
'86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16
Bas
is P
oint
s
German/US Spread (Left) DXY (Right)
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017.
0
10
20
30
40
50
60
70
80
90
100
68
72
76
80
84
88
92
96
100
104
'04 '07 '10 '13 '17
Per
cent
of O
pen
Inte
rest
DXY
Lev
elDXY (left) Net Long Postion (right)
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
27
Trump vs Reagan comparisons
• History, policy suggest a stronger USD, but not valuation. Inflation risk is significant.
• Reagan took office in January 1981 with the USD near a record low. Inflation was 11.8% and fell to 4.5% by end of his 2nd term.
• The USD just posted a sharp rally from 2011-to-date. Both U.S. rates and inflation are near record lows, beginning to rise, not fall.
Asset Values, Economy at Different Starting Point
80
85
90
95
100
105
110
115
120
125
130
'80 '84 '88 '92 '96 '00 '04 '08 '12 '16
4
2
0
2
4
6
8
10
12
14
16
'78 '82 '86 '90 '95 '99 '03 '07 '12 '16
CPI-U: All Items, Y/Y % Change
Real Broad Trade-Weighted Exchange Value of the US$ CPI-U: All Items, y/y % change
Source: Haver Analytics as of January 2017. Note: In 2004, the United States Congress enacted such a tax holiday for U.S. multinational companies, allowing them to repatriate foreign profits to the United States at a 5.25% tax rate. The trade-weighted US dollar index, is a measure of the value of the United States dollar relative to other world currencies.
Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
28
Exchange Rates vs. 5yr sovereign spread
Euro / USD vs. 5yr sovereign spread UK Pound / USD vs. 5yr sovereign spread
-6
-5
-4
-3
-2
-1
0
1
2
3
40.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Per
cent
Eur
o/U
SD
Euro/USD (Left)
5yr sovereign spread (Right)
-5
-4
-3
-2
-1
0
1
21.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Per
cent
GB
P/U
SD
Pound/USD (Left)
5yr sovereign spread (Right)
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
29
0
1
2
3
4
5
6
7
60
80
100
120
140
160
180
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16P
erce
nt
Yen/
US
D
Yen/USD (Left)
5yr sovereign spread (Right)
0
1
2
3
4
5
6
7
8
9
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Per
cent
CAD
/US
D
CAD/USD (Left)
5yr sovereign spread (Right)
Exchange Rates vs. 5yr sovereign spread
Japanese Yen/USD vs. 5yr sovereign spread Canadian Dollar/USD vs. 5yr sovereign spread
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
30
Exchange Rates vs. 5yr sovereign spread
Swiss Franc/USD vs. 5yr sovereign spread Brazilian Real/USD vs. 5yr sovereign spread
0
1
2
3
4
5
6
7
8
9
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Per
cent
Fran
c/U
SD
Franc/USD (Left)
5yr sovereign spread (Right)
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
'95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17
Per
cent
BR
L/U
SD
BRL/USD (Left)
5yr sovereign spread (Right)
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
31
Foreign exchange vs. relative inflation ratios
Euro / USD vs. Inflation Ratio UK Pound / USD vs. Inflation Ratio
98
100
102
104
106
108
110
112
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Euro/USD (Left)
U.S CPI / Euro Area CPI (Right)
98
100
102
104
106
108
110
112
114
116
118
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Pound/USD (Left)
U.S CPI / U.K. CPI (Right)
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
32
Foreign exchange vs. relative inflation ratios
Switzerland Franc / USD vs. Inflation Ratio Brazilian Real / USD vs. Inflation Ratio
60
65
70
75
80
85
90
95
100
105
110
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Franc/USD (Left)
Switzerland CPI / U.S. CPI (Right)
80
100
120
140
160
180
200
220
240
260
280
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
'96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Real/USD (Left)
Brazil CPI / U.S. CPI (Right)
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
33
Foreign exchange vs. relative inflation ratios
Canadian Dollar / USD vs. Inflation Ratio
80
85
90
95
100
105
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
CAD/USD (Left)
Canada CPI / U.S. CPI (Right)
Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
34
Total EM credit growth in USD has slowed
EM credit in USD, Y/Y% Real Trade Weighted Dollar against EM
10
5
0
5
10
15
20
25
30
35
'00 '02 '04 '06 '08 '10 '12 '14 '16
Emerging Market Economies:Credit in US$, Y/Y%
80
90
100
110
120
130
140
'72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 '16
Real TWD of EM
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017. Real Trade Weighted value of USD: Other Important Trading Partners (OITP) index is used as a proxy for a basket of EM currencies vs the US Dollar
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
35
Total EM credit growth in USD has slowed
EM Africa/Middle East credit in USD, Y/Y% EM Asia credit in USD, Y/Y%
20
10
0
10
20
30
40
50
60
'00 '02 '04 '06 '08 '10 '12 '14 '16
Africa and Middle East: Creditin US$, Y/Y%
10
5
0
5
10
15
20
25
30
35
40
'00 '02 '04 '06 '08 '10 '12 '14 '16
Emerging Asia and Pacific:Credit in US$, Y/Y%
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
36
Total EM credit growth in USD has slowed EM Europe credit in USD, Y/Y% EM Latam credit in USD, Y/Y%
20
10
0
10
20
30
40
50
'00 '02 '04 '06 '08 '10 '12 '14 '16
Emerging Europe: Creditin US$, Y/Y%
10
5
0
5
10
15
20
'00 '02 '04 '06 '08 '10 '12 '14 '16
Latin America and Caribbean:Credit in US$, Y/Y%
Source: Haver Analytics as of January 2017. Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
37
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
'02 '05 '08 '11 '14 '17
Cor
rela
tion
30-Day 90-Day
Gold hit by higher rates, higher USD, but meant as hedge
Gold vs S&P 500, 30-Day and 60-Day rolling correlations
Source: Haver Analytics as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
38
Valuation differentials now largely driving GIC FI weights
-300
-200
-100
0
100
200
300
400
500
'86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16
Spre
ad (b
p)
Yield Spread Between Global Investment Committee Fixed Income Overweights vs Underweights
Yield premiums historically wide despite historically low absolute yields.
