World Investment Navigator - Citi.com · looking indicators of growth suggest a resumption of the...

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September 2014 World Investment Navigator Investment Products: Not FDIC Insured Not CDIC Insured Not Government Insured No Bank Guarantee May Lose Value

Transcript of World Investment Navigator - Citi.com · looking indicators of growth suggest a resumption of the...

Page 1: World Investment Navigator - Citi.com · looking indicators of growth suggest a resumption of the European equity rally: Japan large cap equity . We maintain our modest overweight

September 2014

World Investment Navigator

Investment Products: Not FDIC Insured ● Not CDIC Insured ● Not Government Insured ● No Bank Guarantee ● May Lose Value

Page 2: World Investment Navigator - Citi.com · looking indicators of growth suggest a resumption of the European equity rally: Japan large cap equity . We maintain our modest overweight

1. Tactical Outlook

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Global Investment Committee (GIC) Views

Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future events, a guarantee of future results for investment advice, and are subject to change based on market and other conditions.

Top 3 overweights

US large cap equity +3.0%

Europe (ex UK) large cap equity +1.9%

Emerging Asia equity +1.5%

Top 3 underweights

Japan sovereign bonds –2.6%

Europe (ex UK) sovereign bonds –1.3%

US sovereign bonds –1.0%

Meeting right before the US Federal Reserve’s policy update on September 17th and the Scottish independence vote on September 18th, the Citi Private Bank Global Investment Committee (GIC) reiterated its existing asset allocation, staying moderately overweight in global equities and comparably underweight in fixed income.

The GIC awaited the binary outcome of the Scottish referendum in judging the impact on UK and wider European assets. The vote to remain in union subsequently bolstered UK markets and benefitted GIC positioning. Beyond these near-term events, elections in Brazil and Ukraine, as well as European bank stress-tests loom over the markets in the coming month.

Since the last GIC meeting in August, government bond yields have risen, largely driven by the view that the Fed would raise interest rates sooner than previously expected. While this benefited the GIC’s underweight positions in high-grade bonds, the committee doubted the Fed would make the timing of eventual rate-hikes significantly clearer. The FOMC statement and press conference also largely confirmed that view. Importantly, more than half of central banks around the world seem set to be easing policy as they enter 2015. While US policy rates are clearly the most influential single-country driver of global yields, easing across much of the world is still likely to limit the upward pressure going forward, even on US yields.

Beyond near-term speculation over the Fed’s message, monetary-policy divergence appears poised to favor US dollar assets heading into 2015. With US long-term inflation-adjusted bond yields nearly one percentage point higher than Germany’s, global flows are likely to be drawn towards US equities and other risky assets, barring a highly localized disruption to the US economy, which is unlikely. Valuations still favor equities over fixed income, and especially so outside the US However, US dollar strength may undermine emerging-market assets that are most sensitive to dollar savings flows and funding costs, as happened in 2013.

Historically, US rate-hiking cycles have had a fairly benign impact on most asset markets when economic recoveries were not threatened. While we see no threat to the US and global recovery from the Fed’s likely hikes in 2015, the risk of unusual outcomes seems higher this time round. For the first time, the Fed would be shifting from quantitative easing to rate-hikes rather than from rate-cuts to rate-hikes. Central-bank influences on asset prices – particularly on rates and credit markets - have been much deeper than in other periods. The US economic recovery also seems more advanced than many acknowledge.

With these risks in mind, the committee continues to see the best opportunities over the next 12-18 months in risky assets, but is more cautious looking further out.

Note: Allocations are as of GIC meeting September 17, 2014.

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Asset class Tactical positioning

Investment rationale Underweight Neutral Overweight

North American large cap equity

Our expectation for high single digit US earnings per share growth this year and next, low interest rates and rapidly growing dividends leaves us expecting further US market gains

Core European large cap equity1

Falling sovereign credit risk pricing in Europe, coupled with periphery share markets that remain well below levels of 2007 suggest a greater opportunity for “catch up” gains in Europe. If political tensions surrounding Ukraine do not escalate, the recent improvements in European credit markets and forward-looking indicators of growth suggest a resumption of the European equity rally

Japan large cap equity We maintain our modest overweight to the strategic benchmark. While we expect the radical course of monetary easing in Japan to ultimately win out over fiscal tightening, the dual and conflicting fiscal and monetary policy in Japan bears close monitoring, particularly as tightening may be repeated in 2015

Emerging market equity Emerging Markets (EM) equities have modestly outperformed developed market shares year to date. North Asian markets still continue to be our favorite region within EM

Emerging Asia With US and European growth likely to accelerate in coming quarters, we maintain our overweights to export-oriented surplus countries (China, Taiwan and Korea) trading at low valuations

