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Market Outlook & Investment Strategy Aug 2018

Investment Strategies Investment Product Specialists Division Personal Banking and Wealth Management Department The information contained in this document is for reference only and does not constitute any offer, solicitation, recommendation, advice or guarantee, for any Investment products or services. Please refer to the disclaimer for details. 1 Market Outlook & Investment Strategy Market Outlook Jun 2018 Global Economy We retain our view that above-trend global growth and healthy corporate earnings will be supportive to risky assets, in particular to equity, over the medium term. After much Market turbulence over the last few months, sentiment seemed to have turned more sanguine in May for risky assets. Yet concerns on the US-China trade tensions will still linger, coupled with geopolitical risks, and rising energy prices could cap the upside movements for risky assets for the rest of the quarter.

Investment Strategies Investment Product Specialists Division Personal Banking and Wealth Management Department Aug 2018 The information contained in this document is for reference only and does not constitute any offer, solicitation, recommendation, advice or guarantee, for any investment

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Transcription of Market Outlook & Investment Strategy Aug 2018

1 Investment Strategies Investment Product Specialists Division Personal Banking and Wealth Management Department The information contained in this document is for reference only and does not constitute any offer, solicitation, recommendation, advice or guarantee, for any Investment products or services. Please refer to the disclaimer for details. 1 Market Outlook & Investment Strategy Market Outlook Jun 2018 Global Economy We retain our view that above-trend global growth and healthy corporate earnings will be supportive to risky assets, in particular to equity, over the medium term. After much Market turbulence over the last few months, sentiment seemed to have turned more sanguine in May for risky assets. Yet concerns on the US-China trade tensions will still linger, coupled with geopolitical risks, and rising energy prices could cap the upside movements for risky assets for the rest of the quarter.

2 Market attention will also been dominated by the upcoming June FOMC meeting. Even though another rate hike has almost certainly been priced in, the FED s stance on interest rate trajectory will be the key and warrant close monitoring. For the time being, with the steady economic backdrop, gradual rise in global inflation, still non-restrictive monetary policy but supportive fiscal spending, we are of the view that risky assets have further steam to go going into the second half of the year. Thus we see any retracements as opportunities to increase positions towards the second half of the year. Our view remains that equity is preferred to bond, and developed Market exposure is preferred to emerging Market exposure taking into consideration of higher US interest rates and stronger US dollar.

3 On the economic front, the readings for the first quarter from Europe and Japan were weaker than expected and data in the second quarter are mixed. The Zew sentiment indicator from Germany (Chart 1) has stalled though the latest industrial prices have showed signs of improvements. Japan s exports have also picked up after a lackluster quarter. Among developed markets (DMs), US economy is likely to make headway compared to its developed Market peers, supported by tax reforms and larger fiscal spending despite the recent strengthening of the currency. Judging from this slew of data, our view is that global growth will remain above-trend at this point; also there are nuanced growth differentials in regional economies. Meanwhile, the state of emerging Market (EM) economies is largely being held up by the stability of the Chinese economy.

4 Industrial production growth has remained steady even though retail sales and fixed asset Investment came in slightly below expectations. There have also been jitters in individual economies such as Argentina and Turkey that suffered from plunging currencies (Chart 2) and sizable fund outflows in light of an appreciating dollar. However we do not believe With the steady economic backdrop, gradual rise in global inflation, still non-restrictive monetary policy but supportive fiscal spend-ing, we are of the view that risky assets have further steam to go going into the second half of the year Among developed markets , US economy is likely to make headway compared to its de-veloped Market peers, sup-ported by tax reforms and larger fiscal spending despite the recent strengthening of the currency Chart 1. ZEW Germany Assessment of Current Situation Chart 2.

5 USD Vs Argentina and Turkey currenciesWTI Source: Bloomberg, BOCHK, 24-5-2018 Source: Bloomberg, BOCHK, 24-5-2018 Investment Strategies Investment Product Specialists Division Personal Banking and Wealth Management Department Jun 2018 The information contained in this document is for reference only and does not constitute any offer, solicitation, recommendation, advice or guarantee, for any Investment products or services. Please refer to the disclaimer for details. 2 there is any contagion effect as EM fundamentals remain healthy in general. As such, there is no risk of global growth being derailed in light of the stimulative fiscal policy and relatively accommodative monetary policy around the world. US core CPI stood at yoy in and is approaching the Fed s 2% target inflation. The tightness of its labor markets could further boost wages growth, together with rising oil prices (Chart 3) could in turn add to inflationary pressure.

