2018 Outlook and Key Themes · 2018-12-20 · 2018 Outlook and Key Themes Dec 2017 Published: 28 December 2017. 2 Macro Outlook Divergence between regional equity markets remained

2018 Outlook and Key Themes

Dec 2017

Published: 28 December 2017

2

Macro Outlook

Divergence between regional equity markets remained in November but was more muted than October. Results USD terms ranged from negative 3.2% (MSCI Lat America) to a positive 4.3% (Nikkei 225). Positive results for PM Abe’s Liberal Democrats at the end of October bolstered investor spirits in Japan while the US remained well supported as investors focused on the potential package of a tax stimulus plan. The laggard in USD terms for DM was Europe as the Euro Stoxx 600 was flat

Commentary

Quick look back – 4Q’17 continued on a Risk-On roll during the month of November with a bias towards developed markets (DM) as macro-data for the G-10 surprised on the upside. Global equity investors were rewarded (MSCI AC World Equity up 1.8%) as were unhedged investors in global investment grade bonds (Bl. Barclays Global Aggregate (unhedged) up 1.1%). Global commodity index (BBG Commodity Tot. Ret. lost 0.5%) and hedge fund investors (HFR Global Hedge up 0.1%) were flat for the month.

Source : Bloomberg. Note : Equity and Alternative indices are in USD, Bond indices are in Local Currency

3

Macro Outlook

at 0.1% in USD. The story remains unchanged year to date with Emerging Asian equity still the big winners in USD terms (up 36.4%) while the S&P500 brings up the DM rear with a gain of 17.9%.

Most bond market’s local currency returns remained in a tight range from -0.5% (Pan Euro High Yield) to +0.2% (EM Pan Euro Agg. Unhedged). The big exception were EM local currency bonds with the EM Local CY Aggregate up 2.3%. Year to date, EM local currency bonds are up 12.9% while the laggard is Pan Euro Agg. Corporates at +2.2%.

Alternative Assets are also flat for the month in USD terms. In the commodity space, the outlier on the upside is Energy (+2.3%) but this was offset by a drop in Industrial Metals (-4.2%). Year to date returns are remain dispersed in the commodity sector with Energy and Agriculture down 9.3% and 9.1% while Industrial Metals are still up

18.2%. Hedge Funds remain ho-hum in a roaring equity year with the HFR Absolute Return index gaining 3.0% and the HFR Global Hedge index only up 5.1%; Macro/CTA funds lag behind with gains of 1.4% year to date.

Source: Bloomberg

Source: Bloomberg

Commentary

4

Macro Outlook

USD vs Major Currencies – Year to October 31st, 2017

The USD saw some profit taking in November against most of the major currencies except for the AUD against which it gained 1.3%. The USD lost the most versus the MXN (-2.5%), EUR (-2.1%), GBP (-1.8%) and CHF (-1.2%). A recovery in energy prices was supportive for the MXN while European currencies saw a bounce back from the prior month’s selling pressure alongside an improving economic outlook.

The year to date picture for the USD against the major pairs remains a large sea of red with the minor exception of very minor gains versus the BRL (+0.4%). It’s biggest losses are versus EUR (-11.5%), XAU (-10.8%) and GBP (-8.6%).

Source :Bloomberg

Figure 2 - Major Currencies Performance vs USD

Source: Bloomberg

Commentary

5

Macro Outlook

2017 Consensus and our High conviction Calls

As frequent readers of our market musings will know, we like to focus this Outlook piece on how the consensus and our views played out in 2017 as well as what we believe to be the Consensus views, our High Conviction calls and the Unexpected Risks for the coming year.

So how did this year play out for both the consensus and our own expectations?

Consensus Views: Scorecard 2017 – 2 right, 1 mixed, 6 wrong

Below are some of the key consensus views as of the end of 2016 and the results as of 7th Dec. 2017:

US Stocks would be unfettered by the Trump reflation trade (i.e. tax and regulatory reform, infrastructure spending) Right – although the reflation trade reversed, equity markets outperformed led by Info. Tech (+37%), Materials (+22%) and

Financials/Healthcare/Cons. Discretionary (+21%) US Equity valuations are unsustainably high

Wrong – valuations were high but kept climbing to multi-year highs The US Fed will accelerate its policy “normalization” leading to financial sector outperformance

Wrong – Fed kept to its “data dependent” mantra and has raised only 2x 25bps to 8-Dec and will raise another 25bps on 13-Dec. European elections run the risk of major Trump-like populist upsets in the Netherlands and France

Mixed – the populists gained some ground, but centrist politicians won out European markets will outperform the US (2nd year running)

Right – but only by 2-3% for the broader indices (S&P500 +17.2% vs Euro Stoxx 600 +20.8%) Russian and Middle-Eastern equities offer great value

Wrong – valuation notwithstanding, Russian RTS$ is down 2.85% to 7-Dec. and key Middle-Eastern equities are down from -1.7% (Saudi Arabia) to -5.9% (Abu Dhabi)

The shift from monetary to fiscal policy will drive the outperformance of value stocks Wrong – MSCI World Growth stocks (+24.0%) outperform MSCI World Value stocks (+12%) by 12%

