Global Market Outlook-EN-Web

Looking through the soft patch■ We continue to believe 2013 is a Year of Transition dominated

by broadening economic growth and receding tail risks. ■ We expect equities’ outperformance to extend through the

rest of the year. Investors who are underweight equities should consider taking a time-bound approach to raising global equity allocations. (Chart 1)

■ We struggle to find value in G3 government bonds. Within corporate credit, we remain comfortable with US HY on a relative basis. Asian local currency bonds remain attractive.

Going through a soft patch• US: Data has started to disappoint expectations. Housing market

resilience should mean any short term weakness is limited • Europe: Data also disappointed in Europe, consistent with a

continued recession in Q2. We expect core economies to improve later in the year based on a rebound in the global economy

• Asia: China data raised concerns about the likely pace of growth going forward. Bank of Japan policy announcement exceeded expectations, raising hopes for an emergence from deflation

Investment strategy implications (Chart 2)■ Cash: Retain 12m Underweight

Expected to generate returns below the level of inflation■ Bonds: Retain 12m Underweight

Little value seen in USD bond universe; short duration favoured US HY credit offers little value beyond yield, but remains the best of a bad bunchAsia local currency bonds preferred

■ Equities: Retain 12m Overweight

Broadening recovery, receding tail risks and reasonable valuations suggest scope for continued equity outperformance

Trying to time the market risks missing out on further gains

Consider a time-bound, dollar cost averaging approach to building an overweight global allocation

■ Commodities: Reduce to 12m NeutralRising supplies a concern for commodities, despite the expectation of stronger growth. A firmer USD also a headwind Remain underweight gold, although an extended period of consolidation is likely in the near term

■ Alternatives: Retain 12m Neutral We prefer a blended approach to give protection against downside risks and the potential to perform well under our central scenario

■ Currencies: Neutral on Asia ex-Japan and commodity FXUSD strength expected to continue after a pauseCNY likely to act as key anchor for Asia ex-Japan currencies

Note: OW = Overweight, N = Neutral, UW = Underweight.Source: Standard Chartered

Chart 2: Asset allocation summary

Cash

Fixed Income

Equity

Commodities

Alternatives

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12-mthMay 2013

Investment Strategy

Economic and policy outlook

Asset class outlook

Fixed Income

Equities

Commodities

Alternative Strategies

Foreign Exchange

Conclusion

Asset allocation summary

3-12 Month Market Outlook

Disclaimer

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Contents

Global Market Outlook-May 2013This reflects the views of the Wealth Management Group

Page 1 of 16

Global high yield bond yield – Global equity earnings yield

Source: MSCI, Bloomberg, Standard Chartered

Chart 1: Equities remain attractively valued relative to bonds even after 2013 YTD gains

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High yield bonds relatively cheap

Equities relatively cheap

Steve Brice Chief Investment Strategist

Rob Aspin, CFA Head, Equity Investment Strategy

Manpreet Gill Head, FICC Investment Strategy

Audrey Goh Investment Strategist

Suren Chelliah Investment Strategist

Victor Teo Investment Strategist

Our investment themes have continued to perform well. (Chart 3) Global equities remain the top performing asset class for the year. The diversified income basket has also performed well. To be fair, this has also been led by the equity component, but we have also seen improved performance by both Asian local currency and USD high yield bonds over the past month. Meanwhile, our least favoured asset class – G3 sovereign bonds – has lost value year-to-date, despite a strong rally over the past month. (Chart 4)

B.R.I.D.G.E. – Under scrutiny, but intact

The key macro headlines from our B.R.I.D.G.E. investment framework were Broadening global recovery and Receding tail risks. (Chart 5, Chart 6) Two months ago, we highlighted that the ‘next 2-3 months will be a test for this prognosis’ (Still in Transition, Global Market Outlook, March 2013). So it has proven. Economic surprises are now negative in the US, Europe and Asia.

To some extent, this is due to expectations having risen. However, there has also been an undoubted softening in the data of late as well. This was epitomised by the IMF’s decision to downgrade its global growth forecast for 2013 down to 3.3% (from 3.5% six months ago).

However, we see this as a temporary lull in economic growth. A critical assumption is that the US housing market continues to recover and that net job creation continues at a reasonable pace. Meanwhile, we assume the Chinese economy continues its U-shaped recovery.

Global equities still in a sweet spot

1) Growth is expected to hold up and accelerate modestly in H2

2) Significant excess capacity means inflation concerns are limited

3) Central banks are expected to focus on avoiding downside risks

4) Equities are still cheap on an absolute basis and relative to other asset classes

Therefore, we believe equities will continue to perform well on an absolute basis and relative to other asset classes through the end of 2013. There is broad consensus that equity markets will experience a pullback. Often, when such a consensus is formed, the market refuses to comply. However, we are heading into a seasonally weak period for equity markets (see Weekly Market View – Hitting a soft patch, 19 April 2013). A short term pullback or consolidation therefore cannot be ruled out.

Conclusion - We recommend underweight investors consider taking a time-bound, dollar cost averaging approach to raising equity allocations, using any weakness to accelerate purchases.

