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INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE

2019 Market Outlook

Citibank Wealth Management
Investment Strategy & Portfolio Management

January 2, 2019
 The Expected Events of 2018 2

Markets were influenced by various political

The US Federal Reserve continued to raise
rate and reduced balanced sheet, and more
central banks planned to tighten policies
factors (Brexit negotiations, Eurosceptic
Economic growth of China is slowing
victory at Italian election and divided control
of US Congress after midterm election, etc.)

Please note and carefully read the Important Disclosure on the last part
 Top 10 Unexpected Events for 2018 3

Brent Oil
Price Rose 10-year
Turkey’s
Trump to a Four- Treasury
Unpreceden Unanticipat Currency Italy’s
ted US-
Withdrawed
from Iran
Year High,
However,
S&P 500 Hit
Record High
ed USD
Yields
Surged to a
Crisis Budget
Extended
Brexit
Flare up of
North Korea Strength Triggered Battle with Trade Tensions
Nuclear Fell 30% of 2940 Seven-Year Uncertainty
Summit Since April Global EU
Deal From The High of
Worries
Peak 3.25%
Recently

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 Asset Performance - 2018 4

S&P 500 Index -6.2%

STOXX Europe 600 -13.2%

Equities

Nikkei 225 -12.1%

Shanghai Comp. -24.6%

Hang Seng Index -13.6%

HSCEI -13.5%

US Gov't Bond Index ^ 0.8%

Bonds

World IG Corp Bond Index ^ -1.9%

US HY Bond Index ^ -2.1%

US Dollar Index 4.4%

Others

COMEX Gold Futures -2.1%

WTI Crude Oil Futures -24.8%

Source: Bloomberg L.P., as of Dec 31, 2018

^Reference Indices: FTSE Fixed Income Indices
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 Asset Performance - 2018 5

(%) 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18 3Q18 4Q18 2018
Global Equities 6.5 4.2 5.0 5.6 23.1 -1.1 1.9 5.1 -13.3 -8.2
US 6.1 3.1 4.5 6.6 21.8 -0.8 3.4 7.7 -13.5 -4.4
Europe 6.3 1.2 2.8 0.6 11.2 -4.0 4.3 1.3 -11.5 -10.3
Asia 13.4 8.4 6.7 8.3 42.1 0.6 -5.3 -1.5 -8.8 -14.4
Japan -0.3 6.1 2.4 12.0 21.3 -4.9 4.1 9.0 -16.9 -10.4
Hong Kong 10.1 8.5 8.6 8.8 41.3 0.9 -2.5 -2.5 -6.7 -10.6
China A 4.4 7.0 5.8 5.1 24.3 -3.3 -9.0 -0.9 -12.4 -23.6
Emering Markets 11.5 6.4 8.0 7.6 37.8 1.4 -7.9 -1.0 -7.6 -14.5
Global IG 0.9 1.8 1.1 1.0 4.9 -1.7 -0.7 0.6 -0.2 -1.9
US HY 2.4 2.0 1.9 0.5 7.0 -0.7 1.1 2.4 -4.7 -2.1
EM Sovereigns 3.7 2.1 2.5 0.7 9.3 -1.8 -3.7 2.1 -0.7 -4.2
Gold 8.9 -0.6 3.1 1.8 13.5 1.7 -5.5 -4.9 7.7 -1.6
Oil (Brent) -7.0 -9.3 20.1 16.2 17.7 5.1 13.0 4.1 -35.0 -19.5
Dollar Index -1.8 -4.7 -2.7 -1.0 -9.9 -2.3 5.0 0.7 1.1 4.4
EURUSD 1.3 7.3 3.4 1.6 14.1 2.7 -5.2 -0.7 -1.2 -4.5
GBPUSD 1.7 3.8 2.9 0.9 9.5 3.7 -5.8 -1.3 -2.1 -5.6
AUDUSD 5.8 0.8 1.9 -0.3 8.3 -1.7 -3.6 -2.4 -2.4 -9.7

Source: Bloomberg L.P., as of Dec 31, 2018; Returns are total returns

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 Equity – Overweight in Europe ex-UK equities 6

European Dividend Bull Market  We expect Europe (ex UK)

earnings per share growth of
around 10% for 2019 broadly
spread across different sectors.
 Valuations are attractive: On a
cyclically adjusted price to
earnings basis (CAPE) of 19.3,
Europe ex-UK equities are trading
at a 25% discount relative to US
equities.
 Dividend yields are still attractive:
dividend yields (3.3%) > bond
yields (1.3%) in the region.