Rising US Treasury yields and USD strength will pose risks to EM flows Wrong – on all counts: US Yield curves flatter but 5-10 yr rates largely unchanged, USD trade-weighted lost 8.7% and EM Equity and Debt

markets are amongst top performers YTD China debt levels are unsustainable and could lead to a market correction

Wrong – MSCI China Equity index +44.8%, Bl. Barclays EM Loc. Gov China Bond Index +8.7%

6

Macro Outlook

2017 Consensus and our High conviction Calls

Conviction Calls: Scorecard 2017 – 2 right, 2 mixed, 2 developing

Our strategic and tactical calls for 2017were more focused on the following themes some of which we carry over from this year:

Growth in US Consumer spending will continue into the first half of 2017 but may fade during the second half depending on speed of policy implementation in the US

Right: US Consumer Expenditure averaged +2.8% YoY 1H17 vs +2.6% 2H17 to Nov. US Consumer Discretionary sector returned 21% to date Looser fiscal policies in the US and Europe will drive a small increase in Global growth

Right: Developed Market GDP growth increased from 1.9% 4Q16 to +2.8% 3Q17 The positive impact of increased infrastructure spending will not be felt until 2018 but markets will anticipate Energy prices will finish 2017 at

higher levels than they close 2016 Mixed: Infrastructure spending increase is still pending (US) and WTI started 2017 at $56 then dropped to $44 and is now at $57

Commodity exporters are set to benefit from stable to higher prices in 2017 Mixed: Industrial metal exporters (e.g. Chile, Brazil) are clear beneficiaries, Energy exporters are a mixed story

Health care spending will continue to increase as our longer life spans lead to a greater need for medical attention Developing story – pending hard data but trend is in place

Fear of global terrorism will continue to fuel security and defense budgets across the globe Developing story – as of 19 Oct. 2017, Cybersecurity Business Reports notes that cyber crime damage costs are expected to hit $6 trillion

by 2021 and cybersecurity spending will exceed $1 trillion from 2017 to 20121

7

Macro Outlook

Looking Forward

It is that time of the year when market liquidity begins to dry up as trading desks begin their annual process of locking in their gains to maximize their probability of getting a performance bonus for the year. This leads to lower trading volumes, wider bid-ask spreads and a lowered likelihood of bond trades of any significant size. Thus, a wonderful time to begin the wind-down process for the year behind and try to dust off those non-existent crystal balls to pick out the key issues for the year ahead.

What a difference a year makes! Market participants in 2016 were bewildered by unexpected political events (e.g. Brexit, Trump election) leading to sporadic bouts of relative volatility. This year has been dominated by many political headlines (Brexit process, Trump tweets and fake news, Middle-East wars, sexual harassment scandals, etc.) which were largely ignored by financial markets.

This time last year we were ruminating on the then below average levels of market volatility as measured by the VIX (S&P 500 volatility index a.k.a. “the Fear Gauge”) which had averaged 15.8%. By that measure, 2017 has been comatose with the VIX averaging 11.2%. More interesting still is to look

Data through December 31, 2016

Note: The red arrows show the S&P 500’s (SPX’s) peak-to-though declines around each episode.

Source: Investment Strategy Group, Bloomberg

8

Macro Outlook

Looking Forward

at the trading range of the VIX for the last two years: almost 17% points (11.3% to 28.1%) in 2016 versus an even narrower 7% range (9.1% to 16.0%) for 2017. We, like many others, have viewed this level of investor complacency with some concern through much of 2017. That said, we have come around to the view that there is a certain level of rational exuberance in the current market environment (more on this to follow).

To summarize 2017 in a few bullet points, this year has been dominated by the following themes:

• The Trail of Trump’s 100 days of many broken promises

• Positive election surprises in Netherlands and France

• The realities of the Brexit process

• The continual gift of Central bank liquidity

• The reality of an improving global economy

• The additional reality of accelerating earnings

9

Macro Outlook

2018 Consensus Views, our High Conviction Calls & Unexpected Risks

The Big Geo-Political Questions for 2018

US – Will the Republicans lose their control of the US Congress in the November mid-term elections?

2017 has proven to be as tumultuous a year as one could have imagined since the surprise win of Mr. Trump in 2016. The past eleven months have been marked by his tweet-storms, tribal politics and limited success in pushing through any legislation of substance. The one legislative success (depending on where you sit) in the form of the GOP tax plan will likely have to wait until the 1st quarter of 2018.

The US political landscape will be primarily dominated by two issues in 2018: the ongoing Mueller probe into Russian intervention in the 2016 presidential elections and the US midterm elections. It is impossible to assess the probable outcome of the former given the nature of special counsel investigations. The only ones with a real feel for the potential outcome will not be sharing their information until they are ready to close the investigation. Thus, a binary event for investors.

Handicapping US mid-term elections is a slightly different matter. The mid-term elections will see all 435 seats in the US House of Representatives and one-third of the 100 seats of the US Senate up for election. Historically, voter turnout (about 40%) for mid-term elections is lower than for presidential election years (50-60%) - 2018 may well prove to be the exception that proves the rule. In normal years,

Source: NBC News, Gallup 8-Aug-17

10

Macro Outlook


the president's party loses seats in Congress and over the past 21 midterm elections, the president's party has tended to lose 30 seats in the House and 4 seats in the Senate.