Investment Strategy

Page 2 of 16

Global Market Outlook-May 2013

Chart 6: Receding tail risks

Source: IMF April World Economic Outlook, Standard Chartered

IMF’s views on changing systemic risks over past 6 months

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Chart 5: Broadening global recovery

Source: IMF April World Economic Outlook, Standard Chartered

IMF GDP forecasts indicate 2014 expected to besignificantly better than 2012 outside of Japan

Chart 4: Asset Performance (USD)*

Source: Bloomberg, Standard Chartered

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+ High Dividend Yield Equities

Diversified Income Basket

Global Equities

+ Asia Local Currency Bonds

+ Global High Yield Bonds

G3 IG Bonds

Chart 3: B.R.I.D.G.E. themes performing well so far


* For the period 31Dec 2012 to 25 April 2013* Income basket represents equally weighted performance of global high dividend yielding equities (MSCI ACWI High Dividend Yield USD), Asia local currency bonds (BarCap Asia Local Net TR USD) and Global high yield bonds (BarCap Global HY TR USD)

B.R.I.D.G.E. performance YTD (USD)*

Europe: Still in recession (Chart 10 & 11)■ The deterioration in recent indicators has been marked. After rising sharply in Q1, confidence indicators have

significantly reversed these gains. The recent Euro area PMI data held steady at 46.5, signalling a further contraction in the economy is likely in Q2.

Economic weakness likely to prove transitory

Data has started to surprise on the downside in the US, Europe and Asia over the past month. To some extent, this is due to a slight weakening in the headline numbers. However, it is also related to the fact that expectations, particularly in the US, had risen significantly. For us, the key differentiator between this slowdown and previous similar episodes over the past 3 years is the fact that the US housing market is recovering. Therefore, we continue to see 2013 as a Year of Transition towards stronger growth.

US: Data starts to disappoint (Chart 7)■ Consumer’s resilience fades. After holding up in the first two

months of the year in the face of rising taxes and gasoline prices, retail sales and consumer confidence have recently shown signs of weakness. However, it is important to note that confidence remains in a longer term uptrend and the recent decline in gasoline prices should help offset the impact of rising taxes to some extent. (Chart 8)

■ Housing market remains key. There are three types of housing data – construction, sales and prices – that are important. However, we believe prices are the most important and price increases are still accelerating. This should help consumers to re-accelerate spending due to the positive wealth effects. (Chart 9)

■ We continue to expect net job creation to average 175k per month. Even given the very disappointing 88k print in March, the year-to-date gains have been broadly consistent with this forecast (168k Q1 average). However, investors will keenly await April’s number to confirm that March was a blip, especially with the spending sequester starting to take effect and, as a result, public sector jobs coming under increased scrutiny.

■ Small business confidence fragile. While small business confidence has also been in an uptrend over the past few years, it remains at relatively low levels. Again, we cannot stress enough the importance of the need to resolve government fiscal and debt ceiling issues and provide some certainty to this important corporate segment. The US President’s draft budget is a significant step in the right direction, but the gap between the two parties on how to ensure debt sustainability remains wide.

■ The Fed is expected to be on hold through 2013. Speculation of a reduction of the current USD 85bn in monthly asset purchases later in 2013 looks premature as the economy weakens slightly. Recent Fed comments suggest they remain willing to support the economy should growth or inflation falter significantly. However, we continue to believe this will not be necessary. Indeed, we have brought forward our expectation for reduced asset purchases to Q1 next year from Q2 previously.

Economic and policy outlook

Our investment themes have continued to perform well. (Chart 3) Global equities remain the top performing asset class for the year. The diversified income basket has also performed well. To be fair, this has also been led by the equity component, but we have also seen improved performance by both Asian local currency and USD high yield bonds over the past month. Meanwhile, our least favoured asset class – G3 sovereign bonds – has lost value year-to-date, despite a strong rally over the past month. (Chart 4)

B.R.I.D.G.E. – Under scrutiny, but intact

The key macro headlines from our B.R.I.D.G.E. investment framework were Broadening global recovery and Receding tail risks. (Chart 5, Chart 6) Two months ago, we highlighted that the ‘next 2-3 months will be a test for this prognosis’ (Still in Transition, Global Market Outlook, March 2013). So it has proven. Economic surprises are now negative in the US, Europe and Asia.

To some extent, this is due to expectations having risen. However, there has also been an undoubted softening in the data of late as well. This was epitomised by the IMF’s decision to downgrade its global growth forecast for 2013 down to 3.3% (from 3.5% six months ago).

However, we see this as a temporary lull in economic growth. A critical assumption is that the US housing market continues to recover and that net job creation continues at a reasonable pace. Meanwhile, we assume the Chinese economy continues its U-shaped recovery.

Global equities still in a sweet spot

1) Growth is expected to hold up and accelerate modestly in H2

2) Significant excess capacity means inflation concerns are limited

3) Central banks are expected to focus on avoiding downside risks

4) Equities are still cheap on an absolute basis and relative to other asset classes

Therefore, we believe equities will continue to perform well on an absolute basis and relative to other asset classes through the end of 2013. There is broad consensus that equity markets will experience a pullback. Often, when such a consensus is formed, the market refuses to comply. However, we are heading into a seasonally weak period for equity markets (see Weekly Market View – Hitting a soft patch, 19 April 2013). A short term pullback or consolidation therefore cannot be ruled out.

Conclusion - We recommend underweight investors consider taking a time-bound, dollar cost averaging approach to raising equity allocations, using any weakness to accelerate purchases.

Page 3 of 16


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Chart 8: Despite recent weakness the broader trend in confidence indicators remains positive


US consumer confidence and NFIB small business confidence optimism index

Chart 9: House prices continue to rise, supporting wealth effect, while gasoline prices have peaked

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Chart 11: Euro area banks still reluctant to lend


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Chart 7: US economic data starts to disappoint

Source: Citigroup, Bloomberg, Standard Chartered

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Chart 14: Bank of Japan surprises on the upside


Projections for the Bank of Japan’s balance sheet

■ Global growth remains the key to Europe’s outlook. Recent developments reinforce the outlook for any growth to be driven by a global recovery with the core, in particular Germany, to benefit the most. However, the export orders component of the Euro area PMI has weakened for two consecutive months, suggesting any rebound may be some time away.