EU periphery large cap equity2

We maintain our overweight positions in Spain and Italy. We expect the depressed equity markets in the periphery to benefit the most from large declines in sovereign bond yields and ECB easing steps ahead

Asia ex Japan large cap equity3

With a more neutral view of commodities prices, we keep our single underweight to Australia relative to the strategic benchmark, raised earlier this year

Emerging EMEA We remain at a slight underweight on Emerging EMEA shares, with all of the underweight allocation coming from Turkey. The weakness in EM with external deficits could be a rising risk in EMEA going forward even as these markets have performed well this year

Emerging Latin America

As policy changes have improved Mexico’s outlook, we remain bullish on Mexico equity shares. Due to interest rate concerns, worries over external savings requirements and long-term commodity price trends, the GIC has maintained its underweight position in Brazil, though sovereign debt returns have improved as yields have risen. Notably, national election results present binary possibilities for Brazil

Developed small and mid cap equity

European equities have underperformed the US stock market since 2007. We think this offers some opportunity in Europe (ex UK) small and mid cap (Smid) equities. We maintain a neutral position on U.S. SMID as large caps offer better value

Source: Global Asset Allocation team, as of GIC meeting September 17, 2014. (1) Core Europe = Austria, Belgium, France and Germany (2) Peripheral Europe = Greece, Ireland, Italy, Portugal and Spain (3) Asia ex Japan = Australia, Hong Kong, New Zealand and Singapore

GIC Asset Class Views: Equities

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Asset class Tactical positioning

Investment rationale Underweight Neutral Overweight

Developed market core sovereign bonds (DM)1

Yields to remain low near term, but we are defensive on duration as higher rates are expected. German Bund yields have fallen to record lows compared to the US, and this seems to be exerting downward pressure on US yields and upward pressure on the US dollar

EU periphery sovereign bonds2

Higher near-term volatility as geopolitical events fuel risk aversion. Growth and banking concerns persist, but have improved. Financial conditions to remain resilient and further spread compression likely, particularly if the ECB broadens QE.

Emerging market (EM) sovereign bonds

Valuations fully-valued relative to largely unchanged fundamentals. Gains likely to hold near term given excess liquidity provided by major central banks. However, FX-related concern may challenge local currency bonds

Global Inflation-linked Low real yields and only modest inflation pressures limit prospective returns. We maintain an underweight to US TIPS

Supranationals/ agencies

Proposed GSE legislation in the US is unlikely to aversely effect bondholders. Spreads are likely to remain tight. We favor this sector over Treasuries

Securitized fixed income We recommend an underweight given our expectations for rising government rates, which heightens extension risks and negatively impacts performance. US agency MBS is also vulnerable as the Federal Reserve continues to taper asset purchases this year

Corporate investment grade

Direction of rates key to performance. Favor financials over non-financials. Despite some balance sheet releveraging, we prefer to hold corporates in conjunction with our underweight in sovereigns to express a moderate underweight to fixed income overall.

Corporate high yield Remain constructive, although returns are likely to be modest going forward. Carry (not spreads) likely to drive future performance. We maintain our overweight conviction to European and US HY issuers

GIC Asset Class Views: Fixed Income

Hedge Funds Over the last twelve months, the “Long-Short” and “Event Driven” funds have performed well, while Macro and CTA managers have lagged due to low levels of interest rates and low overall volatility.

Commodities

We hold no “long-only” index exposures given a mixed, asynchronous outlook. We are warming to equity exposures for select commodity countries, having made some earlier, upward adjustments.

Source: Global Asset Allocation team, Citi Private Bank, as GIC meeting September 17, 2014. (1) Developed market bonds exclude peripheral European bonds (2) Peripheral Europe = Greece, Ireland, Italy, Portugal and Spain

GIC asset class views: Alternatives

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Equities: Developed Markets •Developed market equity valuations are rising modestly, but continue to compare favorably with low bond yields •Over the medium term, we continue to favor sectors with strong free cash flow growth and low payout ratios with growing dividends •US and Europe large cap equities remain our largest positions as incoming economic data are validating earlier market improvements

Figure 2: Yields on equities compare favorably to those on bond markets

Figure 3: Global earnings revisions downgrades continue to stay negative Figure 4: Japanese equities are positively correlated to USD/JPY

Source: Citi Private Bank using Bloomberg, as at September 15, 2014. Source: Citi Private Bank using Bloomberg and Citi Research, as at September 15, 2014.