Source: DataStream, Citi, as of Dec 17, 2018

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 Equity – Overweight in Europe ex-UK equities 7

UK House Prices & RICS House Price Balance Survey  Headwinds in Europe:
► UK: Vote in parliament on PM
May proposed EU deal by Jan
21 – political uncertainty
remains, weaker domestic
demand and investment across
the UK.
► Italy: Populist leadership
propose a lower budget deficit
target - Italy remains
economically fragile but we do
not expect imminent crisis.

Source: RICS, Nationwide, Halifax, Citi, as of Dec 17, 2018

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 Equity – Neutral in US equities 8

US Government Likely to Deploy More Stimulus to Boost GDP  US GDP growth has likely peaked
since the mid-terms, real GDP
growth may slow to 2.8% in 2019,
a still-above trend pace.
 We anticipate delay of the 2020
fiscal cliff and the $200 billion
Federal infrastructure spending
package may add fiscal stimulus
to the economy.

Source: Citi, as of Dec 11, 2018

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 Equity – Neutral in US equities 9

Simulated Impact on GDP Growth from Trade Tensions Scenarios (%)  We expect 2 further rate hikes of
25bps in 2019, implying a terminal
policy range of 2.75% - 3.00%.
However the exact timing of these
hikes remain uncertain.
 US-China tensions are likely to
continue despite recent truce.
Additional trade and investment
restrictions on China are likely.

Source: Oxford Economics and Citi, as of Dec 3, 2018

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 Asia ex-Japan: Uncertainty Yes, But Much Bad News in the Price 10

 We are not expecting a recession in 2019. Parts

Asia ex-Japan: Price to Book
of Asia are pricing in a recession already. Based
on current P/BV, Asia historically has given a
15% return over the next 12 months and with a
72% probability since 1975.
 Trade and USD may determine returns in 2019.
An ending of the Fed tightening cycle may help
cap the strength of the USD, thus helping Asian
liquidity.
 EPS growth expectations for 2019 have been
revised down from 12-15% to 8%, which is
already much more sensible.
 We expect a slight slowdown to 5.7% in
emerging Asian economic growth over the
coming year. The powerful economic
transformation of EM Asian countries has much
further to go. But investors generally remain
underexposed to the region’s attractive growth
potential.

Source: MSCI, Citi as at Nov 30, 2018

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 China: Macro Headwinds Remain but Valuation Getting Attractive 11

 We expect GDP growth to slow to 6.2%YoY in

Valuation at Historical Lower Bound
2019E, the government may still announce a
growth target “around 6%-6.5%” to anchor the
expectations.
 We see another consensus earnings downgrade
for 2019E – from 15% currently forecasted to
around 10-12% for MSCI China.
 Policy stance has turned more accommodative
since last July, with moderated pace in
deleveraging and stronger fiscal support. We
expect more fiscal stimulus in the coming
months to stabilize the economy.
 Valuation is already at distressed levels. Both
onshore and offshore equities are trading at
~10x fwd PE, which is at the lower-end of the
historical range.
 Pause in trade escalation, stabilizing domestic
growth and a less hawkish Fed are potential
positive catalysts with the US-China trade
dispute being a major swing factor.
Source: DataCentral, Citi as at Nov 30, 2018

Please note and carefully read the Important Disclosure on the last part
 Hong Kong: Limited by Concerns Surrounding the China Macro 12

 HSI is currently trading at ~10.9x FY19E P/E, vs.

HSI PE Valuation
the historical average of 12.5x. A lower multiple
is justified given the concerns surrounding the
China macro.
 We expect HK banks’ NIM to peak in 2019.
Weaker credit demand resulting in lower loan
growth. We see possibility of touching 2015
trough valuation. Asset quality should remain
stable for the larger players.
 We remain positive on the outlook for the
internet sector. Consumer internet competition
will further intensify and industrial internet have
become the new focus for leading giants. The
gaming sector has experienced several
regulatory clean-ups in various ways, which we
HK Sectors Macau Gaming, Select Office and view as a positive development for the industry
(Overweight) Retail Property and Select Tech in the long run. When overall market rebounds
and macro slowdown concerns ease off, the
Chinese Sectors Staples, Insurance and Infra-related larger cap Chinese Internet names will likely
(Overweight) Capital goods rebound stronger than smaller cap names.
Source: Citi, as at Nov 30, 2018