According to an 8th Nov. article from Vox, the current political geography of the US makes it difficult for the Democrats to regain the US Senate. They have 23 seats at risk and 10 of them are in states which supported/strongly supported Trump in 2016.

The story may well be different in the House given President Trump's historically low approval ratings at a time of economic ebullience. While it is too early to tell whether his approval rating may improve by September of 2018, a look at midterm elections since 1946 is raising serious concerns for the Republican majority in power.

Global – Will Trumpian dysfunction lead to a waning of US influence on the global landscape?

Back on the morning of November 11th, 2016, two days after Mr. Trump's surprising win, Foreign Policy magazine's Yascha Mounk wrote an article entitled "Donald Trump Is The End of Global Politics as We Know It." In it he tries to lay out what implications Trump's election carried for global relations even as he acknowledged the difficulty of this task given that "while Trump is a man of strong works, he is not one of consistent views." As

Source : Ipsos MORI, June 2016

Note: Percentages are global medians based on 37 countries. Obama presidency medians are based

on the most recently available data for each country between 2014 and 2016

Source: Spring 2107 Global Attitudes Survey. Q12 & Q30a

PEW Research Center

11

Macro Outlook


we have seen and as our readers will have seen in our past commentary, the past twelve months have proven this to be very much the case.

US influence in the global sphere has been driven by the perception that it is the preeminent economic and military power in the world (hard power tools). Joseph Nye of Harvard University coined the term "soft power" to refer to the ability to shape the preferences of others through appeal and

attraction. This soft power largely derives from the culture, political values and foreign policies of the country in question.

So, what does the world think of the USA today? We thought that the following poll results from various sources might provide food for thought going into 2018:

Note: Data for Tunisia and Colombia are from 2014

Source: Spring 2107 Global Attitudes Survey. Q12a

PEW Research Center

Note: Percentages are global medians based on 37 countries.

Source: Spring 2107 Global Attitudes Survey. Q12b, Q27b, Q31, Q32 & Q33

PEW Research Center

12

Summary of Strategic Investment View

1. How will the probable passage of the GOP Tax plan impact US companies and the economy?

Post his inauguration, we like many others remained focused on what his administration did and not on what he said he did. Not much has changed since we wrote that the Trump show would be the "gift that keeps on giving." While not delivering on many of his promises via major legislation (e.g. ACA (a.k.a. Obamacare) is still the law of the land and the $1 Trillion in infrastructure spending is still a mere dream), the administration's reversal of all things Obama (e.g. regulations) continues.

As we go to print, it looks like US Republicans will succeed in pushing through a version of their GOP tax plan sometime during 1Q18. According to a Gallup poll from Dec. 1-2, 2017, only 29% of American adults approve of the proposed plan and 56% disapprove. Thus, Republican desperation to have at least one policy win before going into the US mid-term elections of 2018 will result in the approval of a largely unpopular raft of tax policies.

Ignoring the social and political implications of the above, investors are looking at the probable reduction in the statutory corporate tax rate from 35% to 20-22% as a positive which will lead to higher earnings for US companies. This is feeding through into strategists’ case for continued upside to the S&P 500. Consensus estimates now see S&P 500 earnings increasing from US$ 133.77 (2017) to $147.12 (+10% in 2018) and $162.21 (+10% in 2019).

In a recent report from Goldman Sachs, their analysts are now looking for the S&P 500 companies to earn $150 in 2018 (above consensus) and $158 in 2019. They assign an 80% probability of tax legislation being approved during 1Q’18 including (1) a reduction of the corporate tax rate to 20%; (2) a territorial system for foreign income; (3) a limit on interest deductibility; (4) immediate business equipment expensing; (5) base broadening; and (6) a one-time tax on overseas cash and earnings to encourage repatriation. As always, the devil is in the details and final calls will depend on what comes out of the joint tax committee.

Figure: Effective Tax Rates are the key

Source : Goldman Sachs, FactSet

Key Market Drivers for 2018

13

Looking at the GS table at left, the sectors that should most benefit are those that are currently paying the highest effective tax rates (i.e. Energy, Telecoms, Industrials) while those that have been more aggressive in reducing their tax liabilities by parking earnings offshore (i.e. Info. Tech. and Health Care) will benefit the least.

2. Growing expectations of synchronized global GDP growth

Economic data over the past months has come in above expectations for the developed market (DM) economies and is driving global GDP estimates higher. Global GDP is now estimated to have grown 3.5% in 2017 versus last year’s estimate of 3.1%. Current consensus estimates for 2018 are looking for an increase to 3.6%. This has been largely driven by better than expected growth in the Eurozone (2.2% yoy CY’17 vs year-end estimates of 1.3%) and Asia ex-Japan (up 6.0% CY’17 vs 5.6% previously).



Source : Bloomberg consensus estimates—Dec. 8, 2017

Source : Bloomberg consensus estimates—Dec. 8, 2017 Source : Bloomberg consensus estimates—Dec. 8, 2017

14

Inflation expectations for the coming year remain largely under control. At a global level, analysts are penciling in a minor increase from 2.8% (CY’16) to 3.0% for 2017 and beyond. Curiously for the US, the headline CPI’s increase from 1.3% CY’16 to 2.1% for 2017 and 2018 is not reflected in the PCE deflator (the Fed’s favored measure of inflation) which remains below 1.5%. In the Eurozone, inflation is expected to remain below the 2% target of the ECB for the foreseeable future which supports our view that we should not expect any significant shift in ECB policy until 4Q18 at the earliest. The BoJ is in a similar situation. Inflation trends in the Emerging markets are expected to pick up on what looks to reflect higher inflation in LatAm.