Source: The Yield Book and Citi Private Bank as of January 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
39
US HY bank loans offer high yields with lower volatility Higher up in capital structure, yield tied to LIBOR which rises with Fed funds Rate
21.5
22.0
22.5
23.0
23.5
24.0
0.5
0.6
0.7
0.8
0.9
1.0
1.1
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17
(Pric
e)
Yie
ld (%
)
3-month USD LIBORUS HY bank loans
Rising LIBOR has fueled HY loan outperformance
Source: FactSet, S&P as of January 2017.
94
98
102
106
110
114
118
122
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17
Tota
l Ret
urn
US HY bondsUS HY bank loansUS IG corp bondsUS Treasury
Source: Bloomberg Barclays Indices, S&P as of January 2017.
HY variable-rate loans display relatively lower price volatility
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
40
Institutional managers forced to chase year-end rallies “Winter is for Bulls, Summer for Bears”…Don’t Extrapolate Year-End Periods Forever
Year Term
Average Real Total Return
Percent Positive
Year 1 All Years 4.6 55First term 1.7 45Second term 8.2 67
Year 2 All Years 7.4 55First term 2.3 42Second term 15.0 75
Year 3 All Years 14.3 85First term 17.7 75Second term 9.2 100
Year 4 All Years 5.7 79First term 8.9 92Second term 0.2 57
Averages All Years 8.0 68First term 7.8 64Second term 8.4 75
Source: Citi Private Bank, FactSet, Haver Analytics, MSCI, Standard & Poor’s, STOXX Limited, and The Yield Book and Citi Private Bank as of January 2017.
Index 1Q Avg 2Q Avg 3Q Avg 4Q Avg 4Q Low Return 4Q High Return Sample PeriodMSCI World Index 2.4 2.5 -0.4 4.9 -20.7 19.0 26 yearsUS 2.6 2.4 0.5 4.9 -27.5 17.8 26 yearsEurope 3.1 3.0 -0.6 4.8 -22.1 25.1 26 yearsUK 1.9 1.4 1.1 5.1 -8.7 16.8 26 yearsJapan 2.0 1.5 -2.1 1.6 -22.3 17.6 26 yearsAsia Ex-Japan 3.5 3.0 -0.3 6.5 -21.6 48.7 26 yearsChina -3.8 7.1 -0.1 3.9 -33.4 47.5 21 yearsLatam 4.1 3.6 1.2 6.7 -20.4 31.0 19 yearsEM EMEA 4.3 2.2 1.1 6.9 -27.5 34.3 17 yearsSeasonality of Global Fixed Income Market Performance (Total Returns By Calendar Quarter)Index 1Q Avg 2Q Avg 3Q Avg 4Q Avg 4Q Low Return 4Q High Return Sample PeriodUS Treasury 0.6 1.3 2.7 1.5 -2.6 8.9 25 yearsGerman Bunds 1.3 0.7 2.4 1.8 -2.5 7.8 25 yearsUK Gilts 0.5 1.1 3.4 3.0 -2.2 10.6 25 yearsUS MBS 1.2 1.4 2.1 1.6 -0.5 5.0 25 yearsHG Corps (USD) 1.1 1.8 2.4 1.8 -1.6 5.2 25 yearsHY Corps (USD) 3.2 2.4 1.1 2.1 -17.2 8.6 25 yearsSeasonality of Commodity Market Performance (Total Returns By Calendar Quarter)Index 1Q Avg 2Q Avg 3Q Avg 4Q Avg 4Q Low Return 4Q High Return Sample PeriodWTI Crude Oil 6.8 6.6 1.8 -6.1 -55.7 24.8 25 yearsGold 2.2 0.1 2.8 0.7 -13.5 12.4 25 years
Seasonality of Global and Regional Share Market Performance (Total Returns By Calendar Quarter)
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
3. Asset Class Views in Charts
42
7.0
1.9
3.9
0.7
2.7
5.0
1.6
24.5
6.7
1.7
3.9
0.7
2.74.5
1.6
24.5
0
5
10
15
20
25
30
Small/Mid cap
Asia ex. JPlarge cap
Japanlarge cap
Nordic UKlarge cap
Cont.Europe
Canadalarge cap
USlarge cap
GIC
Lev
el 3
Ass
et A
lloca
tion Strategic
Tactical
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
70
80
90
100
110
120
130
'12 '13 '14 '15 '16 '17
Inde
x
Exch
ange
Rat
e
USD/JPYJapan equities (RHS)
-60
-40
-20
0
20
40
60
80
100-60
-40
-20
0
20
40
60
'77 '82 '87 '92 '97 '02 '07 '12 '17
YoY
%
YoY
%
S&P 500Initial jobless claims (inverted, RHS)
0
2
4
6
8
10
12
14
16
18
20
'66 '71 '76 '81 '86 '91 '96 '01 '06 '11 '16
Yie
ld (%
)
S&P 500 earnings & dividend yield on 10yr trailing EPS avgUS BBB 20+yrs corporate bond yields10yr U.S. Treasury bond yield
Stocks
Corps
Govts