Figure 1: GIC Developed market equity allocation (level 3)

24.3% North America large cap

8.3% Europe ex UK large cap

4.3% UK large cap

3.6% Japan large cap

2.3% Developed market small and mid cap

1.8% Asia ex Japan large cap

44.6%

Source: Citi Private Bank as of GIC meeting September 17, 2014.

6,500

7,500

8,500

9,500

10,500

11,500

12,500

13,500

14,500

15,500

16,500

75

80

85

90

95

100

105

110

2010 2011 2012 2013 2014

Inde

x

Exc

hang

e R

ate

USD/JPY Nikkei index (RHS)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Sep-12 Mar-13 Sep-13 Mar-14 Sep-14

Global Upgrades / (Downgrades)

Global Equity Performance

0

2

4

6

8

10

12

14

16

18

20

'59 '64 '69 '74 '79 '84 '89 '94 '99 '04 '09 '14

Yie

ld (%

)

S&P 500 Earnings and Dividend Yield on 10-year Trailing EPS Average (%)US BBB 20+yrs corporate yield (%)US 10-Year Yield (%)

Stocks

Govts

Corps

Source: Citi Private Bank using Haver Analytics as at September 15, 2014.

FOR ILLUSTRATIVE PURPOSES ONLY Past performance is no guarantee of future results. Real Results may Vary.

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Equities: Emerging Markets •Emerging market (EM) equities have suffered underperformance compared to their developed counterparts since 2011 •The GIC maintains a slight overweight position in EM countries with current account surpluses (China, Taiwan and South Korea) •Growth prospects seem to be improving. North Asian valuations are at a discount to global averages

Source: Citi Private Bank as of GIC meeting September 17, 2014. Source: Citi Private Bank using Bloomberg, as at September 15, 2014.

Source: Citi Private Bank using Factset and Bloomberg as at September 15, 2014. Source: Citi Private Bank using Haver Analytics and IMF as at September 15, 2014. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events

Figure 7: Some Signs of Improving Profitability in EM, particularly North Asia

Figure 6: Emerging Markets / Developed Markets Stock Price Ratio

Figure 8: China, Taiwan and Korea Current Account Balance as % of GDP

Figure 5: GIC Emerging market equity allocation (level 3)

13.0%

8.6% Emerging Asia

2.4% Latin America

2.0% Emerging EMEA

-10

-5

0

5

10

15

20

25

1980 1985 1990 1995 2000 2005 2010 2015 2020

ChinaTaiwanKorea

IMFForecast

0

10

20

30

40

50

60

1988 1991 1995 1998 2001 2004 2008 2011 2014

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

0

20

40

60

80

100

120

140

160

'92 '95 '97 '00 '02 '04 '07 '09 '12 '14

MSCI ChinaMSCI China EPS (RHS)

2014 EPS estimate

2015 EPS estimate

FOR ILLUSTRATIVE PURPOSES ONLY Past performance is no guarantee of future results. Real Results may Vary.

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-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2004 2006 2008 2010 2012 2014

Yie

ld (%

)

10yr US TIPS

Average:1.15%

0.75

1.25

1.75

2.25

2.75

3.25

Sep-12 Mar-13 Sep-13 Mar-14 Sep-14

Yie

ld (%

)

UK 10yr Gilt yieldUS 10yr Treasury yieldGerman 10yr Bund yield

Fixed Income: Sovereign Debt •While DM yields remain low and are likely to be range bound near term, levels are inconsistent with lasting recovery •Improving fundamentals continue to suggest that upward rate pressures are bound to resume later in 2014 •In EM debt, deteriorating fundamentals and FX volatility are likely to put pressure on returns

Source: Citi Private Bank as of GIC meeting September 17, 2014.

9.5%

5.2% Emerging market

1.7% North America

0.8% Inflation-linked bonds

0.8% Supranational

0.8% Core Europe ex UK

0.2% Peripheral Europe

0.0% Japan

0.0% United Kingdom

Figure 9: GIC fixed income sovereign allocation (level 3) Figure 10: Benchmark yields in US and UK rise with growth expectations

Figure 11: Emerging market sovereign bond yields and spreads offer limited upside Figure 12: Low real yields in the US likely to dilute returns in inflation-linked debt

Source: Citi Private Bank using The Yield Book as at September 15, 2014.

Source: Citi Private Bank using The Yield Book as at September 15, 2014. GIP = Greece, Ireland and Portugal. Source: Citi Private Bank using Bloomberg, as at September 15, 2014.

0

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3

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1996 1999 2002 2005 2008 2011 2014

Spr

ead

(bp)

Yie

ld (%

)

Emerging market (USD)sovereign debt yieldEmerging market (USD)sovereign debt spread (RHS)

FOR ILLUSTRATIVE PURPOSES ONLY Past performance is no guarantee of future results. Real Results may Vary.