Consensus estimates for the coming year portend a better labor picture overall as the benefits of higher growth feed through to an increasing demand for labor and DM economies look to a lower unemployment rate of 5.6% in 2017 and decreasing to 5.2% by 2019. Eurozone unemployment is the big winner with a sustained move into single digits after years of double digit prints. The US unemployment rate is expected to stabilize around the 4-4.1% level although some economists see the possibility of a downward push towards the 3.5% level.



So where does this leave us looking forward to 2018?

Our strategic and tactical calls over the coming years will be more focused on the following themes some of which we carry over from this year:

• US corporate tax cuts will drive increased capex spending, higher US company earnings and sector rotation into main beneficiaries of the lower effective tax rate

• US inflation begin to move higher but European and Japanese inflation will only inch higher during the year

• Global growth will continue to trend higher on the back of increased deficit spending in the US and looser fiscal policies in Europe

• Energy prices during 2018 will remain range bound but with an upward bias on the back of higher global growth and continued OPEC/Non-OPEC cooperation

• Commodity exporters are set to benefit from stable to higher prices in 2018

• Health care spending will continue to increase as our longer life spans lead to a greater need for medical attention

• Fear of global terrorism will continue to fuel security and defense budgets across the globe

• Indian companies will see a significant increase in earnings as the implementation of GST reform, bank recapitalization and de-monetization feed through into the real economy

Conviction Calls

15


The Unexpected

So, what are the events that we would not expect to happen but if they did, could have a significant effect (positive or negative) on our portfolios? These would include but would obviously not be limited to:

• Special counsel Robert Mueller finds senior members of Trump administration colluded with the Russians (where you stand depends on where you sit on this issue as per recent Pew research poll at left)

• North Korea and the US become embroiled in a hot war as diplomacy is overwhelmed by a personality clash

• A major terrorist event in the US or Europe succeeds in triggering an economic slowdown

• The US slips into a recession as Trump’s desire to spend hits resistance from a fiscally responsible Republican establishment

• Trump policies and increased opposition to globalization leads to a trade war which results in a global recession

• Rising wage pressure in the US drive down corporate margins

• Bitcoin crashes as governments ban the cryptocurrencies to regain control over money flows

In summary, notwithstanding our concerns about valuation levels in certain markets, our core strategic views remain optimistic over the near to medium term (next three to six months) on the back of an increasingly synchronized global growth. We continue to manage our client’s portfolios with a focus on our high-conviction views. We will continue to make tactical calls and adjust our positions to reflect market developments.

Note: Q3

Source: Survey of U.S. adults conducted Nov. 29-Dec. 4, 2017

PEW Research Center

16

MSM Absolute Return USD Portfolio to 30th November 2017

Inception = (28 Feb 2012)

The USD based Absolute Return Portfolio is focused on delivering absolute returns over the course of a three year investment cycle through a multi-asset approach. It holds both strategic medium-term investments (core book) and tactical trades (short-term hedging/positioning book) as implemented in our fund strategy.

We’ve rebalanced our positions during the month to increase our exposure to Cons. Discretionary, Cons. Staples, Health Care and Financials as we identified new companies with attractive risk/reward ratios. Positive economic data and corporate results reduce the probability of a significant drop in markets.

In November, the fund has gained 2.0 percent versus a drop of 0.6% for the HFRX Absolute Return index and a gain of 1.8% for the MSCI AC World Equity index. Our outperformance was driven by our long equity book (+1.8%) and the Alternative Investments (+0.3%). The FX book (+0.02%) and Fixed Income (+0.01%) were flat. Equity performance this month was driven by our holdings in the Consumer Staples (+0.7%), Health Care (+0.7%), and Financial (0.4%) sectors.

Year-to-date, the portfolio is up 9.0 percent versus plus 3.1 percent for the HFRX Absolute Return index and 19.8 percent for the MSCI AC World Equity Index. The portfolio is up 15.5 percent since inception.

ASSET ALLOCATION

ASSET LONG HEDGE NET

CASH 18.6 0 18.6 FIXED INC. 2.3 0 2.3 EQUITY 53.0 0 53.0 ALT. INVEST. 26.1 0 26.1

GOLD 0 0 0.0

ATTRIBUTION ANALYSIS - % OF PORT

ASSET LONG SHORT NET

CASH 0.0 0 0.0 FIXED INC. 0.0 0 0.0 EQUITY 2.0 -0.5 1.5 ALT. INVEST. 0.5 0 0.5 FX BOOK 0.0 +0.3 0.3 NET BY BOOK 2.5 -0.2 2.3

SECTOR ALLOCATION

SECTOR % OF PORT.

ABS. RETURN HF 20.2 HEALTH CARE 12.9 FINANCIALS 10.8

CASH 9.6

ENERGY 9.4

MATERIALS 8.3 CONS. DISCRETIONARY 8.2 CONS. STAPLES 6.8

MULTI-SECTOR 6.2

LONG-SHORT EQ. 4.7

TELECOM. SVCS. 2.8

INFO. TECHNOLOGY 0

TOP 10 EQUITY

DESCRIPTION % OF PORT.