Equities: Developed Markets The GIC maintains its neutral, fully-invested weighting on U.S. large cap equities. The sharp rotation within equity sectors sensitive to higher interest rates suggests durability, amid the many significant global risks. President Trump and the Republican controlled congress appears likely to succeed in passing sizeable U.S. corporate and personal income tax cuts. A stronger USD will hurt multinational earnings, but attract foreign investment in the U.S. if trade relationships hold.
Figure 2: Yields on equities compare favorably to those on bond markets
Figure 3: Year-to-year percentage change in S&P 500 and initial jobless claims Figure 4: Japanese equities are positively correlated to USD/JPY
Source: Bloomberg as of January 20, 2017. Source: Haver Analytics, as of January 20, 2017.
Figure 1: GIC Developed market equity tactical & strategic allocations (level 3)
Source: Citi Private Bank as of GIC meeting January 26, 2017. Source: Haver Analytics as of December 30, 2016.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of
future results. Real Results may Vary.
43
-4
-2
0
2
4
6
8
10
12
1996 2001 2006 2011 2016 2021Emerging and Developing Economies Ex-China China
IMFForecast
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
7.0760780800820840860880900920940960980
10001020
May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17
Exh
ange
Rat
e
Inde
x Le
vel
World equitiesCNY/USD (inverted axis, RHS)
0.8 0.9
5.2
1.10.9
5.0
0
1
2
3
4
5
6
Latin America EMEA Asia
GIC
Lev
el 3
Ass
et A
lloca
tion
Strategic
Tactical
-100
-50
0
50
100
150
200
'97 '01 '05 '09 '13 '17
YoY
%
WTI Crude Oil
Brazil equities
Equities: Emerging Markets Latin America has been the hardest hit by a resurgent US dollar since the Trump election. This has set back early signs of recovery that were strongly priced in the region earlier in 2016. However, the sharp declines in regional asset prices from 2011-2015 leave valuations attractive now. We maintain modest overweights in the commodity-linked Andean markets of Chile, Colombia and Peru. Mexico and Brazil remain at a neutral at present.
Source: Citi Private Bank as of GIC meeting January 26, 2017. Source: Haver Analytics and MSCI as of January 20, 2017.
Source: FactSet and The Yield Book as of January 20, 2017. Source: Haver Analytics and IMF as of January 20, 2017. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events
Figure 7: Global equities sold off during prior periods of CNY volatility
Figure 6: Tight historical correlation of Brazilian equities and crude oil
Figure 8: Emerging Markets Current Account Balance as % of GDP
Figure 5: GIC Emerging market tactical & strategic allocations (level 3)
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of
future results. Real Results may Vary.
44
99
100
101
102
103
104
105
106
107
108
109
Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17
Tota
l Ret
urn
(Jan
uary
1=1
00)
US nominal Treasury, 7-10yr
US TIPS, 7-10yr
-1
0
1
2
3
4
5
6
'01 '03 '05 '07 '10 '12 '14 '17
Yie
ld (%
)
10yr US Treasury yield
10yr German Bund yield
2.0
4.6
0.1 0.2
1.5
6.7
1.1
3.5
2.32.0
0.2 0.1
1.4
4.9
0.9
4.2
0
1
2
3
4
5
6
7
8
EM Japan Asiaex. JP
Nordic UK Cont.Europe
Canada US
GIC
Lev
el 3
Asse
t Allo
catio
n Strategic
Tactical
100
200
300
400
500
600
700
'12 '13 '14 '15 '16 '17
Spr
ead
(bp)
EM (USD) Latam sov spreadEM (USD) Middle East/Africa sov spreadEM (USD) E. Europe sov spreadEM (USD) Asia sov spread
Fixed Income: Government Debt We remain overweight in short-term U.S. Treasuries, as an alternative to cash, and keep U.S. intermediate and long-term Treasuries at a fully invested neutral weighting. With nearly a quarter of the developed market sovereign bond universe with negative yields, higher yielding US Treasuries provide a better asset allocation alternative.
