utlook 2016 · 2016. 1. 5. · Portfolio Solutions [email protected] 09 Victor Teo, CFA Investment Strategist [email protected]. Outlook 2016 | 3 Editorial 04 Welcome to our 2016

| Wealth Management Advisory |

Outlook 2016A year to A.D.A.P.T. to a changing landscape

2 | Outlook 2016* Core Global Investment Council voting members

The team

01 Alexis Calla*Global Head, Investment

Advisory and Strategy, Chair of the Global Investment Council

[email protected]

02 Steve Brice*Chief Investment Strategist

[email protected]

03 Aditya Monappa*, CFAHead, Asset Allocation and

Portfolio [email protected]

* Core Global Investment Council voting members

020104 Clive McDonnell*Head, Equity Investment [email protected]

05 Audrey Goh, CFADirector, Asset Allocation and Portfolio [email protected]

06 Manpreet Gill*Head, FICC Investment [email protected]

04

08

05

07 09

06

10 11

10 Tariq Ali, CFAInvestment [email protected]

11 Abhilash NarayanInvestment [email protected]

03

07 Rajat Bhattacharya Investment Strategist

[email protected]

08 Arun Kelshiker, CFAExecutive Director

Asset Allocation and Portfolio Solutions

[email protected]

09 Victor Teo, CFAInvestment Strategist

[email protected]

Outlook 2016 | 3

Editorial04 Welcome to our 2016 outlook

Strategy 06 2016: A year to A.D.A.P.T. to a changing landscape

Macro overview08 Macro overview – Growing out of a deflationary scare

10 Perspectives from our Chief Investment Strategist

Asset classes12 Bonds – More constructive, raise allocation

13 Equity – Adaptability will be key in 2016

14 FX – Focus on nuances

15 Commodities – Not there yet

16 Multi-asset income – Finding balance between yield and volatility

Appendix17 Consensus forecasts 2016

18 2016 key events

19 Suite of key WMA publications

20 Important information

13

11 15

05

Contents

4 | Outlook 2016

Oil prices may bottom, which could have significant implications across the US high yield bond market, Emerging Market equities and commodity-related currencies. And the USD may run out of steam more generally at some point in the year. This is likely to be matched with increased volatility across asset classes.

It was a challenging year2015 has been a tough year for investors. Yet, our core investment strategies played out as scripted. We forecast lower returns for global equity markets and higher volatility; we continued to favour Developed Market equities over Emerging Market equities; and we highlighted the benefits of a diversified income allocation. We also stressed that policy divergence would likely push the USD higher.

Of course, we also got some key themes wrong – acceleration in global growth, a Fed rate hike in the early half of the year and the benefits of global equities and alternative strategies did not materialise. Meanwhile, our diversified income theme generated meagre returns, albeit against a very challenging backdrop.

Thankfully, some of our other key calls generated a lot of value for investors in 2015. For instance, our preferred equity regions (Europe and Japan on a currency-hedged basis) have performed very well over the course of the year, with the currency hedges being an important source of return. Meanwhile, the USD continued to strengthen, as we expected.

Looking aheadLooking forward, one thing we can be sure of is that the investment environment is not going to get easier in 2016. One key factor is the stage the US economy is in its cycle. If you believe we are close to the end of the cycle, ie. close to a recession, then a defensive stance would be warranted.

We take a more constructive view. While we acknowledge that this cycle is already one of the longest on record, the US Federal Reserve is still focused on supporting growth rather than fighting inflation. As such, we believe we have at least 18-24 months of the US economic expansion remaining. History suggests this is still a good point of the cycle to be invested in risky assets such as global equities and US high yield bonds. That said, with returns normally negative in the last 6-12 months of the economic cycle, this means we are getting closer to the end of the equity bull market.

For us, one key variable to monitor is US inflation. We expect deflationary pressures to abate over the coming 12 months as the job market tightens and as oil prices eventually bottom. However, we do not see inflation spiking up anytime soon due to continued excess capacity elsewhere in the world. If we are wrong, and inflation picks up briskly, this would be a significant headwind for riskier assets as it would increase the pressure on the Fed to tighten monetary policy aggressively.

“We believe a high level of diversification and a more tactical approach to investing may be required to help improve returns while also trying to avoid some of the likely pullbacks in riskier assets (such as equity markets).”

The annual calendar is in some ways an arbitrary construct. Yet, for investors, it is always useful to take time out to think about the past 12 months and identify what we did well and, of course, what we could have done better. The next step is to start planning for the year ahead and try to ready ourselves for the opportunities and challenges that we will undoubtedly face in 2016. In this spirit, let’s take a moment to think about the last 12 months.

EditorialWelcome to our 2016 Outlook| Alexis Calla |

Outlook 2016 | 5

Time to A.D.A.P.T.It is against this backdrop that we have labelled 2016 as a year to A.D.A.P.T. to a changing landscape.

Many of the trends that we have seen in recent years may be coming closer to the end. As mentioned above, we appear to be getting closer to the end of the global equity bull market. Oil prices may bottom, which could have significant implications across the US high yield bond market, Emerging Market equities and commodity-related currencies. And the USD may run out of steam more generally at some point in the year, potentially when monetary policies become more synchronised. This is likely to be matched with increased asset market volatility.