SPDR US REG. BANKS 4.8 CAPITAL ONE 4.0

KONIN. AHOLD DELHAIZE 3.5

US STEEL 3.4

SHIRE PLC 3.1

MONDELEZ 3.1

ROCHE AG 3.1

KINDER MORGAN 3.0

PEARSON 2.9

CONOCO PHILLIPS 2.8

REGION ALLOCATION

REGION % OF PORT.

NOR. AMERICA 46.7 GLOBAL 20.2 EUROPE 18.6 ASIA 12.1

EMERGING 2.0

OTHER 0.2

17

Investment Ideas

Global Equity List

In Growth stocks our sectoral bias is Energy, Information Technology, and Consumer Discretionary

In Value stocks our sectoral bias is Health Care, Materials, Consumer Discretionary, and Telecommunication Services

In Yield stocks our sectoral bias is Energy, Financials and Consumer Staples

MSM Focus Ideas

Theme Strategy Name Sector CCY Market

Cap (bln) Entry Date

Initial Entry Level

Last Close

% Return From

Purch.

Top Anal. Target price % Upside

Brexit Recovery Recovery PEARSON PLC Consumer Discretionary GBp 5.91 30-Nov-16 794.00 733.00 -7.68% 766.00 4.50%

Defensive Value KONINKLIJKE AHOLD DELHAIZE N Consumer Staples EUR 22.92 26-Jan-17 19.96 18.40 -7.84% 20.80 13.07%

Defensive Value MONDELEZ INTERNATIONAL INC-A Consumer Staples USD 63.92 29-Nov-17 42.94 42.77 -0.40% 48.40 13.16%

Defensive Yield NESTLE SA-REG Consumer Staples CHF 264.53 13-Oct-14 67.80 85.00 25.37% 89.20 4.94%

Defensive Value VODAFONE GROUP PLC Telecom. Services GBp 61.30 6-Feb-14 204.45 230.05 12.52% 244.30 6.19%

Basing Commodity Value RESOLUTE MINING LTD Materials AUD 0.75 26-Apr-17 1.16 1.01 -13.36% 1.60 59.20%

Basing Commodity Recovery UNITED STATES STEEL CORP Materials USD 5.55 26-Jun-17 21.86 31.73 45.15% 39.00 22.91%

Energy recovery Growth&Yield CONOCOPHILLIPS Energy USD 62.54 21-Mar-17 45.65 52.31 14.59% 53.65 2.56%

Energy recovery Growth&Yield KINDER MORGAN INC Energy USD 39.84 13-Dec-16 21.50 17.84 -17.02% 23.30 30.61%

Energy recovery Value ROYAL DUTCH SHELL PLC-A SHS Energy GBp 200.19 22-Sep-16 1,872.00 2,394.50 27.91% 2,354.00 -1.69%

Energy recovery Value SCHLUMBERGER LTD Energy USD 86.40 1-Oct-14 101.50 62.37 -38.55% 85.45 37.00%

Finance value Value CAPITAL ONE FINANCIAL CORP Financials USD 45.60 13-Jun-17 80.67 94.06 16.60% 96.70 2.81%

Finance value Yield SWISS RE AG Financials CHF 32.25 24-Apr-17 86.95 92.10 5.92% 99.90 8.47%

Healthcare spend Growth ELI LILLY & CO Health Care USD 95.24 14-Nov-16 77.70 86.50 11.33% 95.20 10.06%

Healthcare spend Growth FRESENIUS MEDICAL CARE AG & Health Care EUR 26.81 31-Jan-17 75.33 86.83 15.27% 87.25 0.48%

Healthcare spend Yield GLAXOSMITHKLINE PLC Health Care GBp 64.13 5-Oct-17 1,516.00 1,293.00 -14.71% 1,686.00 30.39%

Healthcare spend Value ROCHE HOLDING AG-GENUSSCHEIN Health Care CHF 209.68 28-Jan-14 200.00 242.30 21.15% 262.60 8.38%

Healthcare spend Value SHIRE PLC Health Care GBp 33.34 27-Mar-17 4,676.00 3,637.50 -22.21% 5,255.00 44.47%

Healthcare spend Value UCB SA Health Care EUR 12.38 6-Nov-17 63.76 63.36 -0.63% 71.30 12.53%

US Consumer spend Value PRICELINE GROUP INC/THE Consumer Discretionary USD 85.88 21-Nov-17 1,761.00 1,760.92 0.00% 2,004.00 13.80%

US Consumer spend Growth STARBUCKS CORP Consumer Discretionary USD 84.94 29-Nov-17 57.25 59.70 4.28% 63.40 6.20%

US Consumer spend Growth VISA INC-CLASS A SHARES Information Technology USD 255.90 29-Feb-16 73.50 112.92 53.63% 122.50 8.48%

Last update target prices: 15-Dec-17

Pricing Date: 15-Dec-17

18

Investment Ideas

Global Fixed Income List - USD Investment Grade Bond Ideas

Investment Grade Bond Ideas: Min. issue size USD 500MM, Moody/S&P Stable to Positive Outlook, 3-8yr Maturity

Indicative Prices as of: 15-Dec-17

Industry Issuer Name Curr Cpn Maturity

Date Mty Type Next Call

Date Ask Price

Yield to Worst (Ask)

Modified Duration

(Ask) Moody

Rtg Moody Outlook

S&P Rtg

S&P Outlook

Internet BAIDU INC USD 2.75 09-Jun-19 AT MATURITY N.A. 100.421 2.46 1.43 A3 NEG N.A. N.A.

