3Q 2015 Investment Outlook

7 Jul 2015

Global Markets
The year to date performance for global equity market was rather flattish,
as the Greek debt woes and Fed rate normalization further kept investors
staying risk-averse, especially during the past quarter. We expect the fear
of financial market turmoil caused by Greek politics and US rate move will
gradually fade by the end of 3Q, and suggest investors to re-position the
asset allocation in preparation for the risk appetite to come back in 4Q.

HK/China Equity Markets

On HK/China stock market, Its expected that the Chinese government will
further support the stock market and the A share market could resume its
order and stabilize very soon, but investors should realize that any stock
market couldnt deviate from its economic fundamentals for long. Looking
at the economic front, our base case scenario is that Chinas growth has
already reached a short-term cyclical growth bottom. If China can achieve
a mild growth rebound in 2H, we will see stock market regain the strength,
especially the cyclical H shares.

Bond Markets
On fixed income market, worries over deflation risks in the Eurozone have
diminished after the ECB launched its bond-buying program in March.
Current concerns on Grexit have pushed the US benchmark yield lower,
but the event is expected to fade sooner than later, in our view. Investors
are suggested to diversify the portfolio and reduce overconcentration on
dollar bonds. We like offshore RMB bonds for yields and we anticipate a
relatively stable RMB exchange rate.

Forex Markets
On FX, we are bullish on USDJPY in 2H15. There could be a new wave of
market expectation on BOJ to do more quantitative easing for trade and
inflation to rise later on this year. Coupled with the US rate hike ahead and
further widening of the US-Japan interest rate differential, we expect the
USDJPY to enter into a new trading range and our year-end target is 128.

Page 1, Total 24 Pages

3Q 2015 Investment Outlook

Executive Summary

7 Jul 2015

CONTENTS

Equities

US

Emerging Markets (EM)

Europe

10

China / Hong Kong

12

Japan

15

Global Bond Market

17

Currencies

AUD

19

GBP

20

JPY

21

EUR

22

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3Q 2015 Investment Outlook

EXECUTIVE SUMMARY

Investment Analysis
Asset Class
US equities

3Q 2015
=/+

European equities

Japanese equities

=/+

Hong Kong China equities

Emerging market equities

DM Corporate Bonds

=/-

EM Sovereign bonds

Asian bonds

=/+

Commodity currencies

Gold

Red means changes have been made recently

Symbol representation:
=/+
=/+
=

Neutral with a Positive bias

Neutral with a Negative bias
Positive
Negative
Neutral

7 Jul 2015

Greek debt woes and Fed rate normalization

further kept investors staying risk-averse,
especially during the past quarter. We expect
the fear of financial market turmoil caused by
Greek politics and US rate move will gradually
fade by the end of 3Q, and suggest investors to
re-position the asset allocation in preparation for
the risk appetite to come back in 4Q.
On HK/China stock market, Its expected that
the Chinese government will further support the
stock market and the A share market could
resume its order and stabilize very soon. If
China can achieve a mild growth rebound in 2H,
we will see stock market regain the strength,
especially the cyclical H shares.
Current concerns on Grexit have pushed the US
benchmark yield lower, but the event is
expected to fade sooner than later, in our view.
Investors are suggested to diversify the portfolio
and reduce overconcentration on dollar bonds.
We like offshore RMB bonds for yields and we
anticipate a relatively stable RMB.
On FX, we are bullish on USDJPY in 2H15.
There could be a new wave of market
expectation on BOJ to do more quantitative
easing for trade and inflation to rise later on this
year. Coupled with the US rate hike ahead and
further widening of the US-Japan interest rate
differential, we expect the USDJPY to enter into
a new trading range and our year-end target is
128.

The year to date performance for global equity market was rather flattish as the global stocks
valuation have already stretched since the end of last year, while the Greek debt woes and Fed
rate normalization further kept investors staying risk-averse, especially during the past quarter. We
expect the fear of financial market turmoil caused by Greek politics and US rate move will
gradually fade by the end of 3Q, and suggest investors to re-position the asset allocation in
preparation for the risk appetite to come back in 4Q. We do not assume the Greece debt
negotiation will turn into a replay of the Euro debt crisis in 2012 and we reckon the chance is that
ECB would continue to support Greece as a member of Eurozone. Even if Greece will eventually
leave the Eurozone, we expect see an orderly exit and will not result in a market crisis. In our view,
the more near-term threat to risk assets would come from the imminent Fed rate hikes, especially
on the emerging market stocks and emerging market FX where the volatility is higher. After such a
long period of easy money and close to zero interest rate in the financial market, it is difficult to find
anecdotal evidence to predict what will happen when Fed begins the rate normalization. There is
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3Q 2015 Investment Outlook

7 Jul 2015

likely another risk-off event to come during the time of uncertainty in 2H15, but we think investors
will eventually want to add on risks as the global economy recovers further. The developed market
equities are likely to be more resilient when the Fed tightens the rate as there is more growth
certainty in both their economy and the corporate earnings relative to emerging market, in our
view.
China equities market fell off sharply in June on leveraging control and governments intention to
prevent market bubbles and bank bad debts. The deleveraging has triggered continuous sell off in
the past few weeks and most over-leveraged umbrella trusts have disappeared by now. It seems
the Chinese government will come back to support the market to prevent it from crashing further.
We hope the A share market could resume its order and stabilize very soon. The bottom-line is
investors should know any stock market couldnt deviate from its economic fundamentals for long.
Looking at the economic front, our base case scenario is that Chinas growth has already reached
a short-term cyclical growth bottom. Both the FAI and other leading indicators such as PMI
remained weak year to date. With a few rate cuts and RRR cuts, as well as local governments
bank debt swap to municipal bonds program, we feel the monetary condition in Mainland is
becoming rather accommodative. Going forward we are looking for signs of growth stabilization,
i.e. further pick up of the property transaction volumes, followed by an increased land sales and
floor starts, plus more infrastructure investment on fiscal policy. If China can achieve a mild growth
rebound in 2H15, we will see stock market regain the strength, especially the cyclical H shares.
We remain our preference on H shares over A shares in 3Q mainly due to valuation and our
confidence in market liquidity in Hong Kong.
On fixed income, the US government bonds have had their biggest quarterly selloff since
December 2013, hurt by an improving US economic outlook and the Feds pending shift into
higher interest rates. The benchmark 10-year rate has climbed from 1.93% at the end of March to
2.35% end of June, marking the first quarterly loss since the final quarter of 2013. Economic
indicators in employment and consumer spending over the past few months have suggested that
the US economy is strengthening after a shallow contraction during the first three months of the
year. Worries over deflation risks in the eurozone, which were prevalent earlier this year, have
diminished after the European Central Bank launched its bond-buying program in March. Current
concerns on Grexit have temporarily pushed the US benchmark yield lower, but the event is
expected to fade sooner than later, in our view. Investors are suggested to diversify the portfolio
and reduce overconcentration on dollar bonds. We like offshore RMB bonds for yields and for
Chinese economic rebound in 2H and we anticipate a relatively stable RMB exchange rate.
On FX, we are bullish on USDJPY in 2H15. Japan's trade deficit widened in recent months, and
this could be a warning signal that current yen exchange is not weak enough to support the foreign
trade. Moreover, Japanese consumer price index remained relatively low this year, leaving some
doubts on whether the pickup of inflation has been as fast as BOJ has expected. There has been
an increased market expectation on BOJ to do more quantitative easing for trade and inflation to
rise. Coupled with the US rate hike ahead and further widening of the US-Japan interest rate
differential, we expect the USDJPY to enter into a new trading range and our year-end target is
128.

