Third Quarter 2003 - Hang Seng Bank Limited

1 3Q 2018 investment outlook 13 Jul 2018. Global Market As the trade war intensified, developed stock markets were volatile in 2Q18, and are expected to remain turbulent through 3Q18. The US stock markets are supported by earnings growth. In particular, the Russell 2000 Index, consisting mainly of small-caps and focused more on local business operations, is relatively immune to effects of the trade war and should be better positioned. Economic growth in Europe and Japan has slowed down and companies in these regions recorded lacklustre 1Q results. As a result stock prices remained static, prompting us to take a cautious approach. Emerging Market Emerging stock markets fell considerably in the second Quarter due to capital outflows and currency depreciation.

2 Looking ahead to 3Q18, the developments of trade wars and movements in USD will continue to affect emerging stock markets. However, we believe many emerging markets are still fundamentally strong, while PE ratios have pulled back to more reasonable levels below 12 times. Unless the situation deteriorates further, emerging stock markets are unlikely to tumble significantly. HK/China Market The China-US trade war and deleveraging efforts in the mainland have weakened China and HK stock markets. This is expected to hinder their performance in the short term. However, markets expect Chinese companies to record substantial earnings growth while liquidity has improved. Hence Hang Seng Index is expected to be well supported. In terms of sectors, areas of interest include local banks, landlords and real estate trusts, retail, mainland insurance, property management, education, pharmaceuticals and gaming sectors.

3 Fixed Income Market In early 2Q18 the market focus was on short duration USD-denominated bonds and Asia local currency bonds. However, it turned out factors such as trade wars and risk-off sentiment should limit 10-yr US Treasury yield from moving up in the short term. Continuous deleveraging in the mainland has resulted in a tighter credit environment, while increasing defaults weigh on Asian high yields. Stronger USD may increase the pressure of capital outflows on emerging economies, which is detrimental to emerging market bonds. In contrast, US high yield bonds benefit from the balance sheet improvements in related companies and high oil prices. Forex Market In the FX market, the USD turned around and shed its weakness, while the Euro and CAD will continue to display weakness due to fundamentals and trade disputes with the US.

4 The JPY could fare better as a safe haven currency relative to the Euro and CAD. Page 1, Total 29 Pages 3Q 2018 investment outlook 13 Jul 2018. Executive Summary 3. Equities US 6. Emerging Markets (EM) 9. Europe 12. CONTENTS. Japan 14. China / Hong Kong 16. Global Bond Market 20. Currencies AUD 22. EUR 24. Crude Oil 26. Page 2, Total 29 Pages 3Q 2018 investment outlook 13 Jul 2018. EXECUTIVE SUMMARY. As the trade war intensified, developed stock markets were volatile in 2Q18, and are expected to remain turbulent through 3Q18. The US stock markets are among the few which have recorded positive returns so far this year, supported by earnings growth. In particular, the Russell 2000 Index, consisting mainly of small-caps and focused more on local business operations, is relatively immune to effects of the trade war and should be better positioned.

5 Economic growth in Europe and Japan has slowed down and companies in these regions recorded lacklustre 1Q results. As a result stock prices remained static, prompting us to take a cautious approach. Emerging stock markets failed to replicate first Quarter performance and fell considerably in the second Quarter due to capital outflows and currency depreciation. Looking ahead to 3Q18, the developments of trade wars and movements in USD will continue to affect emerging stock markets. However, we believe many emerging markets are still fundamentally strong with abundant current account surpluses and are facing moderate inflation, while PE ratios have pulled back to more reasonable levels of below 12x. Unless the situation deteriorates further, emerging stock markets are unlikely to tumble significantly.

6 The China-US trade war and deleveraging efforts in the mainland have weakened China and HK stock markets. This is expected to hinder their performance in the short term. However, markets expect Chinese companies to record substantial earnings growth while liquidity has improved. Hence Hang Seng Index is expected to be well supported. If the trade war escalates, stock markets may face greater downward pressure. In terms of sectors, areas of interest include local banks, landlords and real estate trusts, retail, mainland insurance, property management, education, pharmaceuticals and gaming sectors. In early 2Q18 the market focus was on short duration USD-denominated bonds and Asia local currency bonds. However, it turned out 10-yr US Treasury yield should continue to Source : Bloomberg , HSIS as of 29 Jun.

7 Page 3, Total 29 Pages 3Q 2018 investment outlook 13 Jul 2018. rise in the long term, but factors such as trade wars and risk-off sentiment should limit yield from moving up in the short term. Continuous deleveraging in the mainland has resulted in a tighter credit environment, while increasing defaults weigh on Asian high yields. The Fed's more hawkish stance and stronger USD may increase the pressure of capital outflows on emerging economies, which is detrimental to emerging market bonds. In contrast, US high yield bonds are expected to benefit from US tax reforms since balance sheets of related companies shall improve. High oil prices are also supportive, but it should be noted that the sector's valuation is currently higher than the historical average.

8 In the FX market, the USD turned around and shed its weakness, while the Euro and CAD will continue to display weakness due to fundamentals and trade disputes with the US. The JPY could fare better as a safe haven currency relative to the Euro and CAD. Markets around the world experienced a tumultuous second Quarter ; global economic growth remained stable, while stock markets overall regained upward momentum. However, Trump insisted on implementing "America First" protectionist policies, pushing the global economy to the brink of a full-blown trade war, unsettling the upward trend of stock markets. China and the US imposed tariffs on USD 50 billion worth of goods on each other and threatened to take further action. Besides raising tariffs on imports from China, the US also revoked steel and aluminum tariff exemptions for the EU, Mexico and Canada, which led to retaliatory measures from these regions.

9 The trade war has undoubtedly disrupted global economic growth and has weakened investment sentiment. Further escalation of trade disputes among countries would weigh on stock markets. However, US corporate earnings grew substantially as a result of tax reforms, while the US stock market outshone others on the global stage, becoming one of the few major markets to record positive returns, with the Russell 2000 Index and Nasdaq hitting record highs during the Quarter . As the trade war rages on, US small caps are expected to be better positioned as they are focused on local business operations and are more resilient to effects of the trade war. On the other hand, economic growth in Europe and Japan has slowed down, and companies in these regions recorded lacklustre 1Q results.

10 As a result stock prices remained static, prompting us to take a cautious approach. As the US continued to hike rates, emerging markets began to lose the advantage of interest rate differentials over the US. In addition, as the trade war intensified in 2Q18, capital invested in risk assets flowed back to USD, leading to capital flowing out from emerging markets. The fundamentals of several emerging nations were unstable, as capital outflows resulted in rapid currency depreciation, forcing central banks to tighten monetary policies. During the Quarter , investors were mainly concerned with currency depreciation in countries such as Argentina, Turkey and Brazil. In 3Q18, the developments of trade wars and movements in USD. Page 4, Total 29 Pages 3Q 2018 investment outlook 13 Jul 2018.