■ Fiscal austerity likely to continue for now. The Euro area’s budget deficit narrowed to 3.7% of GDP in 2012 from 4.2% in 2013. However, the move was dominated by Germany’s fiscal tightening, which accounted for around 60% of the reduction. Deficits actually widened in Spain, Greece and Portugal, although some of this was due to one-off factors such as bank recapitalisations.

■ Periphery still under pressure. While bond yields have generally remained relatively low in recent times – outside of Slovenia – we are still waiting to see whether Cyprus’ bail-in of depositors will change the psychology of depositors elsewhere in Europe. The ECB is expected to provide ample liquidity to the periphery’s banking sectors in need, but this reassurance has been insufficient to support their appetite to lend to companies.

■ High corporate debt levels to limit economic recovery. The IMF’s latest Global Financial Stability Report highlighted its concerns on high corporate indebtedness, particularly in the periphery countries, which could constrain growth going forward.

■ Italian saga continues. Italy has still to form a stable government and may still fail to do so, leading to further elections and uncertainty in the months ahead.

Page 4 of 16


Asia: Data weakness a concern■ Weakness in Chinese data continues in March. We have seen some continued weakness in recent data including Q1

GDP, retail sales and industrial production. PMI manufacturing new orders index bounced in March, which hints at a brighter future. However, the authorities have been keen to emphasise that the Q1 7.7% growth rate was acceptable, reinforcing the view that it is the quality of growth that matters going forward, rather than its pace. (Chart 12 & 13)

■ China’s reform agenda key to sentiment. The focus going forward is the extent to which the new leadership will accelerate economic reforms. There is a balancing act between pro-market reform – to help sustain productivity and economic growth – and ensuring a more inclusive sharing of the benefits of growth. The Third Plenary Session in September is when the government is expected to outline in greater detail its reform agenda.

■ Bank of Japan pleasantly surprises. The Abe leadership continues to deliver on its policy promises. The Bank of Japan’s monetary policy easing in early April was significantly larger than expected. However, domestic sentiment towards these policies remains reserved. The recent quarterly Tankan survey of business confidence failed to see a significant increase in investment intentions and the expectation for USD-JPY at year end was 88 (versus a current rate of almost 100). This highlights the challenges faced by the authorities to change perceptions of a stimulus-wary population, but we believe there is an unprecedented commitment to boost growth and inflation. (Chart 14)

■ India data has been mixed. PMI data showed a deterioration, but industrial production and export data picked up. Probably most important for sentiment is the deceleration in inflation which will keep people hoping for another rate cut.

Overall, developments over the past month are testing the belief that this is a Year of Transition towards stronger growth. However, we believe there are significant differences between this spring slowdown and those of the past 3 years with the key difference being the outlook for house prices in the US.

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Chart 12: China and Japan data disappointing

Source: Citigroup, Bloomberg, Standard Chartered

Economic surprise indices

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Chart 13: China new orders index bounces, but overall PMI data still weak


China PMI indices

We remain Underweight G3 government bonds; use recent falls in yields to shorten maturity profile.

In the IG space, favour corporates over sovereigns; in the HY space, maintain preference for the US, but avoid Europe.

Maintain preference for Asia local currency bonds, but keep close watch on risk of USD strength. (Chart 15)

G3 sovereign bonds: Consider using recent falls in yields to reduce maturity profiles. Investors continue to be very poorly compensated for holding G3 government bonds, while they face considerable downside risk if yields begin to rise. Within investment grade, investors are likely better off in corporate bonds over government bonds, and are likely better served by ensuring their USD bond portfolios have a short average maturity profile.

Over the last month, yields fell across all G3 markets – in Japan, this was a direct response to the BoJ’s policy, while in Germany and the US it was likely led both by disappointing economic data and concerns Japanese liquidity would find its way into these markets. So far, we have seen scant evidence of bond outflows from Japan into other markets. Reports also suggest Japan’s largest domestic bond investors are not considering substantial shifts to bonds outside Japan. We therefore see the current fall in G3 yields as an opportunity for investors to rotate out of long-maturity bonds and continue reducing the interest rate sensitivity of their bond portfolios.

Corporate credit (hard currency): US HY still our preferred pick. Yields on HY corporate credit are remarkable similar across the US, Europe and Asia. The risks, however, are not similar. Europe continues to face considerable economic uncertainty which, in turn, has significant downside implications on default risk. In Asia, economic or corporate conditions are not poor, but concentration risk remains high. On balance, thus, the US offers the most attractive risk-reward proposition while Europe offers the least. (Chart 16)

Fixed Income – Underweight

Page 5 of 16


Nevertheless, we maintain a close watch on risk indicators for the HY asset class. Anecdotal evidence suggests issuance of ‘CCC’-rated bonds continues to be high while issuers are taking advantage of strong momentum in the asset class to increasingly loosen bond covenants, both of which are sources of concern for the asset class. As we pointed out last month, however, lending conditions remain comfortable.

Local currency bonds: We remain comfortable with Asia local currency bonds, but are watching currency risks closely. Positive real yields and flat-to-lower policy rates remain supportive of local currency bonds. The risk of a stronger USD, however, means the risk-reward trade-off on the currencies may be deteriorating. Historically, USD strength has tended to be broad-based. While a case can be made that things might indeed be different today for many Asian countries, the likelihood of such an exception remains small. We believe Asia local currency bonds remain attractive at this time, but currency risk is something we are watching closely.