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3Q 2015 Investment Outlook

7 Jul 2015

UNITED STATES
12-Month Performance

INVESTMENT SUMMARY
-

U.S. stocks have managed to move higher in the second quarter this
year- boosted by improving economic data from job market and retail sales,
and robust M&A news from corporates. Despite robust markets, all major
indices have been trading in narrow-range. Historically, narrow ranges had
chances of breaking to the upside, but also had risk of correction.

S&P 500 Index

S&P 500 Index Data

Market cap (USD)
52-week Hi / Lo
3-Mth Total Return
Y-T-D Total Return
50 / 250 Mov.Avg.
2015 Est. Yield
2014 Estimated P/E
2015 Estimated P/E
2015 Estimated P/B

US stocks have managed to move higher so far this year, but have
been trading in narrow-range. Historically, narrow ranges have typically
broken to the upside, but volatility is expected.
US economic data has improved since the weak first quarter, allowing
the Fed to normalize interest rate at a steady pace, without yet having
to react to inflationary pressures.

18.9 trillion
2,131/1,862
-0.36%
0.48 %
2,104/2,096
2.1%
18.3x
17.4x
2.69x

Source: Bloomberg L.P.

As of 06/30/2015

The U.S. economy data proved to get rid of sluggishness reflected in

the first quarter- Economic data have improved in second quarter after the
weak first quarter. There is hope for a pickup in the U.S. economy, as
shown by improving labor market, housing, retail sales and business
activities. The retail sales rebounded in May and June. Energy prices are
substantially lower than they were last summer, unemployment is
improving, interest rates remain low, and wages are starting to rise, which
are all supportive an improving economy. Housing market is also gathering
steam, with the National Association of Homebuilders (NAHB) Index rising
to 59, while building permits, a gauge of future activity, rose
11.8%. Meanwhile, existing home sales rose 5.1%, while new home sales
gained 2.2%. The only setback is manufacturing sector, which appears to
be struggling because of the strong dollar.
September seems to be the most likely the time for interest rate hikeThe U.S. Federal Reserve (Fed) has been paving ways to prepare
investors for interest rate hike before the end of this year. As the labor
market has been improving and wage growth should be progressively
improving, we see September a likely time for a lift off unless there were
surprises. The surprises could include inflation unexpectedly accelerates in
the near term, potential for a strong negative market of another euro crisis
triggered by Greece, or major shock of economic slow-down from China.
U.S. equity market to expect volatility but to the upside- The Fed has
made it clear of its plans to move slowly toward a more normal policy
stance during the last few FOMC meetings. Therefore some but not too
much volatility is expected in the market. History shows that the stock
market performs substantially better during a slow tightening cycle than a
fast one. The forward P/E for the S&P 500 is about 16.8x, which is higher
than the 5-year average of 13.8x and also above the 10-year average of
14.1x. Since valuations are a bit stretched, we therefore expect a volatile
but positive U.S. equity market toward upside.

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3Q 2015 Investment Outlook

7 Jul 2015

Sector Outlooks
Consumer discretionary (Neutral) We are a bit cautious on the consumer
discretionary sector. The sector has been doing well since 4Q14, and we do
see valuations are particularly attractive now. A large part of expected
growth in 2H15 has already priced in the share prices. As the Fed will raise
rates later this year, consumer discretionary shares historically are poor
performers during tightening cycles.
Healthcare / Biotech (Overweight) Having gone through a volatile quarter,
we upgraded our view to overweigh on the sector. The performance of
healthcare hit all-time relative highs and outpaced the S&P 500 year-todate. The sectors market cap weight in the S&P 500 has grown above
15%, as health reform which expand revenue and spending, and also due
to the growth of Biotech. The U.S. Supreme Court's announced ruling
(King vs Burwell) in regards to the legality of health-insurance subsidies
favoring Obamacare is expected to give a boost to healthcare sector, with
hospitals, and insurers are the most obvious benefactors of the law. We
continue to like biotech as biotech companies are more levered to new
product launches. Rising equity markets have helped to increase investor
risk appetite, which is a key factor for the performance of the sector,
especially the smaller cap names. Also M&A activities will continue serve as
catalysts.
Technology (Overweight) The long term growth drivers for the technology
sector, which include structural growth, M&A and reasonable valuations,
remain intact. Technology companies remain attractive with their strong cash
position and less sensitive to movement of oil prices and interest rates. We
preferred equities of innovators, i.e, internet of everything, big data, and
internet security, as we expect them to benefit most from IT spending, while
some may become M&A targets. We also prefer the leading tech giants,
like Apple (APPL US) and Facebook (FB US), as their existing businesses
are still doing well and they continue to adapt to new challenges and/or
continue to return capital to shareholders. In a nutshell, big data, cloud
computing, internet of things, mobile internet and social media will be the
areas for future growth.
Financials (Overweight) The US banking sector should benefit from the
recent results that all US bank pass the stress in 1Q 2015. Most US banks
are now allowed to start paying out more for dividends and/or buybacks.
Financial sector has historically outperformed prior to a first Fed rate hike,
as NIM is expected to expand from growing loan growth. Most U.S. banks
have substantial amount of short-term asset which will likely yield higher
coupons after the rate hikes. We therefore rasied our rating on Financials
to Overweight.
Utilities (Underweight) In contrast to the discretionary sector, these two
sectors are usually considered defensive as they sell products that are
purchased regardless of the market conditions. Utilities are particularly
sensitive, as they correlate positively to energy prices. The average utility
remains expensive at 1.7x price to book and 1.6x price to sales. We are
starting to become cautious considering the Fed may be close to a rate hike
cycle.
Risk Considerations: 1) uneven economic growth in Europe and the BRIC
nations, 2) change in federal budget levels in the U.S., 3) oil price volatility
and 4) geopolitical threats in the Mideast. 5) the U.S. interest rate hikes
earlier than market expected.