Media CBS CORP USD 2.3 15-Aug-19 CALLABLE 15-Jul-19 99.835 2.40 1.60 Baa2 STABLE BBB STABLE

Banks SANTANDER UK PLC USD 2.35 10-Sep-19 AT MATURITY N.A. 100.14 2.27 1.67 Aa3 STABLE A STABLE

Banks GOLDMAN SACHS GROUP INC USD 2.55 23-Oct-19 AT MATURITY N.A. 100.109 2.49 1.78 A3 STABLE BBB+ STABLE

Internet ALIBABA GROUP HOLDING USD 2.5 28-Nov-19 CALLABLE 28-Oct-19 100.302 2.33 1.80 A1 STABLE A+ STABLE

Agriculture ALTRIA GROUP INC USD 2.625 14-Jan-20 CALLABLE 14-Dec-19 100.738 2.24 1.91 A3 STABLE A- STABLE

Auto Manufacturers DAIMLER FINANCE NA LLC USD 2.25 02-Mar-20 AT MATURITY N.A. N.A. N.A. N.A. A2 STABLE A N.A.

Electric KOREA EAST-WEST POWER CO USD 2.5 02-Jun-20 AT MATURITY N.A. 99.504 2.71 2.36 Aa2 STABLE AAu STABLE

Insurance AMERICAN INTL GROUP USD 3.375 15-Aug-20 AT MATURITY N.A. 102.46 2.41 2.51 Baa1 STABLE BBB+ NEG

Lodging MARRIOTT INTERNATIONAL USD 3.375 15-Oct-20 CALLABLE 15-Jul-20 102.911 2.20 2.45 Baa2 STABLE BBB STABLE

Diversified Finan Serv AMERICAN EXPRESS CO USD 2.65 02-Dec-22 AT MATURITY N.A. 99.683 2.72 4.61 A3 STABLE BBB+ STABLE

Auto Manufacturers FORD MOTOR CREDIT CO LLC USD 3.664 08-Sep-24 AT MATURITY N.A. 101.63 3.39 5.87 Baa2 STABLE BBB STABLE

Speculative High Yield Bond Ideas

Sovereign REPUBLIC OF SRI LANKA USD 5.125 11-Apr-19 AT MATURITY N.A. 102.03 3.52 1.25 B1 NEG B+ STABLE

Banks ICICI BANK LTD/DUBAI USD 3.125 12-Aug-20 AT MATURITY N.A. 100.35 2.99 2.50 Baa3 STABLE BBB- N.A.

Banks BANCO DO BRASIL (CAYMAN) USD 5.375 15-Jan-21 AT MATURITY N.A. 102.695 4.43 2.75 Ba3 NEG N.A. N.A.

Oil&Gas PETROBRAS GLOBAL FINANCE USD 5.375 27-Jan-21 AT MATURITY N.A. 103 4.33 2.79 Ba3 STABLE BB- N.A.

Electric CENT ELET BRASILEIRAS SA USD 5.75 27-Oct-21 AT MATURITY N.A. 104.125 4.57 3.42 Ba3 STABLE BB NEG

Banks BANCO DO BRASIL (CAYMAN) USD 5.875 26-Jan-22 AT MATURITY N.A. 105.5 4.39 3.56 Ba3 NEG N.A. N.A.

Iron/Steel ABJA INVESTMENT CO USD 5.95 31-Jul-24 AT MATURITY N.A. 105.922 4.89 5.35 N.A. N.A. BB- N.A.

Source: Bloomberg

The information in this report is indicative only. Pricing will vary according to market conditions.

19

Investment Ideas

Global Fixed Income List - GBP and CHF Investment Grade Bond Ideas

Investment Grade Bond Ideas: Min. issue size GBP/CHF 200MM, Moody/S&P Stable to Positive Outlook, 3-8yr Maturity

Indicative Prices as of: 15-Dec-17

Industry Issuer Name Curr Cpn Maturity

Date Next Call

Date Ask Price

Yield to Worst (Ask)

Mod. Dur. (Ask)

Moody Rtg

Moody Outlook S&P Rtg

S&P Out-look

Banks EFG FUNDING GUERNSEY LTD CHF 4.750 31-Jan-23 31-Jan-18 100.61 -0.57 0.11 N.A. N.A. N.A. N.A.

Banks SANTANDER UK PLC GBP 1.875 17-Feb-20 N.A. 101.94 0.96 2.09 Aa3 STABLE A STABLE

Banks JPMORGAN CHASE & CO GBP 1.875 10-Feb-20 N.A. 102.00 0.93 2.09 A3 STABLE A- STABLE

Retail DEBENHAMS PLC GBP 5.250 15-Jul-21 N.A. 101.14 4.90 3.16 Ba3 STABLE BB- NEG

Banks CRED SUIS GP FUN LTD GBP 3.000 27-May-22 N.A. 105.79 1.63 4.10 Baa2 STABLE BBB+ N.A.