Source: Citi Private Bank as of GIC meeting January 26, 2017.
Figure 9: GIC fixed income government tactical & strategic allocations (level 3) Figure 10: U.S. Treasury/German Bund spreads to remain historically wide
Figure 11: Wide divergences in EM regions, continue to favor Latam Figure 12: US TIPS should outperform nominals with stable/rising oil prices
Source: The Yield Book as of January 20, 2017.
Source: The Yield Book of January 20, 2017. Source: The Yield Book as of January 20, 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not
include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
45
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
'12 '13 '14 '15 '16 '17
Yie
ld (%
)
US IG corp yieldEuro IG corp yield
-5.6
-25.4
-1.4
17.8
38.5
12.6
24.9
66.4
14.4
-40-30-20-10
010203040506070
HYM HY Energy related HY ex-energy related
Tota
l ret
urn
(%)
2015 2016 From Feb 2016 bottom in oil thru year-end
0.4
1.6
2.1
4.5
0.8
2.9
2.1
5.5
0
2
4
6
Europehigh yield
UShigh yield
EuropeIG Corp
USIG Corp
GIC
Lev
el 3
Ass
et A
lloca
tion
Strategic
Tactical
0.10.4
0.91.3
2.42.6 2.8
3.3
4.0
5.8
0
1
2
3
4
5
6
7
10yrJGB
10yrBunds
EURHG Corp
10yrGilts
10yrUST
USCMBS
USDMBS
USDHG Corp
EURHY
USDHY
Yie
ld (%
) Yields
Fixed Income: Credit US IG credit remains at an overweight, and we keep a neutral duration relative to it’s benchmark. Given low yields and ongoing political headwinds, we keep Euro corporates neutral.
Source: Citi Private Bank as of GIC meeting January 26, 2017.
Figure 15: HY energy has rebounded as oil has stabilized
Figure 13: GIC fixed income credit tactical & strategic allocations (level 3) Figure 14: Continue to favor higher yielding US IG corporate bonds over European
Figure 16: High yield debt valuations appear relatively attractive amid low sovereign yields
Source: The Yield Book as of January 20, 2017. Source: Bloomberg Barclay’s Capital as of January 20, 2017.
Source: Bloomberg Barclays Capital as of January 20, 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of
future results. Real Results may Vary.
46
Hedge Funds Macro/CTA funds offer an opportunity to exploit greater market volatility. We retain a slight overweight in the segment while keeping our overall allocation to hedge funds at neutral. The GIC has a favorable view of very select private equity and real estate investments, but does not recommend changing these weightings over tactical time periods.
Event Time frame MSCI DM (Local, %)
MSCI EM (Local, %)
DJ UBS Commodities (%) HFRI Macro (%) Barclay CTA
(%)
Federal Reserve rate hike Feb 1994 to Jun 1994 -5.0 7.2 9.4% -2.3 5.6
Asian financial crisis Jul 1997 to Aug 1998 -2.6 -46.6 -31.1 7.0 2.4
Tech bubble to ‘02 recession Aug 2000 to Sep 2002 -47.2 -25.3 -1.7 15.5 23.1
Global financial crisis Oct 2007 to Feb 2009 -52.2 -53.2 -42.2 4.7 16.1
European Debt Crisis Jan 2011 to Dec 2011 -7.6 -14.9 -13.4 -4.2 -3.1
Low growth environment Jan 2012 to Dec 2012 13.1 13.9 -1.1 -0.1 -1.7
Current period Trailing 12-month 6.8 7.1 11.4 1.3 -2.6*
Table 1: Macro/CTA strategy in risk-on environment
Strategies December 2016 (%)
Trailing 12-Month 2016 Q1 2016 (%) Q2 2016 (%) Q3 2016 (%) Q4 2016 (%)
HFRI Fund of Funds Composite Index 1.1 0.7 0.7 -3.1 0.6 2.3 1.1
HFRI Event-Driven (Total) Index 1.5 10.5 10.5 -0.7 2.9 4.5 3.5
HFRI Relative Value (Total) Index 1.2 7.8 7.8 -0.3 3.0 3.0 2.0
HFRI Equity Hedge (Total) Index 0.8 5.5 5.5 -1.8 1.4 4.6 1.3
HFRI Macro (Total) Index 1.1 1.3 1.3 1.6 1.2 -1.0 -0.4
Barclay Trader Indexes CTA* -0.1 -2.6 -1.3 0.9 0.9 -1.8 -1.3
Table 2: Hedge fund strategies comparison
Source: Citi Private Bank using Bloomberg, as of December 30, 2016. *For the index noted, data is lagged one month. Therefore total returns are as of November 30, 2016. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
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-600
-100
400
900
1400
1900
3
4
5
6
7
8
9
10
11
12
'87 '92 '97 '02 '07 '12 '17
Uni
ts
Mill
ions
of B
arre
ls/d
ay
U.S. crude oil production (millions ofbarrels/day)Active oil rig count (units, RHS)
250
300
350
400
450
500
550
'85 '89 '93 '97 '01 '05 '09 '13 '17
Mill
ions
of B
arre
ls
U.S. stocks of crude oil(millions of barrels)
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
700
750
800
850
900
950
1000
1050
1100
'13 '14 '15 '16 '17
YoY
%
Inde
x
Emerging market equitiesBase metals (YoY, RHS)
Commodities With equities and bonds seeing an increase in correlation, the value of diversification is weakening somewhat. In contrast, gold and risk assets have maintained a significant negative correlation. While higher real interest rates and greater confidence would represent a downside risk to the gold price, the much larger part of our portfolio allocations would benefit from such a welcome trend, if it were to emerge. We keep Gold a small tactical overweight.