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7 Jul 2015

EMERGING MARKETS (EMS)

12-Month Performance

INVESTMENT SUMMARY
-

MSCI Emerging Index

MSCI Emerging Index Data

Market cap (USD)
52-week Hi / Lo
3-Mth Total Return
Y-T-D Total Return
50 / 250 Mov.Avg.
2015 Est. Yield
2014 Estimated P/E
2015 Estimated P/E
2015 Estimated P/B

7.7 trillion
1,104/906
-6.24%
-1.35%
1006/1,000
2.8%
13.3x
12.6x
1.44x

Source: Bloomberg L.P.

As of 06/30/2015

FED would start tightening soon

Taiwan & Korea were the winners during and after the Taper Tantrum
Greek debt crisis are not expected to have significant impact to
emerging market
Earnings in EM were revised downward in Q2
China, India, Korea & Taiwan are our top picks in EM markets

FED tightening Federal Reserve chairwoman Janet Yellen said she

expects interest rate hike this year, after more than six years of extremely
low interest rate. As the Fed moves closer to raise interest rate in the U.S.,
many are asking how the emerging markets will be affected. Lets be
reminded that in two years from now, when the then Fed Chairman Ben
Bernanke first mentioned the QE would be 'tapered' later that year,
prompting a reversal capital flow to emerging markets. Emerging market
equities down 17%, while Asia was also hit as hardly as elsewhere in
emerging markets. In the last two years, some countries improve their
financial situation while some did not. We believe Singapore, Korea and
Taiwan were viewed as more defensive among emerging markets.
Fund Flow during and after the Taper Tantrum In the summer of 2013,
only US$38bn cash outflow from Asia equity and debt markets, which were
only 10% of total inflow to the markets since 2009. After the tapering
tantrum, there have been significant new inflows into Asia (ex-China)
markets, with cumulative portfolio purchase of Asia (ex-China) assets
standing now at $490bn. Just three markets, India, Korea and Taiwan, have
accounted for over 100% of all the offshore net flows into Asia (ex-China)
equity. Taiwan and Korea have improving current account and low degree
of external vulnerabilities. We believe these two countries could out-perform
others during US monetary tightening.
Greece accident impact to emerging market We believe the environment
is different to the pernicious market contagion observed in 2011-2011 due
to various support mechanisms (such as the EFSF/ESM, LTROs & QE).
With little exposure to Greek asset, the contagion risk from Greece to
emerging asset has been limited. We believe any sell-off in the wake of
Greece accident would be relatively short-lived, and likely a buying
opportunity for investors.
Earnings revision According to the IBES's estimation, emerging markets
generally experienced earning downgrade in the past 3 months. Brazil
suffered the most with 2015 & 2016 EPS revised down by 16.6% and 8.6%
respectively. Only a few countries recorded upward revision, Korea is the
only market with both positive earnings growth forecast and positive
earning revision.

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7 Jul 2015

Market Outlook
India (Overweight) India stock market suffered in the 2nd quarter due to
expectation of poor monsoon, behind progress of economic reforms and
earning downward revision. However, we believe India could outperform
others during the 3rd quarter. Up to June, monsoon has been on progress
so far, which reduced the worries of rising food price. Market expects India
could further cut the policy rate due to inflation is still manageable. Starting
from July, the Monsoon Session of parliament would be held. A number of
important economic reforms could be passed, such as Goods and Services
Tax (GST), land acquisition bill and labor reforms. We believe passage of
those reforms could be the coming catalyst, we therefore maintain
overweight Indian equity market.
Korea (Overweight) Korea is facing a cyclical growth challenge. Weak
demand from the global economy has weighed on the production and
shipment of Korea's industrial exports. However, we believe U.S. economy
improving in this quarter may help Korea's export recovery .The outbreak of
MERS is likely to have negative impact on consumer sentiment, but we do
not foresee it to have a long lasting impact to the economy. The
government also announced a supplementary budget (W15 trillion) to offset
the negative impact from the recent MERS breakout. With hefty current
account surplus and large foreign exchange reserve, Korea could be one of
the winners during U.S. monetary tightening. We maintain overweight
Korean equity market.
Taiwan (Overweight) Of all emerging markets, Taiwan equity market
performance is the most positively correlated to movements in US ISM new
orders. With US economy improving and the US ISM new orders picking
up, we believe the sluggish export in Taiwan could benefit. On the other
hand, the domestic demand is being boosted by strong consumer
sentiment and lowest level of unemployment since 2001. The valuation of
Taiwanese equity is also very attractive. Currently, Taiwanese equity
market is trading at about 13.1x forward P/E and it is the only market still
trading lower than its 5 years average. We expect the improving economy
and attractive valuation could support Taiwan stock market.
Indonesia (Neutral) Indonesia Rupiah depreciated to the lowest level since
1998. The inflation remains high in Indonesia. Despite sluggish domestic
demand, inflation remains hovering above 7% in recent months. The supply
related drivers would dominate the inflation outlook in the near term. EI
Nino could pose some upside risk to volatile food prices. With inflation
uncertainty, the Bank of Indonesia is unable to cut the policy rate even GDP
and credit growth remain very sluggish. We remain cautious about the
overall economy.
Russia (Neutral) EU extended the economic sanctions against Russia until
the end of January 2016. Under the last 15 months of EU sanctions,
recessionary trends intensified in Russia with economic contraction
reaching 4.2% year on year in April. The pace of real GDP contraction
deepened further in 2nd quarter. Stronger Ruble wiped off the competitive
advantage of manufacturing sectors and retail sales also recorded a sharp
drop. We believe the Russian economy still has a long way to go to recover
from the current recession.
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3Q 2015 Investment Outlook

7 Jul 2015

Brazil (Underweight) The cumulative 12 month nominal deficit reached alltime high of 7.9% of GDP in May, which fell short from Brazil government
primary fiscal surplus at 1%. On the other hand, CPI accelerated to 8.8% in
June, which putting pressure to Brazil Central Bank to further hike interest
rate on top of 200 basis points raised this year. With tightening fiscal and
monetary policies, we maintain negative outlook on Brazilian equity market.
Risk Considerations: 1) Political, liquidity, and currency risks 2) further Oil
/ commodity prices downside 3) Slowdown in China or U.S 4) unexpected
tightening on Fed fund rate

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3Q 2015 Investment Outlook

7 Jul 2015

EUROPE
12-Month Performance

INVESTMENT SUMMARY
-

Stoxx Europe 600 Index

Stoxx Europe 600 Index Data

Market cap (EUR)
52-week Hi / Lo
3-Mth Total Return
Y-T-D Total Return
50 / 250 Mov.Avg.
2015 Est. Yield
2014 Actual P/E
2015 Estimated P/E
2015 Estimated P/B

7.9trillion
414/310
-6.3%
10.55%
394/369
3.4%
23.7x
16.1x
1.83x

Source: Bloomberg L.P.