Auto Manufacturers FCE BANK PLC GBP 2.727 03-Jun-22 N.A. 104.22 1.73 4.13 Baa2 STABLE BBB STABLE

Banks CRED SUIS GP FUN LTD GBP 2.750 08-Aug-25 N.A. 103.91 2.19 6.79 Baa2 STABLE BBB+ N.A.

Source: Bloomberg

The information in this report is indicative only. Pricing will vary according to market conditions.

20

Proprietary Investment Ideas

If interested please discuss with MSM...

ALTERNATIVE INVESTMENTS

NAME Manager Style Fund CCY Last Close As of…

AuM Mio (ref

ccy.)

Performance

YTD 2016 2015 2014 2013 2012

Enam India Growth Fund Indian securities USD $ 372.66* 30/11/2017 115.6 57.9% 7.20% 7.20% 46.20% 3.00% 34.10%

ENAM India Growth Fund seeks preservation and long-term growth of capital modelled on Long Only Equity Strategy. It identifies high-quality businesses that are structurally well-positioned, have sustainable competitive advantages and execution capability for consistent long-term growth. It will seek to create portfolio of around 15-25 stocks and aims to deliver consistent alpha.

Doric Asia Pacific Small Cap Fund Asian Securities USD $ 543.01** 30/11/2017 258.00 26.9% -1.70% 8.60% 30.10% 15.20% 25.80%

The Doric Asia Pacific Small Cap Fund seeks to achieve medium to long-term capital appreciation of greater than 15% annualized return with two-thirds market risk. The fund invest in listed securities with a market capitalisation generally less than USD 2 billion in the Asia Pacific region including Japan, focusing on core markets of Greater China, India and South East Asia. Doric invest in market leaders that are emerging blue chip companies with solid business models that should experience much faster growth than GRP supported by healthy balance sheets, high returns on capital and reasonable valuations.

Malabar Global Absolute Return Fund Global Macro Fund USD $ 141.09 30/11/2017 215.3 16.91% -2.67% 0.50% 0.92% 15.05% 5.22%

Malabar Global Absolute Return Fund is a sub-fund of the Malabar Fund, an open ended specialised investment company organised under the laws of Luxembourg. It seeks to achieve long term absolute returns through the strength of their investment ideas and not through excessive leverage. A multiple approach methodology is used to make investment decision. Top down global macro outlook drives asset allocation across all assets classes, macro views are used to pick securities and also some opportunistic ideas are chosen.

Iceman Dollar Absolute Return IC Global Macro Fund USD $ 1.1549 30/11/2017 13.13 9.01% -6.84% 9.92% 0.75% 5.64% 3.65%

The IC is a private limited liability incorporated cell of Iceman Jersey ICC. The investment objective is to achieve high absolute returns with limited correlation to global equity and bond markets. The IC will attempt to achieve its objective by exploiting opportunities among and within global asset classes, which may include: global equities, global fixed income securities (including structured securities), currencies, commodities, and specialised investment funds. In September 2015 the fund was renamed from Iceman Global Unit Linked IC fund to Iceman Dollar Absolute IC Fund.

* Correction : new data showing price per share/units. Previously shown price of growth from USD 100 at inception. ** Data is based on weekly NAV estimate provided by the fund house

21

Technical Heat Maps

Recommended Trades

Buy EURUSD 1.1690-1.1720 looking for a move to 1.1850 and 120.00

Sell DAX 13340-13360 looking for a move to 13080 and 12800

Buy WTI 55.90—56.20 looking for a move to 58.50 and 60.00

Buy Gold 1235-37 looking for a move to 1267 and 1300

Buy GBPUSD 1.3280– 1.3310 looking for a move to 1.3450 and 1.3610

Commodities Gold Copper Silver WTI

Crude XAU/EUR

SELL ZONE LEVEL 2 1294-1300 315.75-319.65 16.85-17.10 59.30-59.60 1102-1108

LEVEL 1 1260-1267 308.40-311.80 16.20-16.40 58.18-58.60 1068-1075

CURRENT PRICE

BUY ZONE

LEVEL 1 1233-1237 276.03-279.90 15.60-15.75 56.90-57.10 1030-1035

LEVEL 2 1205-1211 269.90-266.85 15.37-15.47 55.90-56.20 998-1003

EUR/USD GBP/USD AUD/USD USD/JPY EUR/JPY Currencies

SELL ZONE LEVEL 2 1.2010-1.2050 1.3440-1.3460 0.7644-0.7670 115.35-115.60 134.90-135.30

LEVEL 1 1.1850-1.1880 1.3357-1.3384 0.7585-0.7610 114.20-114.50 134.10-134.40

CURRENT PRICE

BUY ZONE LEVEL 1 1.1680-1.1715 1.3280-1.3310 0.7490-0.7510 113.00-113.15 132.60-132.90

LEVEL 2 1.1480-1.1520 1.3170-1.3200 0.7440-0.7460 112.50-112.70 131.90-132.25

Equities Index NASDAQ S&P DAX

SELL ZONE LEVEL 2 6424-6440 2687-2691 13340-13360

LEVEL 1 6397-6405 5669-2673 13210-13250

CURRENT PRICE

BUY ZONE LEVEL 1 6340-6360 2639-2642 12060-12080

LEVEL 2 6190-6220 2600-2605 12910-12945

22


FX

FED to announce a December 2017 rate hike as Yellen steps down as Fed Chair in January 2018

The Fed is widely expected to deliver a hike at the December meeting. While the market expects little change to the language in the statement, the focus will mostly be on changes to the summary of economic projections (SEP) and the post-meeting press conference which will be the last for Yellen as Fed Chair.