6 Elsewhere, the latest consumer prices in the eurozone and Japan were and yoy respectively, lower than the month previously and far below their target levels. Given the mildness of global inflation, monetary policies among the major central banks are tilted to tighten later than expected, owing also to uncertainty of trade policy. Take the UK as an example, the Bank of England (BoE) has postponed its rate hike in May despite heavy hint previously to do so. The risks, of course, still lies with the US where a much higher than expected inflation would hasten the Fed s pace of rate hikes, drive up the dollar, tighten financial conditions and cause havoc to risky assets. However this is not our base case scenario and we continue to expect a gradual pick up in global inflation that will be conductive to Investment .. Equity Despite concerns of higher inflation risks and higher interest rates, intensified protectionist stance from the Trump administration, geopolitical conflicts which have plagued the markets in the previously months, sentiment has improved from the beginning of May.

7 The average VIX Index (Chart 4) has also come down compared to the February-April period. The S&P 500 Index edged up 3% month-to-date (MTD) at the time of writing and added to the quarter-to-date (QTD) to Aided by the much weaker euro, the Eurostoxx 600 Index has clocked in QTD return but only 1% in USD terms. Similar but to a lesser degree, Japan s TOPIX Index was up QTD but only yield negligible return in USD terms in light of JPY weakness. On the other hand, hurt by higher USD and higher rates, emerging markets did not fare as well. The MSCI Emerging Market Index fell by MTD and QTD. Over in Asia, the MSCI AC Asia ex Japan Index fell MTD but gained QTD whereas the Hang Seng Index has outperformed by delivering return MTD and return QTD. Chinese bourses, especially for smaller caps have staged a turnaround in May from a start this year; CSI300 Index has risen MTD but still recorded a small loss of QTD; the Shanghai Composite Index and the Shenzhen Composite Index were up and MTD and 1% and flat QTD respectively.

8 We believe equity will ultimately be bolstered by steady economic backdrop and robust Given the mildness of global inflation, monetary policies among the major central banks are tilted to tighten later than expected, owing also to uncertainty of trade policy Despite concerns of higher inflation risks and higher in-terest rates, intensified pro-tectionist stance from the Trump administration, geopo-litical conflicts , sentiment has improved from the beginning of May Chart 3. Crude Future Daily Chart Chart 4. Chicago Board Options Exchange SPX Volatility Index Source: Bloomberg, BOCHK, 24-5-2018 Source: Bloomberg, BOCHK, 24-5-2018 Investment Strategies Investment Product Specialists Division Personal Banking and Wealth Management Department Jun 2018 The information contained in this document is for reference only and does not constitute any offer, solicitation, recommendation, advice or guarantee, for any Investment products or services.

9 Please refer to the disclaimer for details. 3 corporate earnings growth over the medium term. With slower economic data coming from Europe, Japan and EMs, global growth may have peaked but it remains above trend. However Market gyrations are here to stay as ultra-low volatility levels seen last year would not be a repeat. What has also changed from earlier this year is investor sentiment. With Trump s protectionist rhetoric, looming uncertainty over US-China trade relations, geopolitical tensions and rising energy prices, the near term Outlook for global equity seems challenging. Here we d like to reiterate that historically equity did not tend to peak until the yield curve is inverted. Indeed a flattened yield curve was quite common at this stage of economic cycle in the past so we are not too alarmed by the recent yield movements.

10 We remain our view on US equity as Neutral with Positive bias as we believe its stronger earnings growth (Chart 5) so we prefer to accumulate at weaknesses. Other developed markets such as eurozone and Japanese equity could also benefit from weaker currency (Chart 6) and still accommodative monetary policy. We are less sanguine on emerging Market equities over the near term as increasing USD strength and rising bond yields have already prompted fund outflows and more restrictive financial conditions. Thus we voice caution on emerging Market investments, however, we see short term upside catalysts in China A-share markets with its impending inclusion of the MSCI Indices in early June. Sector wise, we are still biased towards cyclicals over defensives, such as financials (for its well position in higher rate environment) and tech (for its consistency in earnings delivery).


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