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Fixed Income: Credit •We continue to hold neutral credit markets views, despite some balance sheet releveraging, as sovereign rates climb slowly •The favorable economic backdrop and solid fundamentals are likely to produce coupon like returns •We maintain our overweight European high yield debt allocation as low default rates and policy easing should support credit generally

Source: Citi Private Bank as of GIC meeting September 17, 2014.

Figure 15: High yield debt valuations appear relatively attractive amid low sovereign yields

Figure 13: GIC fixed income credit allocation (level 3) Figure 14: Rising debt leverage should mitigate further spread compression

Figure 16: Agency MBS return expectations are low as yields track US Treasury rates

11.9%

4.9% Corporate investment grade

4.0% Securitized

3.0% Developed high yield

Source: Citi Private Bank using The Yield Book, as at September 15, 2014. Source: Citi Private Bank using The Yield Book, as at September 15, 2014.

2.5

3.0

3.5

4.0

4.5

5.0

0

100

200

300

400

500

600

1990 1996 2002 2008 2014

Rat

io

Spr

ead

(bp)

US non-financials spreadUS net debt/ebitda ratio (RHS)

0.61.1 1.3

2.3 2.5 2.63.0 3.1

4.5

5.7

0

1

2

3

4

5

6

10yrJGB

10yrBunds

EURHG Corp

USCMBS

10yrGilts

10yrUST

USDMBS

USDHG Corp

EURHY

USDHY

Yiel

d (%

) Yields

0

2

4

6

8

10

12

14

16

18

1981 1986 1992 1997 2003 2008 2014

Yie

ld (%

)

US MBS index yield

10yr US Treasury yield

Source: Citi Private Bank using Haver Analytics and The Yield Book, as at September 15, 2014.

FOR ILLUSTRATIVE PURPOSES ONLY Past performance is no guarantee of future results. Real Results may Vary.

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Hedge Funds Over the last twelve months, the “Long-Short” and “Event Driven” funds have performed well, while Macro and CTA managers have lagged due to low levels of interest rates and low overall volatility. Over coming meetings, we will look to “break-out” in more granular detail our hedge fund weightings and recommendations

Event Time frame MSCI World (Local, %)

MSCI EM (Local, %)

DJUBS Commod-ities (%) HFRI Macro (%) Barclay CTA

(%)

Federal Reserve rate hike Feb 1994 to Jun 1994 -6.9 11.5 9.4% -8.5 4.1

Asian financial crisis Jul 1997 to Aug 1998 -0.8 -45.1 -31.1 7.0 2.4

Tech bubble to ‘02 recession Aug 2000 to Sep 2002 -45.3 -21.6 -1.7 15.5 23.1

Global financial crisis Oct 2007 to Feb 2009 -50.4 -51.7 -42.2 4.7 16.1

European Debt Crisis Jan 2011 to Dec 2011 -5.0 -12.5 -13.4 -4.2 -3.1

Low growth environment Jan 2012 to Dec 2012 16.4 17.4 -1.1 -0.1 -1.7

2014 -- Year to Date Jan 2014 - August 2014 7.8 10.1 0.7 2.7 0.5*

Table 1: Macro/CTA strategy in risk-on environment

Strategies August 2014 (%)

Trailing 12-Month 2013 Q3 2013 (%) Q4 2013 (%) Q1 2014 (%) Q2 2014 (%)

HFRI Fund of Funds Composite Index 0.9 7.9 9.0 1.7 3.7 0.5 1.4

HFRI Event-Driven (Total) Index 0.4 9.7 12.5 2.7 3.8 1.9 2.2

HFRI Relative Value (Total) Index 0.9 9.3 7.1 1.6 2.4 2.4 2.4

HFRI Equity Hedge (Total) Index 1.6 11.7 14.3 4.1 4.7 1.1 2.2

HFRI Macro (Total) Index 2.1 4.5 -0.4 -1.3 1.8 -0.5 1.5

Barclay Trader Indexes CTA* -0.1 0.9 -1.4 -2.2 1.8 -0.8 0.9

Table 2: Hedge fund strategies comparison

Source: Citi Private Bank using Bloomberg, as at August 29, 2014. *For the index noted, data is lagged one month. Therefore total returns are of July 31, 2014. Past performance is not indicative of future returns.

FOR ILLUSTRATIVE PURPOSES ONLY Past performance is no guarantee of future results. Real Results may Vary.