Please note and carefully read the Important Disclosure on the last part
 Fixed Income Investment Factors 13

Yields
We do not expect an
inverted yield curve until
Coupons 2Q 2019; 10-year UST
Coupons on new issues yields will likely be well
are now 100bp higher contained under 3.75% Tenor
than they were a year
Interest rate risk of short-
ago
dated bonds is lower

Fixed Income
Credit Spread Investment
Corporate bond spreads Default Rate
have been below longer
US speculative-grade
term averages for the last
two years. Robust economic default rates have
growth may support dropped from 5.1% in
prolonged periods of tight December 2016 to 2.6%
corporate bond spreads and may fall further

Please note and carefully read the Important Disclosure on the last part
 US Short-dated Investment Grade Corporate Bonds 14

US Short-dated IG Corporate Bonds Outperformed  Flatter US yield curves have

created an attractive value
US Investment Grade Corporate Bonds
US Short-dated Investment Grade Corporate Bonds proposition for short-dated
102 bonds.
101.35
101  Short-dated IG credit has shorter
100 duration (less sensitivity to rising
US rates) as the US may continue
99
rate hikes.
98 97.85
 US short-dated IG corporate
97 bonds outperformed overall IG
corporate bonds in 2018.
96
95
1/2018 4/2018 7/2018 10/2018

Source: Bloomberg L.P., as of Dec 21, 2018

Please note and carefully read the Important Disclosure on the last part
 US High Yield Bonds & US Variable Rate Bank Loans 15

US Bank Loans: Attractive Yields, Less Volatility  US HY bonds and US bank loans
diversify investment portfolios
US Variable Rate Bank Loans US High Yield Bonds  HY has historically been less correlated
112
with IG fixed income assets, such as US
Treasuries. HY has instead moved more
110
in line with equities, where we expect
positive returns in 2019.
108
 US bank loans have been negatively
106 correlated with US Treasury debt.
105.71
 Default rate (2.6%) remains low and
104.89 may fall further in 2019.
104
 Bank loans’ coupon payments rise and
102 fall with US LIBOR rates. LIBOR has hit
its highest levels in a decade.
100  The appeal of earning higher rates has
1/2017 4/2017 7/2017 10/2017 1/2018 4/2018 7/2018 10/2018 led to strong positive net inflows into
Source: Bloomberg L.P., as of Dec 21, 2018 US bank loans.

Please note and carefully read the Important Disclosure on the last part
 Bearish on USD in Medium and Long Term 16

The Dollar Smile Theory  USD may more than reverse this
year’s rally over the medium term.
USD Appreciation We expect over two years USD
Weak Global Economy US Cyclical Outperformance trend to reverse with
Low Risk Appetite Hawkish Fed approximately 12% downside vs
USD Safe Haven Status RoW on hold / easing major currencies, and around 2-
3% weaker over 6-12m.
 A flatter or inverted yield curve
may be a precursor of weaker
economic growth, which may
undermine the USD.
 The Fed may end the rate hike
US Growth Slowing cycle in 2019, while other major
USD Depreciation Dovish Fed central banks may tighten the
Scepticism About Global Recession policy gradually.
Source: Citi, as of Dec 11, 2018

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 FX Forecasts 17

0-3M 6-12M LT Comments

USD may be undermined as the Fed may end the rate hike
Dollar Index 96.44 93.33 84.26
cycle in 2019.
EUR/USD 1.14 1.18 1.30 EUR may be supported as the ECB may hike rates in 3Q19.
A resolution of Brexit may trigger faster BoE normalization,
GBP/USD 1.27 1.33 1.48
which may underpin GBP.
USD/JPY 111 108 95 Weak USD and rising market volatility may underpin JPY.