Conclusion: Overweight US HY and Asia local currency bonds. Stay Underweight G3 sovereigns and use the recent rise in yields to continue reducing portfolio maturity profiles. Favour corporates over sovereigns. (Chart 17)

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Chart 17: Temporary fall in yields offers opportunity to reduce maturity profiles


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Chart 15: Fixed income asset class performance YTD (USD)*

* For the period 31 Dec 2012 to 25 April 2013Indices are Barclays Capital US Agg, US High Yield, Euro Agg, Pan-Euro High Yield, JPMorgan Asia Credit Index

Source: Barclays Capital, JPMorgan, Bloomberg, Standard Chartered.

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Chart 16: Major regions offer similar yields despite considerable differences in risk profiles

*Barclays US HY for Europe, Barclays Pan-European HY for Europe, JPMorgan Asia Credit Index HY for Asia

Source: Barclays, JPMorgan, Bloomberg, Standard Chartered

Regional HY indices, YTM*

Global equities remain our preferred asset class. They remain cheap compared to bonds and are likely to be supported by continued growth, low inflation and accommodative monetary policies. (Chart 18)

■ We favour an allocation to a global diversified equity portfolio rather than focusing on a specific region, country or sector.

■ We advocate underweight investors consider using a time-bound approach for rotating out of bonds or cash into equities, accelerating purchase on any weakness.

With the more defensive sectors (Staples, Healthcare and Utilities) having outperformed year to date, investors are still not fully buying into our theme that we are in a ‘Year of Transition’ towards stronger growth. In our view, investors are continuing to search for yield and have chased these sectors for their relatively high yield and stable earnings. Should our thesis of stronger growth play out, we would ultimately anticipate a rotation within the equity markets towards the more cyclical sectors, which offer significant value at current levels.

We have made a number of changes to our equity allocations. These are:■ Japan upgraded to Neutral.■ Asia ex-Japan: downgraded to Neutral with China, South

Korea and Thailand all being downgraded to Neutral while Indonesia and Taiwan are upgraded to Neutral.

■ Europe downgraded to Underweight.

Equity – Overweight

Page 6 of 16


These changes are detailed in the section below which covers our preferred markets and sectors:

DM vs. EM: We have a general preference for DM over EM and this view has been consolidated by our downgrade of Asia ex-Japan to Neutral from overweight. We have long been advocates of the view that some of the best brands and franchises are to be found in the Developed markets and as their earnings growth from EM is not, in our opinion, fully priced in, this is one of our preferred longer term themes.

US (OW): The positive wealth effect from the US housing sector’s recovery should drive consumption higher over time. This is positive for the Consumer Discretionary space, in particular, but should also flow through to other sectors such as Technology and Energy. Earnings so far have come in marginally ahead of expectations, but the improving trend in the earnings revisions index has, at least for the moment, stalled. This is something that investors need to monitor over the coming months. (Chart 19)■ Technology: In our view, Technology still offers the best upside, with the sector trading below the market, but having

much higher levels of return on equity and growth. We also expect the CAPEX cycle to improve as the current age of equipment is well above average levels due to companies hoarding cash. Due to a relatively low dividend payout ratio, the Technology sector has not benefitted from the search for yield theme, but we expect this to change over time as companies are increasingly encouraged by the market to increase payouts. (Chart 20)

■ Energy: While the sector has underperformed due to lower oil prices, it still offers attractive valuations and yield. ■ Healthcare: Though we are only Neutral US Healthcare, we would still advocate investors take exposure to the

sector as valuations remain fair and the sector benefits from better than average earnings visibility. We didn’t overweight the sector due to concerns that the US may, due to budgetary pressure, cut some of their medical benefits, but to date this has not been the case.

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Chart 19: Positive wealth effect from rise in home prices


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Chart 20: Tech firms continue to deliver high returns


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Chart 18: Equity market performance (USD)*

* For the period 19 Mar 2013 to 25 April 2013Indices are MSCI World TR, MSCI Emerging Markets TR, MSCI USA TR, MSCI Europe TR USD, MSCI Asia ex-Japan TR USD, MSCI Japan TR USD


Page 7 of 16


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Chart 22: Japan equities remain cheap even after the rally

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Chart 23: Clear divergence in valuations in Asia region


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Chart 21: Yen weakness a key driver for Japanese equities

MSCI Japan and USD/JPY Currency

JAPAN (upgraded to Neutral from underweight): So far, the Abe leadership has delivered on its stimulus plans. The BoJ’s recent policy announcement has encouraged us and we have decided to raise Japan to Neutral. The rapid upward revision to earnings supports this shift.

So far, it is foreign investors that have driven the market higher and, with local investors being significantly overweight JGBs and cash, we feel this rally has further to go on a 12m view. In the short term, though, the market does look overbought and, given the risk of a snapback, we would wait for better levels before considering to overweight Japanese equities, going long the market, but preferring to finance the purchase in yen. (Chart 21 & 22)

ASIA ex-JAPAN (Downgraded to Neutral from Overweight): We have downgraded the region on the basis of:

■ Disappointing macro data coming out of China.

■ Potential policy risks in China: Reforming the State Owned Enterprises (SOEs) appears to be back on the government’s agenda.

■ Impact of weaker yen on the South Korean export market.

■ Stalling earnings revisions though the trend is still supportive.