Figure 18: Base metal prices are positively correlated to emerging market equities
Figure 20: Current U.S. oil production high despite declines in new drilling activity Figure 19: Crude oil inventories beginning to fall from record levels
0.5% Precious metals
0.0% Industrial metals
0.0% Agriculture
0.0% Energy
Figure 17: GIC commodities tactical allocation (level 3)
0.5%
Source: Citi Private Bank as of GIC meeting January 26, 2017.
Source: Haver Analytics as of January 20, 2017.
Source: Bloomberg and MSCI as of January 20, 2017. MSCI Emerging Markets index is used.
Source: Haver Analytics as of January 20, 2017.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of
future results. Real Results may Vary.
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Structural Risks to GIC Positioning
Global Recession Emerging Markets Collapse
Risk
• U.S. and global growth contracts on monetary tightening or some unpredicted, severe shock.
• Corporate earnings fall hard. Trade contracts sharply between nations.
• A surging US dollar and collapsing trade send EM economies into a new contraction.
• China’s economy experiences a true hard landing.
• The oil price collapses anew.
Likely impact on asset markets
• US and global stocks fall. • Credit spreads widen. • U.S. dollar surges. • Safe-haven bond markets
such as Japan’s surge further into negative yield territory.
• Latin American and other EM equity and credit markets plunge as do regional currencies.
• Commodities, including gold, fall on the weight of higher real interest rates.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
For illustrative purposes only. Past performance is no guarantee of future results. Real Results may Vary.
4. Appendix
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Contacts North America/Latin America EMEA ASIA
Steven Wieting Global Chief Investment Strategist +1.212.559.0499 [email protected] Kris Xippolitos Head of Fixed Income Strategy +1.212.559.1277 [email protected] Chris Dhanraj NAM Investment Strategist +1.212.559.6251 [email protected] Jorge Amato Latin America Investment Strategist +1.212.559.0114 [email protected] Joseph Kaplan Global Investment Strategy +1.212.559.3772 [email protected] Malcolm Spittler Global Investment Strategy +1.212.559.8651 [email protected]
Jeffrey Sacks EMEA Investment Strategist +44.207.508.7325 [email protected] Shan Gnanendran EMEA Capital Markets +44.207.508.0631 [email protected] Maya Issa Global Investment Strategy [email protected]
Ken Peng Asia Investment Strategist +852.2868.8904 [email protected] Shirley Wong Asia Investment Strategy +852.2298.6119 [email protected]
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Glossary Li Ke Qiang Index (or Keqiang Index) measures China’s economy using three indicators; railway cargo volume, electricity consumption and loans disbursed by banks. Asia Pacific ex Japan equities are measured against the MSCI Asia Pacific ex Japan Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure the performance of large cap stocks in Australia, Hong Kong, New Zealand and Singapore. Cash is measured against the three-month LIBOR, which is the interest rate that banks charge each other in the international inter-bank market for three-month loans (usually denominated in Eurodollars). CBOE Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by Standard & Poor’s 500 stock index option prices. CBOE Crude Oil Volatility Index (OVX) measures the market’s expectation of 30-day volatility of crude oil prices MOVE index: The Merrill lynch Option Volatility Estimate Index is a yield curve weighted index of the normalized implied volatility US Treasury options CBOE SKEW Index ("SKEW") is an index derived from the price of S&P 500 tail risk. Similar to VIX, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible. Citigroup GRAMI (Global Risk Aversion Macro Index) measures risk aversion across asset classes. It is an equally weighted index of developed and emerging market sovereign spreads, US credit spreads, TED spread and implied FX, equity and swap volatility. GRAMI is shown as standard deviations from the mean. Citi Economic Surprise Index cover all G10 economies and are available by each country. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance beating consensus. The indexes are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The indexes also employ a time decay function to replicate the limited memory of markets. Commodities are measured against the Dow Jones-UBS Commodity Index, which is composed of futures contracts on physical commodities traded on exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME). The major commodity sectors are represented, including energy, petroleum, precious metals, industrial metals, grains, livestock, softs, agriculture and ex. energy. Corporate high yield is measured against the Citigroup US High Yield Market Index, which includes all issues rated between CCC and BB+. The minimum issue size is $50 million. All issues are individually trader priced monthly. Corporate investment grade is measured against the Citi World Broad Investment Grade Index (WBIG) – Corporate, a subsector of the WBIG. This index includes fixed rate global investment grade corporate debt within the finance, industrial and utility sectors, denominated in the domestic currency. The index is rebalanced monthly. Developed market large cap equities are measured against the MSCI World Large Cap Index. This is a free-float adjusted, market-capitalization weighted index designed to measure the equity market performance of the large cap stocks in 23 developed markets. Large cap is defined as stocks