USD/CHF 1.00 0.98 0.92 CHF may be restrained as the SNB still sees it highly valued.
AUD may stay neutral as the RBA may not hike rates until
AUD/USD 0.72 0.70 0.77
2H 2020.
NZD may stay neutral as the RBNZ may not hike rates until
NZD/USD 0.69 0.68 0.67
1Q 2020.
CAD may be underpinned as the BoC may still have three
USD/CAD 1.32 1.30 1.20
more hikes.
If US-China agreement cannot be reached in 90 days, RMB
USD/CNY 6.85 7.00 6.60
depreciation pressure will likely resume afterwards.
Source: Citi, as of Dec 11, 2018
Please note and carefully read the Important Disclosure on the last part
 18
INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE

Appendix
 Appendix：Economic Forecasts 19

Current Balance Fiscal Balance

GDP Growth (%) CPI Inflation (%)
(% of GDP) (% of GDP)
2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F
Global 3.2 3.1 3.0 2.7 2.4 2.5 0.3 0.2 0.0 -2.6 -3.1 -3.1
U.S. 2.9 2.8 2.0 2.0 1.1 1.8 -2.5 -3.0 -3.6 -4.7 -6.1 -6.0
Japan 0.8 1.1 0.4 1.0 0.7 1.1 3.6 4.1 4.3 -4.1 -4.3 -3.9
Euro Area 1.9 1.5 1.6 1.7 1.3 1.5 3.1 3.2 3.2 -0.8 -1.1 -1.0
U.K. 1.2 1.2 1.9 2.5 1.9 1.8 -3.2 -2.7 -2.5 -1.5 -1.7 -1.7
Canada 2.1 1.8 2.0 2.3 1.5 1.8 -2.4 -1.9 -2.0 -0.8 -0.8 -0.7
Australia 3.0 2.7 2.7 1.9 1.9 2.2 -2.2 -2.3 -2.6 -0.6 -0.3 0.1
New Zealand 2.6 2.9 2.8 1.6 1.9 2.0 -2.5 -3.2 -3.6 1.1 0.7 1.2
EM Asia 6.0 5.7 5.6 2.4 2.6 2.5 0.8 0.6 0.6 -2.6 -2.9 -2.9
Latin America 1.6 2.1 2.5 7.5 7.4 5.6 -1.9 -1.8 -2.0 -4.6 -4.2 -4.2
EM Europe 3.0 1.5 2.8 5.9 7.4 5.8 1.3 0.5 -0.1 0.0 -0.5 -0.9
China 6.6 6.2 6.0 2.2 2.2 2.1 0.2 -0.1 -0.1 -2.6 -3.0 -2.9
Hong Kong 3.4 2.5 2.7 2.4 1.8 2.2 3.3 2.8 2.0 2.8 2.2 1.8
South Korea 2.7 2.4 2.2 1.6 1.8 1.6 4.5 4.1 3.5 1.8 0.6 -0.5
India 7.3 7.5 7.7 3.7 4.0 4.2 -2.7 -2.0 -1.8 -5.8 -5.6 -5.2
Indonesia 5.1 5.0 4.9 3.2 3.9 4.0 -3.0 -2.6 -2.2 -1.9 -1.9 -1.7
Brazil 1.4 2.2 2.0 3.7 3.9 4.1 -0.8 -1.4 -1.7 -7.1 -6.2 -6.7
Russia 1.8 1.5 2.4 2.9 5.1 4.1 6.7 3.9 3.1 2.5 1.9 1.1
Source: Citi, as of Dec 11, 2018

Please note and carefully read the Important Disclosure on the last part
 Appendix：Interest Rate and Commodity Forecasts 20

Citi analysts’ forecasts

Unit 1Q19F 2Q19F 3Q19F 4Q19F 1Q20F 2Q20F
U.S. % 2.75 3.00 3.00 3.00 3.00 3.00
Japan % -0.10 -0.10 -0.10 -0.10 -0.10 0.00
Euro Area % 0.00 0.00 0.00 0.25 0.25 0.50
U.K. % 0.75 1.00 1.00 1.25 1.25 1.50
Canada % 1.75 2.00 2.25 2.25 2.50 2.50
Australia % 1.50 1.50 1.50 1.50 1.50 1.50
New Zealand % 1.75 1.75 1.75 1.75 2.00 2.00
China (1-year deposit rate) % 3.40 3.40 3.40 3.40 3.40 3.40
Hong Kong (3-month Hibor) % 2.40 2.50 2.60 2.70 2.70 2.70
NYMEX WTI Crude USD/bbl 63 55 58 62 60 58
ICE Brent Crude USD/bbl 52 43 49 52 55 53
NYMEX Natural Gas USD/MMBtu 3.40 2.90 2.80 2.70 2.80 2.90
Aluminum (LME) USD/MT 2,000 2,100 2,100 2,100 2,200 2,200
Gold (Comex) USD/oz 1,240 1,250 1,300 1,300 1,325 1,325
Soybean (CBT) USD/bu 875 910 925 950 1,000 1,025
Source: Citi, as of Dec 11, 2018