The above withstanding, the Asia ex-Japan markets still offer value and are expected to generate strong positive returns. The market should thus remain a key component of an investor’s equity portfolio. Hong Kong remains our core Overweight and, with its limited exposure to SOEs, is our preferred way to capture exposure to China. (Chart 23)

Within the Asian ex-Japan markets, given the number of moving parts (macro, valuations, policy, yen) we have made a number of changes to our country weights, preferring to move to a more neutral allocation between markets. The key calls that we are making are to:

South Korea (downgraded to Neutral from Overweight): Like many investors, we were somewhat surprised by the scale of the BoJ intervention in terms QE and our view is that the period of yen weakness may be longer and deeper than initially expected. A weaker yen will make Japanese exporters more competitive and, given the overlap with Korean exports (e.g. steel and autos), this is likely to negatively impact earnings for the Korean exporters. On the domestic front, the economy remains weak and we see little upside catalyst at this point. (Chart 24)

Taiwan (upgraded to Neutral from Underweight): To balance our downgrade of Korea we are upgrading Taiwan. Taiwan’s exports have less overlap with Japan and, with an improving earnings revisions index and our expectations for the capex cycle to improve, the market should be well supported.

Thailand (downgraded to Neutral from Overweight): The market has outperformed and we decided to take profit.

Indonesia (upgraded to Neutral from Underweight): With the more stable rupiah, recent announcements on fuel subsidies and ‘pump priming’ ahead of the elections in 2014, we decided to increase Indonesia to a Neutral.

EUROPE (Downgrade to Underweight from Neutral): We are downgrading Europe on the basis that:

■ Economic environment continues to remain weak with economic data coming in below expectations.

■ Tail risks have been reduced but, as Cyprus highlighted, there is a lack of cohesiveness amongst policy makers.

■ Earnings revisions have shown a weak trend and unless the underlying economy improves we would expect earnings to come in weaker than currently expected. (Chart 26)

While we are downgrading the market, we continue to see excellent opportunities for stock pickers or those much longer term investors, who are comfortable holding positions through periods of heightened volatility.

Our preferred sectors are Healthcare, followed by Energy and Industrials. We remain underweight Telecoms and Utilities on the basis their operating environment is extremely difficult and the sector suffers from high leverage.

Conclusion: We advocate underweight investors consider using a time-bound approach for rotating out of bonds or cash into equities, accelerating purchase on any weakness

Page 8 of 16


-15

-10

-5

0

5

10

-9

-7

-5

-3

-1

1

3

5

Jan -10 Jun -10 Nov -10 Apr -11 Sep -11 Feb -12 Jul -12 Dec -12

Rat

io

%

MSCI EUROPE 3m% Chg 12m Fwd EPS Earnings Revision Ratio(RHS)

Chart 26: Analysts are starting to revise down earnings


MSCI Europe earnings revisions ratio As of 22 April 2013

Source: Datastream, Bloomberg, Standard Chartered

Chart 25: MSCI China is dominated by large SOEs

% of state ownership by market cap in selected sectors

62%

76%

75% 38% 19% 53% 36%0

100200300400500600700800900

1000

Ban

ks

Ene

rgy

Telc

o

Insu

ranc

e

Rea

l Est

ate

Cap

ital G

oods

Mat

eria

ls

USD

(Bn)

Non SOE SOE

China (downgraded to Neutral from Overweight): We are downgrading China for a number of reasons:

Macro: Economic data has been coming in below expectations and retail sales growth has been at a declining pace for the past 3 months. We do not anticipate any likelihood of further policy stimulus and, at the same time, expect credit growth may be increasingly curtailed.

Earnings revisions index: The ERI appears to have peaked and may be tapering off, which would not be supportive to equities.

Policy: The focus will be on the next round of reforms, in particular State Owned Enterprises (SOEs). The fear is the government will decide to level the playing field in terms of competition and access to capital. It is also possible that the government will seek to raise funds from its SOE stakes either by divesting (negative for the market) or encouraging higher dividends (positive). This could have negative implications for those areas of the market that have a significant share of state ownership such as Financials, Energy and Telecoms. (Chart 25)

While the market is attractively valued, the above headwinds are likely, in our opinion, to limit any outperformance over 12m. Given this we prefer to move to Neutral until the picture is clearer, most likely in September.

*Top 7 sectors by market capitalisation

We have turned Neutral given significant excess supply in many markets and softer demand from China given policy uncertainty. In addition, we believe the strength in the USD is likely to limit commodity price gains in the medium term. From a sub-asset class perspective, we remain overweight industrial metals and underweight gold.

We remain Overweight industrial metals. The significant build up in inventory levels has continued to weigh on industrial metals prices as demand from China has been soft. We believe this is likely to be temporary as greater clarity on China’s reform policies emerges. The broader uptrend in industrial metal prices continues to hold albeit at a slower pace and with continued significant short term risk. (Chart 27)

We remain Neutral oil. The convergence of demand and supply are expected to keep crude oil prices range-bound, but at a lower range than previously expected. This is mainly due to the excess supply in the crude oil market with softer demand from a slower growth recovery. Though geopolitical risks remain, we see these diminishing. Having some exposure to oil as a hedge against an escalation of tensions is still important.

We remain Underweight gold. We believe the high opportunity costs of being exposed to gold together with rising probability of the US Fed unwinding its quantitative easing program are likely to weigh on gold in the long run. In addition, real prices are not far from 1980 peaks. While Gold is likely to undergo a period consolidation within a lower range following the sharp sell-off, the broader downward channel in gold prices continues to hold. The same set of factors argue for downside risk in silver, potentially at a faster pace than gold given its very high volatility. (Chart 28)

Conclusion: Disappointing economic growth and increased supply in many of the commodities markets are likely to keep prices range bound for now. Any further upside is likely to be limited by USD strength.