representing roughly 70% of each market’s capitalization. Developed market small and mid cap equities are measured against the MSCI World Small Cap Index, a capitalization-weighted index that measures small cap stock performance in 23 developed equity markets. Developed sovereign is measured against the Citi World Government Bond Index (WGBI), which consists of the major global investment grade government bond markets and is composed of sovereign debt, denominated in the domestic currency. To join the WGBI, the market must satisfy size, credit and barriers-to-entry requirements. In order to ensure that the WGBI remains an investment grade benchmark, a minimum credit quality of BBB–/Baa3 by either S&P or Moody's is imposed. The index is rebalanced monthly. World Government bond index-ex US is measured against the Citi World Government Bond Index (WGBI), which consists of the major global investment grade government bond markets excluding the United States and is composed of sovereign debt, denominated in the domestic currency. To join the WGBI, the market must satisfy size, credit and barriers-to-entry requirements. In order to ensure that the WGBI remains an investment grade benchmark, a minimum credit quality of BBB–/Baa3 by either S&P or Moody's is imposed. The index is rebalanced monthly. Emerging sovereign is measured against the Citi Emerging Market Sovereign Bond Index (ESBI). This index includes Brady bonds and US dollar-denominated emerging market sovereign debt issued in the global, Yankee and Eurodollar markets, excluding loans. It is composed of debt in Asia, Latin America (Latam), Europe/Middle East/Africa (EMEA) We classify an emerging market as a sovereign with a maximum foreign debt rating of BBB+/Baa1 by S&P or Moody's. Defaulted issues are excluded. Sub-indices for these regions are also used for greater detail.
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Glossary Europe ex UK equities are measured against the MSCI Europe ex UK Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure the performance of large cap stocks in each of Europe’s developed markets, excluding the United Kingdom. Global bonds are measured against the Citigroup Broad Investment Grade Bond. The index is weighted by market capitalization and includes fixed rate Treasury, government sponsored, mortgage, asset backed, and investment grade (BBB–/Baa3) issues with a maturity of one year or longer and a minimum amount outstanding of $1 billion for Treasuries, $5 billion for mortgages, and $200 million for credit, asset-backed and government-sponsored issues. Global equities are measured against the MSCI All Country World Index, which represents 48 developed and emerging equity markets. Index components are weighted by market capitalization. Japan equities are measured against the MSCI Japan Large Cap Index. A free-float-adjusted market-capitalization-weighted index designed to measure large-cap stock performance in Japan. Topix is the Tokyo Stock Exchange Tokyo Price Index. Along with the Nikkei 225, is an important stock market index for the Tokyo Stock Exchange in Japan, tracking all domestic companies of the exchange's First Section Nikke Index is a price-weighted average of the top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange LDXY Index is a spot index of emerging Asia's most actively traded currency pairs valued against the US dollar. MSCI EM (Emerging Markets) Index is free-float adjusted and weighted by market capitalization. The index is designed to measure equity market performance in regions of Asia, Latin America, Europe, and Africa MSCI North America Index is free-float adjusted and weighted by market capitalization. The index is designed to measure equity market performance in the US and Canada. MSCI World Index (Gross) is free-float adjusted and weighted by market capitalization. The index is designed to measure global developed market equity performance. Emerging markets equities are measured against the MSCI Emerging Markets Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure equity market performance of 22 emerging markets in Asia, Latin America, Europe, and Africa. Sub-indices are also available for these regions and by country. Shanghai Shenzhen CSI 300 Index (CSI 300) Index is a free-float weighted index that consists of 300 A-share stocks listed on the Shanghai or Shenzhen Stock Exchanges. Hang Seng Composite Index (HSI) is a market-cap weighted index that covers about 95% of the total market capitalisation of companies listed on the Main Board of the Hong Kong Stock Exchange. TWSE, or TAIEX, Index is capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange. German DAX is a blue chip stock market consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. FTSE 100 is a share index of the largest 100 companies listed on the London Stock Exchange with the highest market capitalization. The FTSE 250 is the 101st to 350th largest companies listed on the London Stock exchange. S&P/TSX Composite is the headline index for the Canadian equity market. Securitized: Citi World Broad Investment Grade Index (WBIG) – Securitized is a subsector of the WBIG. This index includes global investment grade collateralized debt denominated in the domestic currency, including mortgage-backed securities, covered bonds (Pfandbriefe) and asset-backed securities. The index is rebalanced monthly. Supranationals: Citi World Broad Investment Grade Index (WBIG) – Government Related is a subsector of the WBIG. This index includes fixed rate investment grade agency, supranational and regional government debt, denominated in the domestic currency. The index is rebalanced monthly. UK equities are measured against the MSCI UK Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure large-cap stock performance in the United Kingdom. Europe STOXX 600 Index is a consists of 600 companies which represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