Please note and carefully read the Important Disclosure on the last part
 Appendix：Equity Indices Forecasts 21

Dec 29, 2017 Dec 31, 2018 End-2019 2019 Potential

Region Close Close Forecast Level Return (%)
Global
Global MSCI AC World Index 588 532 650 22.2%
EM MSCI Emerging Market 1,158 966 1,100 13.9%
Developed Countries
U.S. S&P 500 Index 2,674 2,507 2,850 13.7%
Europe STOXX Europe 600 389 338 450 33.3%
FTSE 100 7,688 6,728 8,400 24.8%
Japan TOPIX Index 1,818 1,494 1,788 19.7%
Asia
Asia ex Japan MSCI Asia ex Japan 713 597 660 10.6%
China Shanghai Stock Exchange Composite Index 3,307 2,494 - -
CSI 300 Index 4,031 3,011 3,600 19.6%
MSCI China Index 89 71 85 19.4%
Hong Kong Hang Seng Index 29,919 25,846 30,000 16.1%
Hang Seng China Enterprise Index 11,709 10,125 11,500 13.6%

Source: Citi and Bloomberg L.P., as of Dec 31, 2018

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Important Disclosure 22
Important Disclosure 23
Important Disclosure on High Yield Bonds 24
Unrated or non investment grade Debt Securities typically offer a higher yield than investment grade Debt Securities, but also present greater risks
with respect to liquidity, volatility, and non-payment of principal and interest. As a result of being classified as non investment grade Debt Securities,
these Debt Securities present a greater degree of credit risk relative to many other fixed income Debt Securities.
Higher Credit Risk – Unrated or non investment grade Debt Securities generally have predominantly speculative characteristics with respect to the
issuer’s capacity to pay interest and repay principal. There is greater risk of non-payment of interest and loss of principal. Many issuers of these
Debt Securities have experienced substantial difficulties in servicing their debt obligations, which has led to default and restructurings. The issuers
of these Debt Securities generally have to pay a higher rate of interest than investment grade Debt Securities.
Higher Liquidity and Secondary Market Risk – The markets in which unrated or non investment grade Debt Securities are traded are generally
more limited than those in which investment grade Debt Securities are traded. This lack of liquidity may make it more difficult to resell these Debt
Securities and obtain market quotations.
Downgrade Risk – Downgrades in the credit rating of unrated or non investment grade Debt Securities by rating agencies are generally
accompanied by declines in the market value of these Debt Securities. In some circumstances, investors in the unrated or non investment grade
Debt Securities market may anticipate such downgrades as a result of these credits being placed on “credit watch” by rating agencies, causing
volatility and speculation of further credit deterioration.
Higher Vulnerability to economic cycles - During economic downturns, unrated or non investment grade Debt Securities are typically more
susceptible to price volatility and fall more in value than investment grade Debt Securities as i) investors may reevaluate holdings in lower-quality
bonds in favor of investment-grade corporate Debt Securities; ii) investors become more risk averse; and iii) default risk rises. This is often
referred to a “flight to quality”.
Event Risk – This includes any of a variety of events that can adversely affect the issuer of unrated or non investment grade Debt Securities, and
therefore the issuer’s ability to meet debt service obligations to repay principal and interest to Debt Securities holders. Event risk may pertain to the
issuer specifically, the industry or business sector of the issuer, or generally upon the overall economy. It could have a direct or indirect impact on
the issuer and their outstanding debts.
Important Disclosure on RMB 25
Risk relating to RMB – If you choose RMB as the base currency or the alternate currency, you should also note the following:

RMB is currently not freely convertible through banks in Hong Kong. Due to exchange controls and/or restrictions imposed on the convertibility,
utilisation or transferability of RMB (if any) which in turn is affected by, amongst other things, the PRC government's control, there is no guarantee
that disruption in the transferability, convertibility or liquidity of RMB will not occur. There is thus a likelihood that you may not be able to convert
RMB received into other freely convertible currencies.

CNH exchange rates and CNY exchange rates are currently quoted in different markets with different exchange rates, whereby their exchange rate
movements may not be in the same direction or magnitude. Therefore, the CNH exchange rate may be different from the CNY exchange rate.