Commodity – Neutral

Page 9 of 16


36

41

46

51

56

61

80

100

120

140

160

180

200

220

Jan- 09 Jan- 10 Jan- 11 Jan- 12 Jan- 13

Inde

x

Inde

x

DJUBS Industrial metals price Index JP Morgan Global PMI Manufacturing

Chart 27: Soft patch in global growth weighed on commodity prices


DJUBS Commodity Price Index vsJP Morgan Global PMI Manufacturing

1200

1300

1400

1500

1600

1700

1800

1900

6567697173757779818385

Dec -10 May-11 Oct -11 Mar -12 Aug-12 Jan -13

USD

Mln

s oz

Gold ETF holdings (estimated, LHS) Gold (RHS)

Chart 28: Lower investment demand a drag on gold prices


Gold price vs Gold ETF holdings

We maintain our Neutral stance towards Alternative strategies, albeit with an increasing upside bias. The outlook for equity long/short and event-driven strategies continues to improve. However, the ability of a combined basket of strategies to provide (1) exposure to a broadening global recovery, while (2) still offering some protection against any short-term volatility, and (3) having limited interest rate sensitivity remain the main attractions of this asset class, in our view. (Char 29)

The environment for some alternative strategies appears to be improving. Equity long/short and event-driven have been the top two performing strategies year-to-date. Equity long/short strategies have likely benefited from an improving stock-picking environment – S&P 500 implied correlations (which are one indicator of how correlated stocks within the S&P500 index are expected to be), for example, have accelerated their downtrend since the beginning of 2013. Event-driven strategies, on the other hand, have been a key beneficiary of strong corporate balance sheets which, in turn, have triggered increased mergers and acquisitions (M&A) activity. While thus far this has manifested itself in a few high-visibility actions rather than a broader pickup in total M&A activity, strong corporate balance sheets argue room for this to rise exists.

A combined basket of alternative strategies is likely a good option for investors to ensure exposure to a broadening global recovery, but with lower volatility than equities. Equity long/short strategies no doubt retain a relatively high correlation to global equities. A combined alternative strategies’ basket (either including or excluding equity long/short strategies) offers a good alternative for investors seeking exposure to continued gains in risky assets, but with a lower level of volatility compared with global equities. Alternative strategies also have relatively limited correlation to duration, thereby reducing sensitivity to interest rate risk. CTA strategies, meanwhile, remain a reasonable source of insurance against downside volatility.

Conclusion: Hold Neutral allocation towards alternative strategies, with preference for a basket of alternatives, given their role in helping manage volatility within a diversified investment portfolio.

Alternatives – Neutral

Page 10 of 16


0%

1%

2%

3%

4%

5%

6%

Alternatives Total

Macro/CTA

Eventdriven

Equity Market Neutral

Merger Arb

Distressed Volatility Equity Hedge

%

Chart 29: Equity hedge and event-driven strategies have led Alternative strategies higher YTD


HFRX indices’ performance 2013 YTD

USD – The strength in the USD is expected to persist through 2013

US economic data continues to highlight a firm recovery despite recent disappointments. As such, we believe, the US Fed will likely begin unwinding its quantitative easing program by early 2014, which is expected to be bullish for the USD.

EUR – We are medium-term bearish on the EUR

The economic recovery in the Euro area remains constrained with growing speculation that the European Central Bank (ECB) may announce further measures to stimulate the economy as early as May 2. From our perspective, the lack of further action by the ECB or the implementation of further monetary easing will likely, either way, be bearish for the EUR in the medium term. In addition, though risks surrounding the Euro area debt crisis have receded significantly, political uncertainty and tight austerity measures remain. (Chart 31)

JPY – We are medium-term bearish on the JPY

We are bearish on the JPY following the announcement of aggressive monetary easing by the Bank of Japan. This view was further supported by the lack of protest against the BoJ’s action at the recent G20 meeting. However, taking note of earlier statements by Japanese policymakers on the comfortable rate of USD-JPY being around 100, we believe any significant upside from this level will likely be limited. In light of this, carry strategies are attractive, but high levels of JPY volatility adds risk to trades. We continue to recommend a hedged exposure to Japanese assets.(Chart 32)

GBP – We are medium term bearish on the GBP

The UK economic environment deteriorated further as elevated levels of inflation and the lack of consensus within the Bank of England’s (BoE) monetary policy committee delayed further stimulus. We believe any significant action will only likely come in June when Mark Carney steps in as Governor. From a fiscal perspective, the budget deficit reduction has been slow, which prompted Fitch Ratings to downgrade UK’s top sovereign rating. This is the second rating downgrade this year and it will likely lead to greater portfolio outflows over time.

AUD – We are medium-term neutral on the AUD (Chart 34)

A stronger USD, disappointing economic indicators, especially in China and a lingering possibility of a rate cut by the RBA this year are likely to weigh on the AUD. However, stronger demand for high yielding assets has kept the AUD supported. Australia continues to hold its AAA credit rating and offers the highest yield among G7 countries.

Foreign Exchange

Page 11 of 16


1.2

1.22

1.24

1.26

1.28

1.3

1.32

1.34

1.36

1.38

-120-100

-80-60-40-20

020406080

100

Dec-11 Mar -12 Jun-12 Sep -12 Dec-12 Mar - 13

EUR

-USD

Inde

x

Euro zone Economic Surprise Index EUR - USD

Chart 31: Economic growth expectations in the Euro area is a key driver for the EUR


EUR-USD vs Euro zone Economic Surprise Index

80100120140160180200220240260280300

Jan -09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Inde

x

US Fed assets Bank of Japan assets

Chart 32: BoJ decision likely to be bullish of USD-JPY


US Fed and Bank of Japan Assets

94

96

98

100

102

104

106

108

110

Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

Inde

xed

Chart 34: Commodity currencies have been range-bound


Commodity currenciesNote: Average of AUD, NZD and CAD performance

70

75

80

85

90

95

Jan - 08 Jan - 09 Jan - 10 Jan - 11 Jan - 12 Jan - 13

Inde

x

Fed expands QE1 program

Bernanke hints at QE2

Bernanke hints at QE3

QE1 purchases completed

QE2 purchases completed

US Fed minutes hint at end of QE3

Chart 30: Unwinding of QE is key for USD

Note: DXY Index comprises of the weighted performance of the USD against the EUR, JPY, GBP, CAD, SEK and CHF.