As of 06/30/2015

With inflation and economy continues to expand, Eurozone is on track

for a gradual recovery in 3Q 15.
Greece debt crisis continued to drive sentiments in market, however,
Grexit still not a prominent risk to Eurozone.
Equities valuations are still favorable factoring in the earnings growth
prospect.

Economic data shows Eurozone is gaining traction. In the past quarter,

we could witness that the quantitative easing from the ECB was starting to
take effect in the Eurozone economy. The Eurozone consumer price index
st
(CPI) was 0.3% in May and 0.1% in June, considering that back in the 1
quarter, the CPI was still negative for 3 months in a row, the gain is
significant and shows strong sign of recovery. Aside from inflation, we could
see expansion in the economy by looking at the Markit Eurozone
Composite PMI, the index was recorded at 54.1in June versus 53.6 in May,
Services and Manufacturing PMIs were all above the watermark of 50, at
54.4 and 52.5 respectively. With the economy continues to expand and
inflation starts to pick up, we believe the Eurozone economy is on track for
a gradual recovery in 3Q 2015.
Greece standoff causes ripples, but not prominent risk to Europe
economy. As negotiation continued in the bailout talks that goes between
IMF, ECB and Greek government, market sentiment was driven up and
down with every single slightest achievements or hiccups along the way.
Market is in focus on the outcome of the bailout talks in early July by the
time of writing. However, regardless of the final outcome of the bailout talk,
we still expected the Grexit to be highly unlikely, for the referendum would
most likely shows result of public support to stay in the Eurozone. And even
Greece is in technical default for its inability to repay its loans; the
contagious effects result from it would be far less than the time during the
Euro debt crisis, as Europe is now at a stronger state, with European
Financial Stability Fund (EFSF) and European Stability Mechanism (ESM)
and ECB monthly quantitative easing (QE) in place to maintain financial
stability.
Ridden by crisis, valuation is not over-stretched. The prospect of
recovery attracted capital flows into the region from all over the world.
Although the Greek debt drama caused significant drawdown to the
markets, the Stoxx Europe 600 Index still gained 14% during the first half of
2015. With a prospective P/E level of 16.3x, the valuation of Stoxx Europe
600 Price Index is still lower than its latest 5 years averages.
Germany (Overweight) German equities performed generally well since
the start of 2015, however, the performance was lackluster due to the
nd
Greece debt crisis in the 2 quarter of 2015, YTD return declined from 23%
in 1Q15 to 16.4%, retail sales in May also recorded a negative growth of
0.4% versus market forecast of 2.8%. However, looking at the fundamental,
the Germany economy was gaining paces, with CPI on yoy basis rose from
-0.3% to 0.7% in May, industrial product recorded 1.4% on yoy basis, which
is the highest since Aug 2014. We believe the negative impact on Greece
would be short-lived, if the economy continues to improve, the Germany
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3Q 2015 Investment Outlook

7 Jul 2015

equities would continue to outperform.

U.K. (Overweight) FTSE 100 index climbed 8.4% for the 1H of 2015. Even
with the Greece crisis continued to worry investors in the European market,
UK continued to rebound strongly after uncertainty in the political scene
was finally eased off. The GfK consumer confidence after the election
showed a figure of 7 which has tripled the forecast of 2 and previous figure
st
of 1. In addition, GDP on a yearly basis for the 1 quarter also climbed
2.9%, higher than the forecasted number of 2.5% and previous figure of
2.4%. We continued to believe that UK economy would recover strongly in
rd
the 3 quarter of the year, because of the stable political environment within
UK and the Bank of England successfully built up investor confidence.
However, as Fed in US might be raising the rates in September, we
expected BoE might be troubled by the same dilemma; the rate hike might
be a hindrance to the recovery of the UK government in the near term.
France (Neutral) French Statistics Bureau recorded a 0.6% growth in final
1Q GDP growth, the figure doubled the pace of Germany and Britain GDP
growth of the same period, and thanks to the reduction in corporate tax
rate, corporate profit also rose to 31.1%, exceeding periods since 1Q 2011.
However, the labor market condition is still in trough and the depreciation in
Euros did not contribute much to the current accounts of France, we remain
neutral on the countrys prospect in 3Q15.
Risk Considerations: 1) Greece demands austerity easing and exit from
Eurozone; 2) Slowdown in China / U.S.; 3) Geopolitical developments 5)
Failures to act timely by the ECB; 6) Global slowdown which affect overall
sentiment and interfere Eurozones recovery progress.

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CHINA / HONG KONG

12-Month Performance

INVESTMENT SUMMARY
-

Further stimulating monetary policies and reforms will be the key

investment theme in 3Q15.
H-share is attractive given low valuation, while A-share market will be
volatile in 3Q.
We anticipate China financials, property, TMT, infrastructure,
pharmaceutical, IPP and new energy will outperform.

HS China Enterprise Index

More monetary policies are expected to come. Most China economic

figures remained weak. China export in May declined 2.8% yoy. HSBC
HS China Enterprise Index Data
China Manufacturing PMI for Jun stayed below 50 threshold, indicating the
contraction of manufacturing activities for SMEs. All the growths of retail
Market cap (HKD)
3.34Trillion
sales, fixed asset investment and industrial production remained weak.
52-week Hi / Lo
14,802 /10,186 Nearly all economic figures pointed out that China economy is still facing
3-Mth Return
+7.8%
downward pressure. We believe China government will further introduce
more monetary easing measures.
Y-T-D Return
+11.0%
50 / 250 Mov.Avg.
13,985 /11,853
2015 Est Yield
3.3%
2014 Historic P/E
9.2x
2015 Estimated P/E 9.2x
2015 Estimated P/B 1.22x
Source: Bloomberg L.P.
As of 06/30/2015

12-Month Performance

Reform is one of the key growth drivers. China government is striving to

introduce economic reforms and SOE reforms. Many sectors will undergo
reforms, including financials, telecom, resources, pharmaceutical, power,
etc. It is believed that reforms will enhance productivity, industry
transparency and benefit economic long-term development. On the other
hand, SOE reforms include asset restructure, management incentive and
mixed ownership. Unlisted SOE companies will speed up to inject quality
assets into their listcos which will boost listcos earnings growth as well as
valuation.
SZ-HK Stock Connect will be a catalyst. It is expected that Shenzhen-HK
Stock Connect will be launched in 2H15. Even though it may be delayed
(according to newspaper), we expect delay timing not to be long. We
believe SZ-HK Stock Connect would be one of the market catalysts.