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Commodities US oil and gas supplies are surging. The GIC remains at its benchmark 0% weighting for “long only” indices, but idiosyncratic positive opportunities are emerging in individual commodities (agriculture, etc). Select producer equities may outperform broad-based futures

Figure 18: Base metal prices are positively correlated to emerging market equities

Figure 20: U.S. Mining Production is Surging and the Trade-Weighted Dollar (TWD) Bottoming Figure 19: U.S. Mining employment vs. Energy production

0.0% Precious metals

0.0% Industrial metals

0.0% Agriculture

0.0% Energy

Figure 17: GIC commodities allocation (level 3)

0%

Source: Citi Private Bank as of GIC meeting September 17, 2014.

Source: Citi Private Bank using Haver Analytics, as at September 15, 2014.

5.5

6.0

6.5

7.0

450

500

550

600

650

700

750

800

850

900

2000 2002 2005 2007 2009 2012 2014

U.S. Mining Employment (Thous)

U.S. Energy Production (QuadrillianBTUs, 12-Month Avg, RHS)

80

90

100

110

120

130

80

90

100

110

120

130

140

1974 1982 1990 1998 2006 2014

Inde

x

Inde

x

Mining Output Index (LHS)

Real Broad TWD (LaggedFour Years, RHS)

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

850

900

950

1000

1050

1100

Aug-12 Feb-13 Aug-13 Feb-14 Aug-14

YoY

%Inde

x

Emerging market equitiesBase metals (YoY, RHS)

Source: Citi Private Bank using Bloomberg, as at September 15, 2014.

Source: Citi Private Bank using Haver Analytics, as at September 15, 2014.

FOR ILLUSTRATIVE PURPOSES ONLY Past performance is no guarantee of future results. Real Results may Vary.

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Structural Risks to GIC Positioning

US momentum fades Europe falls back Dollar falls, EM Surges

Risk

• Positive economic momentum begins to fade and US loses cyclical leadership

• Earnings fall as top line growth shrinks and margins compress

• European policy cohesion frays

• Sovereign debt and banking sectors weaken

• Russian energy supplies to Europe are severely disrupted

• Oil prices surge as incremental U.S. supplies are insufficient for world markets. The dollar begins a new weakening trend undermining U.S. assets

Likely impact on asset markets

• US stocks fall • Spreads widen • Treasuries rally

• European equity shares drop

• Broader risk markets weaken in sympathy

• US dollar falls • US shares underperform • Commodities surge • EM commodity-related

assets outperform

FOR ILLUSTRATIVE PURPOSES ONLY Past performance is no guarantee of future results. Real Results may Vary.

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2. 2014 Global Investment Themes

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2014 Investment Themes Our investment themes for 2014 reflect four core principles

All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market and other factors. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to asset classes, portfolio allocations or investments. Not all investments are suitable for all investors, nor available to investors in each jurisdiction.

Shifting Growth Opportunities We favor Developed Markets (DM) over Emerging Markets (EM) generally, and identify equity opportunities in select EMs with external surpluses and low valuations

The Liquidity Trade Off In their search for yield, investors should consider raising exposures to less liquid investments that may have stronger return prospects

Hedging Portfolio Risk Given relatively low market volatility and the correspondingly cheap cost of hedging instruments, now is the right time to consider hedging investment portfolios Harnessing Global Change As the world is transitioning from a severe crisis, we see a number of structural changes in the economic and financial landscape

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3. Appendix

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Contacts North America EMEA ASIA

Steven Wieting Global Chief Investment Strategist +1.212.559.0499 [email protected] Michael Brandes Global Head, Fixed Income Strategy +1.212.559.1098 [email protected] Kris Xippolitos Fixed Income Strategist +1.212.559.1277 [email protected] Joseph Kaplan Fixed Income Strategy +1.212.559.3772 [email protected] Shawn Snyder Office of the Chief Investment Strategist +1.212.559.8651 [email protected]

Jeffrey Sacks EMEA Capital Markets Strategist +44.207.508.7325 [email protected] Jonathan Sparks Office of the Chief Investment Strategist +44.207.508.6185 [email protected]

Ken Peng Asia Investment Strategist +852.2868.8904 [email protected]