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Glossary S&P 100 index is a subset of the S&P 500,and includes 100 leading U.S. stocks with exchange-listed options. Constituents of the S&P 100 are selected for sector balance and represent about 57% of the market capitalization of the S&P 500 and almost 45% of the market capitalization of the U.S. equity markets. The stocks in the S&P 100 tend to be the largest and most established companies in the S&P 500. US Dollar Index (DXY) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and six major world currencies. The ICE US computes this by using the rates supplied by some 500 banks. Thomson Reuters/Core Commodity CRB index (CRY) is a commodity futures index which comprises 19 commodities: Aluminium, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat. US equities are measured against the Standard & Poor’s 500 Index, a capitalization-weighted index which includes a representative sample of 500 leading companies in leading industries of the US economy. Although the S&P 500 focuses on the large cap segment of the market, with over 80% coverage of US equities, it is also an ideal proxy for the total market. Wells Fargo Hybrid & Preferred Securities Financial Index: The Wells Fargo Hybrid and Preferred Securities Aggregate Index is a modified market-capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. Hedge funds are measured against the HFRI Fund Weighted Composite Index. This is an equally weighted composite index including both domestic and offshore funds, with no fund of funds. The index includes over 2,000 constituent funds. All funds report assets in USD and all funds report net of all fees returns on a monthly basis. Fund must have at least $50 million under management or have been actively trading for at least 12 months. HFRI Fund of Funds Composite Index – Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio. A manager may allocate funds to numerous managers within a single strategy, or with numerous managers in multiple strategies. The minimum investment in a Fund of Funds may be lower than an investment in an individual hedge fund or managed account. The investor has the advantage of diversification among managers and styles with significantly less capital than investing with separate managers. HFRI Event-Driven (Total) Index: event driven is also known as ‘corporate life cycle’ investing. This involves investing in opportunities created by significant transactional events, such as spin-offs, mergers and acquisitions, bankruptcy reorganizations, recapitalizations and share buybacks. Returns for HFRI indices are to be considered estimated returns for the previous stated quarter as HFRI may revise index data from time to time, as necessary. Generally final index returns are made available by HFRI four months after a particular month end. HFRI Relative Value (Total) Index – Investment Managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivative or other security types. Fixed income strategies are typically quantitatively driven to measure the existing relationship between instruments and, in some cases, identify attractive positions in which the risk adjusted spread between these instruments represents an attractive opportunity for the investment manager. RV position may be involved in corporate transactions also, but as opposed to ED exposures, the investment thesis is predicated on realization of a pricing discrepancy between related securities, as opposed to the outcome of the corporate transaction. HFRI Equity Hedge (Total) Index – Equity Hedge: Investment Managers who maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. EH managers would typically maintain at least 50% exposure to, and may in some cases be entirely invested in, equities, both long and short. HFRI Macro (Total) Index – Macro: Investment Managers which trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top down and bottom up theses, quantitative and fundamental approaches and long and short term holding periods. Although some strategies employ RV techniques, Macro strategies are distinct from RV strategies in that the primary investment thesis is predicated on predicted or future movements in the underlying instruments, rather than realization of a valuation discrepancy between securities. In a similar way, while both Macro and equity hedge managers may hold equity securities, the overriding investment thesis is predicated on the impact movements in underlying macroeconomic variables may have on security prices, as opposes to EH, in which the fundamental characteristics on the company are the most significant are integral to investment thesis. Barclay CTA Index is a leading industry benchmark of representative performance of commodity trading advisors. There are currently 565 programs included in the calculation of the Barclay CTA Index for the year 2011, which is unweighted and rebalanced at the beginning of each year. LIBOR (London Inter-Bank Offered Rate) is based on rates that contributor banks in London offer each other for inter-bank deposits. From a bank's perspective, deposits are simply funds that are loaned to them. So in effect, a LIBOR is a rate at which a fellow London bank can borrow money from other banks. LIBOR is offered in various durations (i.e. overnight, one month, 3 month, 6 month, 1 year).