CSI 300 Index

CSI 300 Index Data

Positive on H-share index given attractive valuation. We are positive on

both HK stock market and A-share market in the mid-and long-term.
However, in the near term, we are more confident on H-share given its
attractive valuation at ~9x 2015 PE. We maintain our HSCEI year-end
target at 16,000. For A-share markets, government curbed margin financing
9.93Trillion
in May-Jun, resulting in the near-term high volatility. Although government
5,354 / 2,143 has launched several stimulus measures on A-share market, we expect Ashare to be still volatile in the near term due to weak sentiment and
+11.2%
relatively high valuation. However, easing monetary policy and reforms will
+27.5%
4,852 / 3,326 continue drive A-share market in 4Q15. We expect A-share markets to be
volatile in 3Q15 and have a better performance in 4Q15.
1.4%

Market cap (RMB)

52-week Hi / Lo
3-Mth Total Return
Y-T-D Total Return
50 / 250 Mov.Avg.
2015 Est Yield
2014 Historic P/E
19.7x
2015 Estimated P/E
16.8x
2015 Estimated P/B
2.36x
Source: Bloomberg L.P.
As of 06/30/2015

Which sectors we like in 3Q15? For HK stock market, we like China

financials, large China property developers and infrastructure as they will
benefit from monetary easing measures. We are positive on TMT,
pharmaceutical and new energy sector with their strong earnings growth.
Independent power producers (IPP) would be one of the key reform sectors
and their parentcos will accelerate to asset injections.
Risk Considerations: 1) deflation; 2) policy undershoot; 3) continuous
slowdown in property market; and 4) large scale hot money outflows.
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3Q 2015 Investment Outlook

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China Sector Snapshot

12-Month Performance

Hang Seng Index

Hang Seng Index Data

Market cap (HKD)

8.84Trillion
28,443 /
52-week Hi / Lo
22,586
3-Mth Total Return
+7.3%
Y-T-D Total Return
+13.7%
27,437 /
50 / 250 Mov.Avg.
24,836
2015 Est Yield
3.2%
2014 Historic P/E
11.0x
2015 Estimated P/E
12.6x
2015 Estimated P/B
1.36x
Source: Bloomberg L.P.
As of 06/30/2015

Financial (upgrade to Overweight) We turn to have positive view on

China Banks, given hopes of unfolding game-changing reforms and further
policy easing. At the end of Jun, State Council endorsed draft amendment
of removing regulatory LDR cap of 75%. This should make banks more
resilient to rise in funding costs brought by slowing deposit growth. And
PBoC simultaneously cut both lending rates and RRR. Rate cut could help
reduce social financing costs and cushion some asset quality pressures.
The coming catalysts will be local government debt swap, SOE and mixed
ownership reforms, and further policy easing. We upgrade our view to
OVERWEIGHT on China Banks. But Insurance and Brokerage will be
volatile as proxies to A share stock market, which is with heightened
volatility.
Property (maintain Overweight) Market believes key developers 1H15
average interest cost will narrow to 6.7% versus 7.0% in FY14, and will
continue to narrow ahead which aids margin recovery. And with
consecutive rate cut and lower down-payment, homebuyers affordability
has largely improved. It is believed more aggressive policy loosening for the
sector would come. Potential measures could be further lowering first-home
mortgages and strictly enforcing banks to provide mortgage rate discount.
In addition to policy easing, other positive drivers for a sector rally may be
1) further stronger sales rebound in June, likely to roll over into July and
Aug; 2) sectors aggressive capital raising mostly done already.
Technology, Media & Telecommunications (maintain Overweight)
China 4G net adds recovered, up 76.6% mom to 13.4mn in May. Rapid
growth in data volumes will benefit telcos and telecom equipment vendors.
And penetration rate of 3G/ 4G has accelerated to 52.0%. We see larger
monetization potential for the market leaders in internet and software
sectors, which has built scalable ecosystem in mobile internet. We maintain
our OVERWEIGHT view on the sector.
Infrastructure (maintain Overweight) As pro-growth measures to be
rolled out in light of the weaker-than-expected economic growth, it is
expected China Railway Corporation to increase the railway FAI target,
same as last year. In the past few months, China has made material
progress in overseas contracts, including a survey/design order of Russia
HSR, a metro order in Israel, a framework agreement of metro EPC in
Kazakhstan, and the railway survey in Brazil. We maintain our view to BUY
on the sector.
Pharmaceutical (maintain Overweight) Government will continue
healthcare reform this year and may allow online drug sales. This will
benefit the large drug distributors with online sale business. Also, large drug
companies are forecasted to have strong earnings growth, driven by
production expansion and gain in market share. Market concerns on further
drug price cut which has reflected in recent price weakness.
New energy (maintain Overweight) China government will continue to
encourage the use of clean energy. We believe wind speed recovery in
China will largely boost wind farms utilization and earnings growth this
year. On the other hand, we expect gas distributor to have steady earnings
growth despite weaker-than-expected gas demand. Large gas distributors
are likely to gain more market share.
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7 Jul 2015

IPP (maintain Overweight) We expect coal price to keep low in 2H15 due
to oversupply. Being a high financial leverage sector, we expect further
interest rate cut to ease their financial pressure and help to drive earnings.
Moreover, their parentco will speed up to inject quality assets into listcos
which will drive listcos earnings growth. Given sector average ~9x 2015 PE
and 4.4% yield, valuation is attractive.

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Japan
12-Month Performance

INVESTMENT SUMMARY
- Monetary and Fiscal policy in unison to drive inflation and economic
growth.
- Nikkei 225 kept supported above 20,000 despite mixed readings in
economic data and business sentiment.
- Data dependent BOJ on the sidelines, but open to further quantitative
easing options.