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Glossary ADXY Index is a spot index of emerging Asia's most actively traded currency pairs valued against the US dollar. Asia Pacific ex Japan equities are measured against the MSCI Asia Pacific ex Japan Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure the performance of large cap stocks in Australia, Hong Kong, New Zealand and Singapore. Barclay CTA Index is a leading industry benchmark of representative performance of commodity trading advisors. There are currently 565 programs included in the calculation of the Barclay CTA Index for the year 2011, which is unweighted and rebalanced at the beginning of each year. Cash is measured against the three-month LIBOR, which is the interest rate that banks charge each other in the international inter-bank market for three-month loans (usually denominated in Eurodollars). CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by Standard & Poor’s 500 stock index option prices. Citigroup GRAMI (Global Risk Aversion Macro Index) measures risk aversion across asset classes. It is an equally weighted index of developed and emerging market sovereign spreads, US credit spreads, TED spread and implied FX, equity and swap volatility. GRAMI is shown as standard deviations from the mean. Citigroup USBIG Corporate, 7–10 year Index consists of publicly issued, non-convertible corporate bonds rated Aa or Aaa that have at least $2.5 million par value outstanding. It is a value-weighted, total return index, that includes approximately 800 issues with maturities of 7–10 years. Commodities are measured against the Dow Jones-UBS Commodity Index, which is composed of futures contracts on physical commodities traded on exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME). The major commodity sectors are represented, including energy, petroleum, precious metals, industrial metals, grains, livestock, softs, agriculture and ex. energy. Corporate high yield is measured against the Citigroup US High Yield Market Index, which includes all issues rated between CCC and BB+. The minimum issue size is $50 million. All issues are individually trader priced monthly. Corporate investment grade is measured against the Citi World Broad Investment Grade Index (WBIG) – Corporate, a subsector of the WBIG. This index includes fixed rate global investment grade corporate debt within the finance, industrial and utility sectors, denominated in the domestic currency. The index is rebalanced monthly. Developed market large cap equities are measured against the MSCI World Large Cap Index. This is a free-float adjusted, market-capitalization weighted index designed to measure the equity market performance of the large cap stocks in 23 developed markets. Large cap is defined as stocks representing roughly 70% of each market’s capitalization. Developed market small and mid cap equities are measured against the MSCI World Small Cap Index, a capitalization-weighted index that measures small cap stock performance in 23 developed equity markets. Developed sovereign is measured against the Citi World Government Bond Index (WGBI), which consists of the major global investment grade government bond markets and is composed of sovereign debt, denominated in the domestic currency. To join the WGBI, the market must satisfy size, credit and barriers-to-entry requirements. In order to ensure that the WGBI remains an investment grade benchmark, a minimum credit quality of BBB–/Baa3 by either S&P or Moody's is imposed. The index is rebalanced monthly. Emerging markets equities are measured against the MSCI Emerging Markets Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure equity market performance of 22 emerging markets. Emerging sovereign is measured against the Citi Emerging Market Sovereign Bond Index (ESBI). This index includes Brady bonds and US dollar-denominated emerging market sovereign debt issued in the global, Yankee and Eurodollar markets, excluding loans. It is composed of debt in Africa, Asia, Europe and Latin America. We classify an emerging market as a sovereign with a maximum foreign debt rating of BBB+/Baa1 by S&P or Moody's. Defaulted issues are excluded.

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Glossary Europe ex UK equities are measured against the MSCI Europe ex UK Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure the performance of large cap stocks in each of Europe’s developed markets, excluding the United Kingdom. Global bonds are measured against the Citigroup Broad Investment Grade Bond. The index is weighted by market capitalization and includes fixed rate Treasury, government sponsored, mortgage, asset backed, and investment grade (BBB–/Baa3) issues with a maturity of one year or longer and a minimum amount outstanding of $1 billion for Treasuries, $5 billion for mortgages, and $200 million for credit, asset-backed and government-sponsored issues. Global equities are measured against the MSCI All Country World Index, which represents 48 developed and emerging equity markets. Index components are weighted by market capitalization. Hedge funds are measured against the HFRI Fund Weighted Composite Index. This is an equally weighted composite index including both domestic and offshore funds, with no fund of funds. The index includes over 2,000 constituent funds. All funds report assets in USD and all funds report net of all fees returns on a monthly basis. Fund must have at least $50 million under management or have been actively trading for at least 12 months. HFRI Event-Driven (Total) Index: event driven is also known as ‘corporate life cycle’ investing. This involves investing in opportunities created by significant transactional events, such as spin-offs, mergers and acquisitions, bankruptcy reorganizations, recapitalizations and share buybacks. Returns for HFRI indices are to be considered estimated returns for the previous stated quarter as HFRI may revise index data from time to time, as necessary. Generally final index returns are made available by HFRI four months after a particular month end. Japan equities are measured against the MSCI Japan Large Cap Index. A free-float-adjusted market-capitalization-weighted index designed to measure large-cap stock performance in Japan. LDXY Index is a spot index of emerging Asia's most actively traded currency pairs valued against the US dollar. MSCI EM (Emerging Markets) Index is free-float adjusted and weighted by market capitalization. The index is designed to measure equity market performance in the global emerging markets. MSCI North America Index is free-float adjusted and weighted by market capitalization. The index is designed to measure equity market performance in the US and Canada. MSCI World Index (Gross) is free-float adjusted and weighted by market capitalization. The index is designed to measure global developed market equity performance. Securitized: Citi World Broad Investment Grade Index (WBIG) – Securitized is a subsector of the WBIG. This index includes global investment grade collateralized debt denominated in the domestic currency, including mortgage-backed securities, covered bonds (Pfandbriefe) and asset-backed securities. The index is rebalanced monthly. Supranationals: Citi World Broad Investment Grade Index (WBIG) – Government Related is a subsector of the WBIG. This index includes fixed rate investment grade agency, supranational and regional government debt, denominated in the domestic currency. The index is rebalanced monthly. UK equities are measured against the MSCI UK Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure large-cap stock performance in the United Kingdom. US Dollar Index (DXY) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and six major world currencies. The ICE US computes this by using the rates supplied by some 500 banks. US equities are measured against the Standard & Poor’s 500 Index, a capitalization-weighted index which includes a representative sample of 500 leading companies in leading industries of the US economy. Although the S&P 500 focuses on the large cap segment of the market, with over 80% coverage of US equities, it is also an ideal proxy for the total market. Wells Fargo Hybrid & Preferred Securities Financial Index: The Wells Fargo Hybrid and Preferred Securities Aggregate Index is a modified market-capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock.