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Important Information In any instance where distribution of this communication (“Communication”) is subject to the rules of the US Commodity Futures Trading Commission (“CFTC”), this communication constitutes an invitation to consider entering into a derivatives transaction under US CFTC Regulations §§ 1.71 and 23.605, where applicable, but is not a binding offer to buy/sell any financial instrument.
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Important Information OTC derivative transactions involve risk and are not suitable for all investors. Investment products are not insured, carry no bank or government guarantee and may lose value. Before entering into these transactions, you should: (i) ensure that you have obtained and considered relevant information from independent reliable sources concerning the financial, economic and political conditions of the relevant markets; (ii) determine that you have the necessary knowledge, sophistication and experience in financial, business and investment matters to be able to evaluate the risks involved, and that you are financially able to bear such risks; and (iii) determine, having considered the foregoing points, that capital markets transactions are suitable and appropriate for your financial, tax, business and investment objectives.
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Important Information The expressions of opinion are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future results. Real results may vary.
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Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer’s credit rating, or creditworthiness, causes a bond’s price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made.
Mortgage-backed securities ("MBS"), which include collateralized mortgage obligations ("CMOs"), also referred to as real estate mortgage investment conduits ("REMICs"), may not be suitable for all investors. There is the possibility of early return of principal due to mortgage prepayments, which can reduce expected yield and result in reinvestment risk. Conversely, return of principal may be slower than initial prepayment speed assumptions, extending the average life of the security up to its listed maturity date (also referred to as extension risk).
Additionally, the underlying collateral supporting non-Agency MBS may default on principal and interest payments. In certain cases, this could cause the income stream of the security to decline and result in loss of principal. Further, an insufficient level of credit support may result in a downgrade of a mortgage bond's credit rating and lead to a higher probability of principal loss and increased price volatility. Investments in subordinated MBS involve greater credit risk of default than the senior classes of the same issue. Default risk may be pronounced in cases where the MBS security is secured by, or evidencing an interest in, a relatively small or less diverse pool of underlying mortgage loans. MBS are also sensitive to interest rate changes which can negatively impact the market value of the security. During times of heightened volatility, MBS can experience greater levels of illiquidity and larger price movements. Price volatility may also occur from other factors including, but not limited to, prepayments, future prepayment expectations, credit concerns, underlying collateral performance and technical changes in the market. Alternative investments referenced in this report are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in the fund, potential lack of diversification, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and advisor risk. Asset allocation does not assure a profit or protect against a loss in declining financial markets. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.
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Important Information Factors affecting commodities generally, index components composed of futures contracts on nickel or copper, which are industrial metals, may be subject to a number of additional factors specific to industrial metals that might cause price volatility. These include changes in the level of industrial activity using industrial metals (including the availability of substitutes such as man-made or synthetic substitutes); disruptions in the supply chain, from mining to storage to smelting or refining; adjustments to inventory; variations in production costs, including storage, labor and energy costs; costs associated with regulatory compliance, including environmental regulations; and changes in industrial, government and consumer demand, both in individual consuming nations and internationally. Index components concentrated in futures contracts on agricultural products, including grains, may be subject to a number of additional factors specific to agricultural products that might cause price volatility. These include weather conditions, including floods, drought and freezing conditions; changes in government policies; planting decisions; and changes in demand for agricultural products, both with end users and as inputs into various industries. The information contained herein is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Readers interested in the strategies or concepts should consult their tax, legal, or other advisors, as appropriate.
In Hong Kong, this document is issued by CPB operating through Citibank, N.A., Hong Kong branch, which is regulated by the Hong Kong Monetary Authority. Any questions in connection with the contents in this document should be directed to registered or licensed representatives of the aforementioned entity. In Singapore, this document is issued by CPB operating through Citibank, N.A., Singapore branch, which is regulated by the Monetary Authority of Singapore. Any questions in connection with the contents in this document should be directed to registered or licensed representatives of the aforementioned entity. In the United Kingdom, Citibank N.A., London Branch (registered branch number BR001018), Citigroup Centre, Canada Square, Canary Wharf, London, E14 5LB, is authorised and regulated by the Office of the Comptroller of the Currency (USA) and authorised by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The contact number for Citibank N.A., London Branch is +44 (0)20 7508 8000. Citibank Europe plc is regulated by the Central Bank of Ireland. It is authorised by the Central Bank of Ireland and by the Prudential Regulation Authority. It is subject to supervision by the Central Bank of Ireland, and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request. Citibank Europe plc, UK Branch is registered as a branch in the register of companies for England and Wales with registered branch number BR017844. Its registered address is Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. VAT No.: GB 429 6256 29. Citibank Europe plc is registered in Ireland with number 132781, with its registered office at 1 North Wall Quay, Dublin 1. Citibank Europe plc is regulated by the Central Bank of Ireland. Ultimately owned by Citigroup Inc., New York, USA.
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