Expansionary policies seeing encouraging effects. Under the influences

of Abenomics, the Japanese economy is seen to be growing with Nikkei
225 rising to record highs above 20,000 since Abes appointment as the
new P.M. of Japan. The unprecedented expansion in monetary policy and
proactive shift in fiscal policies to drive economic growth and inflation paved
Nikkei 225 Index
the way for Japans economic revival. Recent announcement of the second
hike in sales tax rate (from 8% to 10%) originally scheduled for October this
Nikkei 225 Index Data
year being delayed till April 2017 adds to the prospect towards economic
growth and increased inflation, however it does present headwinds towards
Market cap (JPY)
368.9trillion
52-week Hi / Lo
19,754/13,910 Abes government on the matter of fiscal consolidation to reduce the
governments fiscal deficits. Despite the efforts from both the Japanese
3-Mth Total Return 3.75%
government and the Bank of Japan to promote growth through an
Y-T-D Total Return 16.77%
expansionary monetary policy and a flexible fiscal policy, The third arrow in
50 / 250 Mov.Avg. 20,868/14,533
Abenomics is still the Achilles heel in Japans economic growth; a lack of
2015 Est. Yield
1.6%
a defined growth strategy.
2014 Estimated P/E 22.9x
2015 Estimated P/E 19.13x
2015 Estimated P/B 1.75x
Source: Bloomberg L.P.
As of 06/30/2015

Silver lining in a neutral environment with mixed data. Data wise,

domestic consumption rose in May with Core real household spending
rising 2.1% m/m on the back of a firming labor market in Japan, reversing
the loss sustained the initial VAT rate hike in April came in at -3.5% m/m.
Though an encouraging rebound in the data, Household consumption
remains soft, prompting Abes decision to further delay the second sales tax
hike to a later date. Core CPI (all items ex.fresh food) has seen a slight
increase of 0.1% y/y in May after coming in flat (ex. VAT) in April. Despite
the increase, CPI inflation remains soft while oil price were seen a
rebounding in Q2 2015, however with Irans discussions on uranium
production back in focus, any accord struck between Iran and the US that
would have Irans sanctions lifted would cause oil prices to drop further,
potentially pushing Japans CPI rates back to negative territories looking
forward. Employment in Japan however, shows a more positive note, with
labor force growth seen increasing by 0.3% m/m in May after a -0.5% m/m
reading in April; job prospects are also seen improving with Job offers ratio
rose from 1.17% in April to 1.19% in May, evidencing Japans economy to
be driven by domestic consumption. Manufacturing is also seen improving
thanks to the weaker Yen with PMIs in Services and Composite seen rising
in May, Services: 51.5 vs. Prev. 51.3, Composite: 51.6 vs. Previous 50.7.
Bank of Japan on the sidelines. In June, after the depreciation in the
value of Yen prompted the rise in USDJPY exchange rates from 118 to 125
highs, The Greek debacle has seen a global risk-off sentiment which
translated to Yen currency being bought up on market uncertainty. USDJPY
falling from 125 to 122 from the risk-off sentiments. Comments from the
BOJ suggested that FX rates should reflect the markets flow of demand
and supply, yet suggested further monetary easing is still a possibility for
the year in order to achieve the inflation target set out by the BOJ. Any
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3Q 2015 Investment Outlook

7 Jul 2015

further monetary easing however will be highly depending on upcoming

economic data, whether if inflation and GDP growth momentum recedes. If
BOJ decides to increase QE, it may likely be through the medium of risk
assets such as equities and exchange traded funds.
Risk Considerations: 1) Inability to implement structural and other
economic reforms; 2) Yen appreciation due to global risk-off sentiment; 3)
significant surge in JGB yield 4) fiscal deficits caused by delayed sales taxes
increase; 5) BOJ fails to enact further easing in order to boost inflation by its
self-imposed deadline

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BONDS
US Treasury 10 Year Yield

FOMC likely to raise interest rate by end of 3Q 2015

The June FOMC meeting did not announce any rate hikes but re-iterated
that the decision would be data dependent and gradual in pace. The
markets general consensus on tightening would be in September, but with
an increasing number of investors betting on a further delay on rate hike to
December or even early next year. In the meantime,
after a sufficient
nd
upward movement of US Treasury in 2015 2 quarter, there is a high
chance for Treasury yield to be consolidated at this level and become
volatile again before the mid-September FOMC meeting.
Worst for Greece, market awaits for a silver lining

GERMAN 10 Year Treasury

Greece situation has turned into the worst as the Greek prime minister has
put the latest reform proposal from Greece creditors to a referendum on 5
July 2015. If the no vote in the referendum is the answer from Greece
public, the chance for Greece to left Eurozone would be substantially
higher. Also an IMF payment was scheduled to mature on 30 Jun 2015 but
has been missed. Greece bond may then enter into the technical default
zone. Greece debt trouble remains as one of the most influential incidents
in the global bond market. Driven by the flight for safety sentiment, the
Germany 10-yr treasury yield has plunged to 0.75% from 0.9% during the
last week of June. Risk adverse market behavior could further widen
corporates credit spread and put pressure on the global corporate bond
prices. Investors should be more cautious on the European debt.
Enormous fund outflows from fixed income sector in June 2015
The lately volatile US Treasury has made investors reluctant to put money
into the Bond fund market. There is a sufficient fund outflows recorded in
June. Both developed market (DM) and emerging market (EM) bond funds
recorded cumulative net outflows by the end of 1H2015, of which the retail
investors were the major sellers while Institutional investors were the
bargain hunters in the market. As for DM bond funds, high grade and high
yield bond funds were taking the majority of the toll, with high yield bond
funds trying to reverse its outflow in the last week of 2Q 2015.
CNY is being planned to join the Special Drawing Rights family
An IMF fund team has visited China to have technical discussion on CNY
inclusion in the Special Drawing Rights (SDR) basket. SDR review is
performed every 5 years and the market is expecting 50% chance of CNY
joining the SDR family in the upcoming revision in Oct 2015. Chinese
Government regards the inclusion of CNY into the SDR basket as one of
the major milestone for CNY Internationalization. Market analysts believed
that CNY has already satisfied some criteria to become SDR, but further
steps are needed to match with the freely usable criteria. Therefore, further
loosening measures in Chinas capital control are expected this year. These
measures can enhance the global appetite in CNY currency and related
CNY investment products. CNY bond sector could be expected to be
benefit from it.
China real estate markets recovered in 2Q 2015
rd

Chinese Central Bank has announced its 3 25 bps cut in interest rate this
year, together with a cut in Chinas Required Deposit Reserve Ratio of a
total 150bps reduction. Market has expected the Chinese Government to
implement monetary easing policy and further stimulate measures that
could be announced in the second half of the year. Therefore, some signs
of turnaround in the Chinese real estate markets have been seen. In May
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7 Jul 2015

2015, based on the National Bureau of Statistics of China, there were 20

and 37 cities out of the 70 largest cities in China having a raise in new and
existing home prices respectively.
These numbers have been started
st
nd
increasing since Mar 2015 with 1 tier cities
benefited the most. 2 tier
rd
cities housing price is generally stable and 3 tier cities housing price is still
nd
lagging.
With further improvement in the real estate market sentiment, 2
rd
and 3 tier cities housing prices could be expected to eventually being
picked up. In addition, more and more property developers have received
approval for issuance of domestic CNY bonds in the onshore market.
Based on current market practices, the cost of bond insurance could be
lower in onshore than offshore markets as onshore bonds may have a
higher local credit rating. If property developers can issue low cost domestic
bond successfully, the interest expense of the companies can be reduced
and liquidity can be enhanced. This positive stimulation could result in favor
of their offshore bonds as well.
Risk Considerations: i) Unexpected large level of rate hike in US; ii) Deterioration of
US and Chinese economy; iii) Prolonged global recession; iv) Unexpected global
deflation; v) Sharp decline in asset prices. vi.) Greece exits Eurozone, and vii.)
disintegration of Euros.