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Important Information In any instance where distribution of this communication (“Communication”) is subject to the rules of the U.S. Commodity Futures Trading Commission (“CFTC”), this communication constitutes an invitation to consider entering into a derivatives transaction under U.S. CFTC Regulations §§ 1.71 and 23.605, where applicable, but is not a binding offer to buy/sell any financial instrument. This Communication is prepared by Citi Private Bank (“CPB”), a business of Citigroup, Inc. (“Citigroup”), which provides its clients access to a broad array of products and services available through Citigroup, its bank and non-bank affiliates worldwide (collectively, “Citi”). Not all products and services are provided by all affiliates, or are available at all locations. CPB personnel are not research analysts, and the information in this Communication is not intended to constitute “research”, as that term is defined by applicable regulations. Unless otherwise indicated, any reference to a research report or research recommendation is not intended to represent the whole report and is not in itself considered a recommendation or research report. This Communication is provided for information and discussion purposes only, at the recipient’s request. The recipient should notify CPB immediately should it at any time wish to cease being provided with such information. Unless otherwise indicated, (i) it does not constitute an offer or recommendation to purchase or sell any security, financial instrument or other product or service, or to attract any funding or deposits, and (ii) it does not constitute a solicitation if it is not subject to the rules of the CFTC (but see discussion above regarding communication subject to CFTC rules) and (iii) it is not intended as an official confirmation of any transaction. Unless otherwise expressly indicated, this Communication does not take into account the investment objectives, risk profile or financial situation of any particular person and as such, investments mentioned in this document may not be suitable for all investors. Citi is not acting as an investment or other advisor, fiduciary or agent. The information contained herein is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Recipients of this Communication should obtain advice based on their own individual circumstances from their own tax, financial, legal and other advisors about the risks and merits of any transaction before making an investment decision, and only make such decisions on the basis of their own objectives, experience, risk profile and resources. 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Investing in structured products is intended only for experienced and sophisticated investors who are willing and able to bear the high economic risks of such an investment. Investors should carefully review and consider potential risks before investing. OTC derivative transactions involve risk and are not suitable for all investors. Investment products are not insured, carry no bank or government guarantee and may lose value. Before entering into these transactions, you should: (i) ensure that you have obtained and considered relevant information from independent reliable sources concerning the financial, economic and political conditions of the relevant markets; (ii) determine that you have the necessary knowledge, sophistication and experience in financial, business and investment matters to be able to evaluate the risks involved, and that you are financially able to bear such risks; and (iii) determine, having considered the foregoing points, that capital markets transactions are suitable and appropriate for your financial, tax, business and investment objectives. This material may mention options regulated by the U.S. Securities and Exchange Commission. Before buying or selling options you should obtain and review the current version of the Options Clearing Corporation booklet, Characteristics and Risks of Standardized Options. A copy of the booklet can be obtained upon request from Citigroup Global Markets Inc., 390 Greenwich Street, 3rd Floor, New York, NY 10013 or by clicking the following link, http://www.theocc.com/components/docs/riskstoc.pdf, http://www.theocc.com/components/docs/about/publications/november_2012_supplement.pdf If you buy options, the maximum loss is the premium. If you sell put options, the risk is the entire notional below the strike. If you sell call options, the risk is unlimited. The actual profit or loss from any trade will depend on the price at which the trades are executed. The prices used herein are historical and may not be available when you order is entered. Commissions and other transaction costs are not considered in these examples. Option trades in general and these trades in particular may not be appropriate for every investor. Unless noted otherwise, the source of all graphs and tables in this report is Citi. Because of the importance of tax considerations to all option transactions, the investor considering options should consult with his/her tax advisor as to how their tax situation is affected by the outcome of contemplated options transactions.