DXY Index

Page 12 of 16


80

85

90

95

100

105

110

115

Jan- 05 Jan- 07 Jan- 09 Jan- 11 Jan- 13

Inde

x

Chart 35: RMB arguably close to fair value


Renminbi Nominal Effective Exchange rate

113

114

115

116

117

118

119

120

121

76

77

78

79

80

81

82

83

84

Mar -12 Jun -12 Sep -12 Dec -12 Mar -13

Inde

x

Inde

x

DXY Index ADXY Index (RHS)

Chart 33: Broad USD strength poses some risks to Asia ex-Japan currencies

Note: DXY Index comprises of the weighted performance of the USD against the EUR, JPY, GBP, CAD, SEK and CHF.ADXY Index comprises of the weighted performance of the CNY, HKD, INR, IDR, KRW, MYR, PHP, SGD, TWD and THB against the USD.


DXY and ADXY Indices

We are medium term neutral on Asia-ex Japan currencies (Chart 33)

Asia ex-Japan continued to face growing pressures arising from a weaker JPY and a stronger USD, but the stability of the Renminbi is likely to anchor Asia ex-Japan currencies. Going forward, we see growing downside risks. The weaker JPY will likely continue to pose more risk to North East Asian currencies relative to South East Asian currencies, some of which are expected to gain. In addition, the broad USD strength arising from tighter fiscal and monetary policies are also likely to add downward pressure.

CNY – We are medium term bullish on CNY albeit with limited upside

The Renminbi appreciated to a record level against the USD in April with the People’s Bank of China deputy governor highlighting the possibility of a further widening of the daily trading band. The current band is +/-1% from the official daily fixing rate. Further liberalisation measures of the exchange rate system are likely as China progresses towards its long term objective of internationalising the Renminbi. However, we expect authorities to allow only a gradual CNY appreciation to allow a more orderly domestic rebalancing. In addition, from a valuation perspective, the record level trade-weighted CNY highlights that the Renminbi is arguably closer to fair value. (Chart 35)

SGD – We remain medium-term bullish on SGD albeit with limited upside

The Monetary Authority of Singapore (MAS) maintained its current monetary stance of a 2% per annum rise in the SGD trade-weighted basket of currencies, with the width of the band at +/- 2% on either side in April. Inflation remains the primary concern while the growth outlook is expected to be moderate.

Conclusion: We expect strength of the USD to persist through 2013 and become more broad-based as the US tightens fiscal and monetary policies. Following this, we believe the US Fed will likely begin unwinding its quantitative easing program by early 2014. Asia ex-Japan currencies face growing risks arising from a weaker JPY and broad USD strength but stability in the Renminbi is likely to anchor performance.

Page 13 of 16


We believe our B.R.I.D.G.E. framework is still appropriate. 2013 is viewed as a Year of Transition from a shorter-cycle, policy-driven economic environment to one that is stronger and more sustainable. Naturally, this will not be a smooth process as the past month’s events attest. However, we believe the economy will be much more stable by the end of the year than in 2012.

Against this backdrop, global equities are our preferred asset class. We believe underweight investors should consider taking a time-bound approach to increasing their allocation to a globally diversified equity portfolio.

Conclusion

All figures are in percentages Currency : USD

Summary View vs. SAA Conservative Moderate Moderately Aggressive Aggressive

Cash UW 23 0 0 0

Fixed Income UW 36 36 17 3

Equity OW 24 42 61 85

Commodities N 6 11 11 6

Alternatives N 11 11 11 6

Asset Class Region View vs. SAA Conservative Moderate Moderately Aggressive Aggressive