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7 Jul 2015

AUD/USD
12-Month Performance
INVESTMENT SUMMARY
Chinas economic recovery in Q3 will underpin Australian dollar
Global commodity prices are close to bottoming out
AU-US yield spread widens and supports the currency pair
AUD/USD third quarter target at 0.7800
Chinas economic recovery in Q3 will underpin Australian dollar

AUD/USD

AUD/USD Data
RBA Cash Rate
52-week Hi / Lo
3-Mth Change
12-Mth Change
50 / 250 Day
Moving Average

Chinas central bank has cut lending rates for the fourth time since
November last year and lowered the banks reserve requirement ratio for
several times in the view of economic slowdown. We believe the central
bank will continue to implement easing monetary policies to stimulate the
domestic economy. We expect a further slowdown in Chinas second
quarter GDP, as the industrial output and manufacturing production growth
turned slow. However We believe China, the biggest trade partner of
2.00%
Australia, will most probably pick up in the third quarter because of the
0.9460 / 0.7548 positive impact of the central banks monetary policies, posting positive
impact on Australia export sector and hence its economy, and underpinning
+0.85%
the exchange rate of Australian dollar.
-18.28%
0.7807 / 0.8323 Global commodity prices are close to bottoming out

Source: Bloomberg L.P.

As of 6/30/2015

We believe the Greece debt crisis will have little impact on commodity
markets and we could see the demand of commodity was climbing up in the
second quarter. The price of iron ore, which accounts for more than 20
percent of Australias export income, rebounded by nearly 30 percent in the
second quarter as demand rose and benefitted the mining investment in the
country. We are forecasting that the iron ore price are bottomed out in the
second quarter and will be stable in the second half year, which help to
stabilize the trend of the Australian dollar. Besides, the domestic economy
will be benefited from the low energy cost and low currency exchange rate
may attract more foreign fund flow to Australia for investment purpose.
Hence, we expect the local currency will climb up at the end of this year.
AU-US yield spread widens and supports the currency pair
The RBA has cut interest rates for two times in February and May to 2.00
percent, aiming to stimulate non-mining growth amid labor market slack,
sluggish consumer confidence and business investment. In its second time
rate cut, we could see the investors were fully priced in and the Australian
dollar rebounded against the U.S. dollar after the statement in May. As the
labor market and property market in Australia improved, we believe it is less
likely to see further rate cut from RBA within this year but the central bank
is still reluctant to withdraw the easing policy in the short period of time. On
the other hand, the U.S. economic figures, especially the labor market
figures, were beating market estimates in the second quarter, fueling the
expectation on rate hike from the Fed Reserve by the end of this year. We
can see the Fed rate hike expectation has been, to some extent, reflected
in the currency market. Besides, the yield spread between 2 year AU
government bond and US T-bond shows a sign of bounce in the second
quarter after reaching nearly 8-year low in the first quarter. Looking forward
to the third quarter, we believe AU-US yield spread will be stabilizing and
this carry trade pairing will gain back its attractiveness.

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7 Jul 2015

GBP/USD
12-Month Performance

INVESTMENT SUMMARY
In-out EU referendum poses limited impact on currency this year
Economic growth is picking up pace this year
Stance of monetary policy from Bank of England
GBP/USD third quarter target at 1.6000
In-out EU referendum poses limited impact on currency this year

GBP/USD

GBP/USD Data

Prime Minister David Cameron and his Conservative Party won the UK
general election on 7 May without forming coalition government, settling the
major political issue in the UK this year. However, the market concern soon
switched to an in-out EU referendum by the end of 2017 David Cameron
has pledged to hold. As UK parliament has already ruled out holding the
referendum on the same day as the Scottish and London elections in May
2016, we believe 2017 would be the more likely date for the referendum. It
0.50%
is undeniable that there will be a huge political risk on the sterling pound
1.7161 / 1.4598 exchange rate during the year 2016-2017, but we think the impact would be
quite limited in this year and we are fundamentally bullish on the sterling.
+6.21%

BOE Bank Rate

52-week Hi / Lo
3-Mth Return
12-Mth Return
- 8.27%
50 / 250 Day
1.5463 / 1.5694
Moving Average
Source: Bloomberg L.P.
As of 6/30/2015

Economic growth is picking up pace this year

The lower petrol prices in recent months were boosting disposable income,
and more consumers spending benefitted the businesses such as retail,
wholesale and consumer services in UK. The GDP advanced 2.9 percent
year-on-year in the first quarter of 2015, after confirming at 7-year high in
the fourth quarter last year. Besides, unemployment rate was stable at 5.5
percent in April, the lowest since mid-2008 and the wage growth showed a
decent improvement. We believe UK economy will continue to grow this
year. UK June Services and Construction Purchasing Managers Index
(PMI) had shown improvement while Manufacturing sector was still lagging
market estimates despite holding above the 50 mark that separates growth
from contraction. The growth of housing market starts to show a sign of
slowdown, but with low inflation and mortgage rate, wages starting to rise
and consumer confidence remaining high, we expect the housing market to
pick up again over the third quarter. In general, after two years of recovery,
the UK is likely to continue to grow faster than most of its G7 counterparties.
Stance of monetary policy from Bank of England
Though the economy expanded at a faster pace than market expectation
and growth is forecasted to remain strong this year, the fall in oil prices has
induced global inflation tumbling and put over the Bank of England to keep
loose monetary policy this year. UK saw a monthly 0.2 percent inflation in
May, which had shown a small improvement from the first quarter. The BOE
has concern on a stronger domestic currency will tend to lower inflation,
which would disappoint sterling bulls. Therefore, a neutral stance from the
central bank is expected in the coming rate decision in next couples of
meetings. We predict that the sterling may not move too sharply but rise in
a more progressive way towards 1.6000 in the third quarter. The BOE is
believed to follow the U.S. Federal Reserve to become the second major
central bank to lift interest rate, and the initial hike is forecasted to take
place in the first quarter of 2016.