It is probably too early for the Fed to express concerns over the curve, as financial conditions remain accommodative, making it easier for the Fed to continue to tighten monetary policy despite a meaningful change in realised inflation. In the SEP, we expect a small uptick in growth in 2018 owing to tax reform, but longer-run growth prospects should remain unchanged.

Little changes are also expected in headline or core inflation, but the unemployment rate could be revised lower in 2019. However, we do not expect a change in the natural rate of unemployment, although the unemployment rate continues to decline and wage gains remain tepid. On the dots, the median is expected to stay at 3 dots for 2018, though many economists now expect four hikes next year.

On Wednesday we also get the CPI data for November. Following the strong PPI print on Tuesday most economists are now expecting an increase of 0.3% in core CPI for the month of November. This will continue to support our call for a gradual re-pricing of term premiums over the upcoming quarters. With supply out of the way strengthen in data is likely to support a sell-off in treasuries with should be dollar supportive in the near term

Forward guidance from ECB for 2018 keenly awaited

The European Central Bank made the big policy announcements at its last meeting, but the detail of how it plans to scale back asset purchases is still missing.

President Mario Draghi may cast more light on specifics this week, though he is under no obligation to do so. Forward guidance should also be a focus of the meeting and the ECB will probably raise its forecasts for the path of inflation in the near term. Bloomberg Economics expects underlying inflation to remain weak enough next year to justify a final extension to its QE program beyond September.

The ECB’s triple forward guidance -- on interest rates, the duration of QE and bond reinvestments -- will be a focus of the meeting. Draghi is likely to be tested on their resilience during the press conference, most notably the decision to bind asset purchases to the inflation outlook. As the minutes of the last meeting revealed, "several members" reiterated that "the present forward guidance linking the APP purchases to the criteria for a sustained adjustment in the path of inflation should be replaced over time with a reference to the monetary policy stance, in all its dimensions."

Given the pick-up in economic growth this year, the case for adding additional stimulus each month has weakened. If more members of the Governing Council come to accept this argument, another extension beyond September 2018 will become less likely -- and tweaking that guidance would be a first step toward acknowledging that.

Still, a "large majority" decided to keep the guidance unchanged in October and that’s very likely to be the case again this week. Doves are

Talking Points

23


FX

still in a majority on the council, which means a patient approach is likely to prevail in Frankfurt. This will keep the door open for further monetary stimulus if the underlying inflation remains weak next year.

Pound Gains on Potential Brexit-Bill Concessions in Parliament

The pound rose after U.K. Prime Minister Theresa May’s government signalled lawmakers will get a vote on a Brexit deal in a concession to get legislation through parliament. Sterling snapped three days of losses after U.K. Brexit Secretary David Davis promised lawmakers that the U.K. won’t ratify any deal without the agreement of parliament, as a Brexit bill faces its first vote where the government might lose.

“What we’ve seen is a slow capitulation of the U.K. government toward a) what the EU asks for and b) what the softer Brexit Tory rebels have long been calling for,” said Jordan Rochester, a foreign-exchange strategist at Nomura International Plc. “The end destination is still unclear, but the direction of travel is not, and the pound should head higher as a result.”

Sterling’s trajectory has been dominated by Brexit negotiations in recent weeks, with cracks in the unity of the U.K.’s cabinet position weighing since a deal on Friday to move talks onto trade. The EU’s chief Brexit negotiator Michel Barnier said there would be “no going back” on Friday’s agreement.

The pound is still up 8 percent this year, with the Bank of England having raised interest-rates at its last meeting as Brexit’s impact on the economy hasn’t been as bad as feared. While it isn’t expected to move on interest rates on December 14th , the market will be watching if it acknowledges the Brexit progress removes downside risks.

24

Important Information This communication is provided for information and discussion purposes only. Unless otherwise indicated, (i) it does not constitute an offer or recommendation to purchase or sell any financial instruments or other products, and (ii) 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 or financial situation of any particular person. MSM is not acting as an advisor, fiduciary or agent. 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 the investor's own objectives, experience and resources. The information contained in this communication is based on generally available information and, although obtained from sources believed by MSM to be reliable, its accuracy and completeness cannot be assured, and such information may be incomplete or condensed. Any assumptions or information contained in this document constitute a judgment only as of the date of this document or on any specified dates and is subject to change without notice. Investments in financial instruments or other products carry significant risk, including the possible loss of the principal amount invested. Financial instruments or other products denominated in a foreign currency are subject to exchange rate fluctuations, which may have an adverse effect on the price or value of an investment in such products. This document does not purport to identify all risks or material considerations which may be associated with entering into any transaction. MSM accepts no liability for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained in or derived from this communication. This document may contain historical and forward looking information.

Disclaimer

Documents

2018 Outlook and Key Themes · 2018-12-20 · 2018 Outlook and Key Themes Dec 2017 Published: 28 December 2017. 2 Macro Outlook Divergence between regional equity markets remained