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Important Information None of the financial instruments or other products mentioned in this Communication (unless expressly stated otherwise) is (i) insured by the Federal Deposit Insurance Corporation or any other governmental authority, or (ii) deposits or other obligations of, or guaranteed by, Citi or any other insured depository institution. Citi often acts as an issuer of financial instruments and other products, acts as a market maker and trades as principal in many different financial instruments and other products, and can be expected to perform or seek to perform investment banking and other services for the issuer of such financial instruments or other products. 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Citigroup, its affiliates and any of the officers, directors, employees, representatives or agents shall not be held liable for any direct, indirect, incidental, special, or consequential damages, including loss of profits, arising out of the use of information contained herein, including through errors whether caused by negligence or otherwise. In the US, brokerage products and services are provided by Citigroup Global Markets Inc. (“CGMI”), member SIPC. Accounts carried by Pershing LLC, member FINRA, NYSE, SIPC. CGMI and Citibank, N.A. are affiliated companies under the common control of Citigroup. Outside the US, brokerage products and services are provided by other Citigroup affiliates. Investment Management services (including portfolio management) are available through CGMI, Citibank, N.A. and other affiliated advisory businesses. This document is for informational purposes only and the views expressed in this document by the Global Investment Committee. Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer’s credit rating, or creditworthiness, causes a bond’s price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made. Alternative investments referenced in this report are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in the fund, potential lack of diversification, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and advisor risk. Asset allocation does not assure a profit or protect against a loss in declining financial markets. Mortgage-backed securities (“MBS”), which include collateralized mortgage obligations (“CMOs”), also referred to as real estate mortgage investment conduits (“REMICs”), may not be suitable for all investors. There is the possibility of early return of principal due to mortgage prepayments, which can reduce expected yield and result in reinvestment risk. Conversely, return of principal may be slower than initial prepayment speed assumptions, extending the average life of the security up to its listed maturity date (also referred to as extension risk). Additionally, the underlying collateral supporting non-Agency MBS may default on principal and interest payments. In certain cases, this could cause the income stream of the security to decline and result in loss of principal. Further, an insufficient level of credit support may result in a downgrade of a mortgage bond's credit rating and lead to a higher probability of principal loss and increased price volatility. Investments in subordinated MBS involve greater credit risk of default than the senior classes of the same issue. Default risk may be pronounced in cases where the MBS security is secured by, or evidencing an interest in, a relatively small or less diverse pool of underlying mortgage loans.

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Important Information MBS are also sensitive to interest rate changes which can negatively impact the market value of the security. During times of heightened volatility, MBS can experience greater levels of illiquidity and larger price movements. Price volatility may also occur from other factors including, but not limited to, prepayments, future prepayment expectations, credit concerns, underlying collateral performance and technical changes in the market. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity. Factors affecting commodities generally, index components composed of futures contracts on nickel or copper, which are industrial metals, may be subject to a number of additional factors specific to industrial metals that might cause price volatility. These include changes in the level of industrial activity using industrial metals (including the availability of substitutes such as man-made or synthetic substitutes); disruptions in the supply chain, from mining to storage to smelting or refining; adjustments to inventory; variations in production costs, including storage, labor and energy costs; costs associated with regulatory compliance, including environmental regulations; and changes in industrial, government and consumer demand, both in individual consuming nations and internationally. Index components concentrated in futures contracts on agricultural products, including grains, may be subject to a number of additional factors specific to agricultural products that might cause price volatility. These include weather conditions, including floods, drought and freezing conditions; changes in government policies; planting decisions; and changes in demand for agricultural products, both with end users and as inputs into various industries The information contained herein is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Readers interested in the strategies or concepts should consult their tax, legal, or other advisors, as appropriate. In Hong Kong, this document is issued by CPB operating through Citibank, N.A., Hong Kong branch, which is regulated by the Hong Kong Monetary Authority. Any questions in connection with the contents in this document should be directed to registered or licensed representatives of the aforementioned entity. In Singapore, this document is issued by CPB operating through Citibank, N.A., Singapore branch, which is regulated by the Monetary Authority of Singapore. 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