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USD/JPY
12-Month Performance
INVESTMENT SUMMARY
Monetary policy divergence between U.S. and Japan
Recent economic figures suggested yen depreciation was not enough
The Bank of Japans stance on the weak yen currency
USD/JPY third quarter target at 125.00
Monetary policy divergence between U.S. and Japan

USD/JPY

USD/JPY Data

In the 17 June FOMC meeting, the Fed remained interest rate unchanged
and said the U.S. economy was strong enough to handle rate hike by the
end of this year, but concerns remained over the recovery of the labor
market and confidence that inflation will move to its 2 percent objective. We
believe after the impact of bad weather in the first quarter, the labor market
will show a sign of healing for rest of the year and we can see inflation is
starting to pick up. Though the Fed downgraded economic outlook in the
0.10%
June meeting, signaling a slowdown in rate hike pace, but we believe the
Fed will probably start rate hike by the end of this year. The yen exchange
125.63 / 101.30 rate is sensitive to U.S. interest rate to some extent and the US-JP
sovereign bond yield spread is still at a very low level over the past 10
+2.08%
years. Therefore, if the yield spread widens due to the Fed rate hike by the
+20.51%
end of this year, a further yen depreciation will be seen.

BOJ Unsecured
Overnight Call
Rate
52-week Hi / Lo
3-Mth Return
12-Mth Return
50 / 250 Day
121.88 / 115.26
Moving Average
Recent economic figures suggested yen depreciation was not enough
Source: Bloomberg L.P.
Japan trade deficit widened to 216 billion yen in May this year, following a
As of 6/30/2015
deficit of 55.8 billion yen in April. The trade balance was in surplus in

March. Trade balance is the major component to Japans economy and we

can see the weak yen policy could not help Japan with stable trade surplus.
That may imply the domestic currency is not weak enough for generating
stable trade surplus. Japans first quarter recorded a year-on-year growth of
3.9%, showing growth for a second consecutive quarter. Besides,
household spending rose 4.8 percent on year in May, marking the first onyear increase since the country raised consumption tax in April 2014.
However, the core consumer price index rose only 0.1 percent on-year in
May. It is skeptical that the inflation could reach the BOJ target as soon as
the central bank official expected. Hence, yen depreciation is still preferable
for a sustainable economic growth in Japan.
The Bank of Japans stance on the weak yen currency
We reduce expectations for BOJs further policy easing in the coming few
months from the recent meeting statements of the central bank. Comments
from the governor Kuroda may slow further declines in the currency and the
Japans economy may not need extra monetary stimulus. From Kurodas
clarification on the real-effective exchange rate of the yen in June, we
believe the BOJ was not trying to totally curb the yen weakness but they
just expressed the stance that a severe depreciation was not preferable.
Hence, we believe the U.S. dollar is going to consolidate against the yen in
the third quarter and the exchange rate will probably break out the range
bound if the Fed Reserve confirms to raise its interest rate by the end of
this year.

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12-Month Performance

7 Jul 2015

EUR/USD
INVESTMENT SUMMARY
Eurozones economy continues to improve
The US-German government bonds yield spread may remain stable
The impact of potential Grexit should be manageable
EUR/USD third quarter target at 1.1500
Eurozones economy continues to improve

EUR/USD

EUR/USD Data
ECB Main
Refinancing Rate
52-week Hi / Lo
3-Mth Return
12-Mth Return
50 / 250 Day
Moving Average

Eurozone's GDP grew by 0.4% qoq in 1Q, up from 0.3% in the previous
quarter. The growth in the region outpaced that in the US. Inflation has
picked up in 2Q15, reversing the deflation pattern existed in 1Q15. CPI in
June for the region rose 0.2% annually. Business sentiment recovered as
well, in particular the services sector. Eurozone Markit manufacturing PMI
climbed to 52.5 in June, well above the neutral level, indicating a decent
0.05%
expansion in the manufacturing sector. Markit services PMI came even
better that reached a 4 year high to 54.4 in June. The accommodative
1.3689 / 1.0496
monetary policies adopted by ECB, a relative low EUR exchange rate and
+3.98%
the weakness in oil prices should further stimulate business investment and
-18.29%
expansion of operation, which should be a key driver of the regional
economy in the second half of the year.
1.1147 / 1.1957

Source: Bloomberg L.P.

As of 6/30/2015

The US-German government bonds yield spread may remain stable

The Fed unexpectedly kept interest rate unchanged in June, while
downgraded the 2015 growth forecast. Fed Chair Janet Yellen emphasized
that a decisive evidence of economic growth is needed to support a change
in monetary policy. Though the prospect of Fed's rate hike this year
remains, the pace should be more gradual than market previously
estimated. Meanwhile, amid an improving Eurozone's economic outlook,
there is a low chance for ECB to step up its bond buying program. As a
drastic change in monetary policy of the Fed and that of ECB should be
rare, the yield spread between the US government bonds and German
government bonds of same maturity may start stabilizing. Stable yield
spread should lessen the selling pressure over the euro against the dollar.
The impact of potential Grexit should be manageable
Despite Greece's referendum denying international creditors bail-out
proposal, a compromise between Greece and international creditors is not
out of reach. A resolution of Greece problem will be viewed as EUR
positive. Undeniably, the default increased the likelihood of Grexit and
contagion effects could build. However, the magnitude of contagion should
be more manageable, when compared to Eurozone debt crisis in 2011, as
nowadays more ECB support mechanisms are available. Besides, no
catastrophic sell-off in periphery bonds suggests investors are of less panic
than last time. We believe a Grexit, though is unlikely in our point of view,
may put imminent pressure on the euro and dampen market sentiment. But
in the medium to long run, the market will re-focus on economic
fundamentals, which should be supportive of euro.

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3Q 2015 Investment Outlook

Disclaimer

7 Jul 2015

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7 Jul 2015

Disclosures
Procedures are in place to identify and manage any potential conflicts of interest that arise in connection with the
research operations. HSISs analysts and its other staff who are involved in the preparation and dissemination of
research studies operate and have a management reporting line independent of HSBC Groups investment
banking business. Chinese wall procedures are in place between the research business operations and other
banking operations to ensure that any confidential and price sensitive information is handled in an appropriate
manner.
Analyst(s) is(are) paid in part by reference to the profitability of Hang Seng Bank Limited which includes
brokerage commission revenues.

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