Cash & Cash Equivalents USD Cash UW 23 0 0 0

IG Developed World UW 24 15 0 0

IG Emerging World N 5 10 3 0

HY Developed World OW 2 6 5 0

HY Emerging World N 5 5 9 3

North America OW 8 14 19 25

Europe UW 5 7 11 16

Japan N 2 3 4 6

Asia ex-Japan N 7 14 22 29

Other EM UW 2 4 5 9

Commodities Commodities N 6 11 11 6

Hedge FoF/CTAs N 11 11 11 6

Emerging Market Equity

Tactical Asset Allocation - May 2013

Investment Grade

High Yield

Developed Market Equity

Page 14 of 16


Asset Allocation Summary

Source: Standard Chartered

Spot Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014

Page 15 of 16


3 -12 Month Market Outlook

Spot Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014

Central bank policy rates

US

Europe

UK

Japan

Australia

China

Taiwan

Malaysia

Indonesia

South Korea

India

Philippines

Thailand

0.25

0.75

0.50

0.25

3.00

6.00

1.88

3.00

5.75

2.75

7.50

3.50

2.75

0-0.25

0.50

0.50

0-0.25

3.00

6.00

2.00

3.00

5.75

2.75

7.25

3.50

2.50

0-0.25

0.50

0.50

0-0.25

3.00

6.00

2.13

3.00

5.75

2.75

7.25

3.50

2.50

0-0.25

0.50

0.50

0-0.25

3.00

6.25

2.25

3.25

5.75

2.75

7.25

4.00

2.50

0-0.25

0.50

0.50

0-0.25

3.50

6.75

2.38

3.25

5.75

2.75

7.25

4.00

2.50

0-0.25

0.50

0.50

0-0.25

3.50

7.25

2.50

3.25

5.75

2.75

7.25

4.00

2.50

-

-

-

-

-

-

-

-

-

-

-

-

-

Spot Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014

Commodities*

Silver

Brent Oil

WTI Oil

Copper

Aluminium

Corn

Soybeans

103

94

7,180

1,941

624

1,374

703

111

95

7,250

2,000

700

1,400

750

112

100

7,500

2,100

680

1,450

780

116

106

7,750

2,200

680

1,500

790

116

109

8,500

2,300

720

1,350

790

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Forex

EUR/USD

GBP/USD

USD/JPY

USD/CAD

USD/CHF

AUD/USD

NZD/USD

USD/CNY

USD/SGD

USD/MYR

USD/IDR

USD/KRW

USD/INR

USD/THB

USD/PHP

1.30

1.54

99.17

1.02

0.94

1.03

0.85

6.17

1.24

3.03

9720

1108

54.23

29.26

41.16

1.29

1.48

105.00

1.03

0.95

1.06

0.86

6.18

1.24

3.05

9,850

1,100

55.00

29.75

41.00

1.32

1.52

102.00

1.00

0.94

1.08

0.88

6.14

1.23

3.00

9,800

1,070

53.50

29.25

40.50

1.29

1.46

102.00

0.98

0.97

1.08

0.89

6.10

1.21

2.95

9,500

1,050

53.00

28.75

39.00

1.30

1.48

100.00

1.00

0.97

1.10

0.91

6.07

1.19

2.90

9,200

1,035

52.00

28.25

38.50

1.27

1.47

102.00

0.99

1.00

1.07

0.89

6.04

1.20

2.95

9,400

1020

53.00

28.20

39.00

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Source: Bloomberg, Standard Chartered Research (26 April 2013 Economics Weekly)

* Period averages for each quarter.

Disclosure Appendix

This document is not research material and it has not been prepared in accordance with legal requirements designed to promote the

independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. This

document does not necessarily represent the views of every function within the Standard Chartered Bank, particularly those of the Global

Research function.

Standard Chartered Bank is incorporated in England and Wales with limited liability by Royal Charter 1853, Reference number ZC 18. The

Principal Office of the Company is situated in England at 1 Aldermanbury Square London EC2V 7SB. Standard Chartered Bank is authorised and

regulated by the Financial Services Authority under FSA register number 114276.

In Dubai International Financial Centre (“DIFC”), the attached material is circulated by Standard Chartered Bank DIFC on behalf of the product

and/or Issuer. Standard Chartered Bank DIFC is regulated by the Dubai Financial Services Authority (DFSA) and is authorised to provide financial

products and services to persons who meet the qualifying criteria of a Professional Client under the DFSA rules. The protection and

compensation rights that may generally be available to retail customers in the DIFC or other jurisdictions will not be afforded to Professional

Clients in the DIFC.

Banking activities may be carried out internationally by different Standard Chartered Bank branches, subsidiaries and affiliates (collectively

“SCB”) according to local regulatory requirements. With respect to any jurisdiction in which there is a SCB entity, this document is distributed in

such jurisdiction by, and is attributable to, such local SCB entity. Recipients in any jurisdiction should contact the local SCB entity in relation to

any matters arising from, or in connection with, this document. Not all products and services are provided by all SCB entities.

This document is being distributed for general information only and it does not constitute an offer, recommendation, solicitation to enter into any

transaction or adopt any hedging, trading or investment strategy, in relation to any securities or other financial instruments. This document is for

general evaluation only, it does not take into account the specific investment objectives, financial situation, particular needs of any particular

person or class of persons and it has not been prepared for any particular person or class of persons.

Opinions, projections and estimates are solely those of SCB at the date of this document and subject to change without notice. Past performance

is not indicative of future results and no representation or warranty is made regarding future performance. Any forecast contained herein as to

likely future movements in rates or prices or likely future events or occurrences constitutes an opinion only and is not indicative of actual future

movements in rates or prices or actual future events or occurrences (as the case may be).

This document has not and will not be registered as a prospectus in any jurisdiction and it is not authorised by any regulatory authority under any

regulations.

SCB makes no representation or warranty of any kind, express, implied or statutory regarding, but not limited to, the accuracy of this document

or the completeness of any information contained or referred to in this document. This document is distributed on the express understanding

that, whilst the information in it is believed to be reliable, it has not been independently verified by us. SCB accepts no liability and will not be

liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this

document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault,

mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or

any contents.

SCB, and/or a connected company, may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities,

currencies or financial instruments referred to on this document or have a material interest in any such securities or related investment, or may

be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers

of such investments. Accordingly, SCB, its affiliates and/or subsidiaries may have a conflict of interest that could affect the objectivity of this

document.

This document must not be forwarded or otherwise made available to any other person without the express written consent of SCB.

Copyright: Standard Chartered Bank 2013. Copyright in all materials, text, articles and information contained herein is the property of, and may

only be reproduced with permission of an authorised signatory of, Standard Chartered Bank. Copyright in materials created by third parties and

the rights under copyright of such parties are hereby acknowledged. Copyright in all other materials not belonging to third parties and copyright

in these materials as a compilation vests and shall remain at all times copyright of Standard Chartered Bank and should not be reproduced or

used except for business purposes on behalf of Standard Chartered Bank or save with the express prior written consent of an authorised

signatory of Standard Chartered Bank. All rights reserved. © Standard Chartered Bank 2013.

THIS IS NOT A RESEARCH REPORT AND HAS NOT BEEN PRODUCED BY A RESEARCH UNIT.

Page 16 of 16


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