As such, we believe a high level of diversification and a more tactical approach to investing may be required to help improve returns while also trying to avoid some of the likely pullbacks in riskier assets (such as equity markets).

Key investment views as we enter 2016

Asset class/theme Preferred areas/strategies

Global equities Euro area (FX-hedged) Japan

Income investing Diversified approachimportant in risingvolatility environment

Alternative strategies Equity long-shortGlobal macroEvent-driven

6 | Outlook 2016

2015 marked the sixth year of global growth since the 2008-09 crisis. This makes it one of the longest business cycles on record. As the cycle matures, generating investment returns is likely to get even more challenging. Assessing where the US economy is in its cycle is key. A US recession in 2016, or early 2017, would warrant more caution. We are more upbeat, expecting US economic expansion to continue well into 2017. Nevertheless, we believe investors will need to be even more vigilant than in 2015 and A.D.A.P.T. to a changing landscape.

In this environment, we believe global equities can deliver positive returns and outperform other asset classes in 2016. That said, we would consider gradually increasing allocation to bonds and alternative strategies as we head into the late stage of an economic cycle.

2016: A year to A.D.A.P.T. to a changing landscape| Steve Brice |

Outlook 2016 | 7

A

D

P

A

T

• Global equity bull market likely to extend as we remain some distance from the end of the US expansion

• Euro area (FX-hedged) and Japan still our preferred markets as they are likely only in the mid-part of their economic recovery

• Gold likely to stabilise in Q1 as gradually tightening labour markets in the US and Germany put modest upward pressure on inflation

• US high yield bonds expected to perform well as default risk is contained as oil prices eventually bottom in 2016

• China our preferred market in Asia as consumption gradually takes over from investment as the key driver of growth

• Non-Asia Emerging Markets may bottom in 2016 following gradually shifting growth dynamics in China and eventually bottoming oil prices

• US dollar bonds likely to deliver modest, but positive returns in 2016 as any tightening remains modest

• Income investing remains valid as absolute levels of yields remain low

• USD strength to become less broad-based

• Investors need to take into account drawdown risks as volatility normally picks up moving into the late stage of the US economic cycle

• Increase allocation to bonds and alternative strategies as we approach the end of the cycle to benefit from different sources of return and lower volatility

Deflationary pressures to abate in Developed Markets due to gradually tightening labour markets and bottoming oil prices.

Asia and Emerging Markets still dependent on China, which is transitioning towards consumer-led growth. Oil prices also key.

Policies of central banks to remain supportive of growth, Fed tightening not withstanding.

Transition to late cycle likely to lead to higher volatility.

Advanced economies at different stages of the economic cycle. US expansion mature, but consumer spending to drive growth in 2016. Europe and Japan in mid-cycle.

8 | Outlook 2016

Macro overviewGrowing out of a deflationary scare

Consumption to drive global growth

• Global economic recovery is likely to continue for the seventh year since the 2008-09 recession

• We expect trend growth (3.0-3.5%), driven by rising domestic consumption in the US, Europe and Asia

• Emerging Markets, especially outside of Asia, are likely to recover from a sharp downturn aided by a gradual recovery in commodities, although subdued global trade remains a headwind

Policies to remain accommodative

• Fiscal policies are likely to be less of a drag in the US and Europe and more supportive in China and Japan

• The US Fed raised rates in December 2015 for the first time since 2006, but future rises are expected to be gradual

• The European Central Bank and People’s Bank of China are likely to ease monetary policy further

• Bank of Japan to sustain aggressive asset purchases

Emerging Markets, policy mistakes remain key risks

• A sharp slowdown in China and a faster-than-expected tightening of US monetary policy rank among the top risks to our constructive outlook

• Monetary policy errors leading to a deterioration in the growth outlook, geopolitical uncertainty and a sustained surge in the USD or oil prices remain other key risks

Deflation pressures to ease

• Tighter job markets in the US, UK, Germany and Japan and an eventual recovery in oil prices are likely to allay deflation concerns

• However, excess productive capacities in China and Europe are likely to prevent a surge in inflation

Sustained growth to allay deflation fears

| Rajat Bhattacharya |

Outlook 2016 | 9

10 | Outlook 2016

Perspectives from our Chief Investment Strategist

How would you characterise the global economic outlook

for 2016?

The key input to investment decisions next year is where we are

in the US economic cycle. While it is very difficult to accurately predict recessions, most indicators point to a continued recovery over the next 18-24 months. The US economy normally only goes into recession after the central bank starts focusing on controlling inflation rather than supporting growth.

Continued global excess capacity, for example in Europe and China, means any pick-up in inflation, and therefore any tightening in monetary policy, should be gradual. Meanwhile, we see a reduced headwind from fiscal policy next year. Therefore, we expect the US economic expansion to continue into 2017.

Elsewhere, Europe and Japan are expected to accelerate modestly, and India is likely to deliver stronger growth on the back of structural reforms. On the other hand, China’s structural slowdown is expected to extend – as the economy shifts to consumer-led growth – although this is unlikely to experience a hard landing.

Against this backdrop, what are your preferred

asset classes?

Equities remain our favoured asset class. A key factor here is the

outlook for corporate earnings.

In the Euro area and Japan, our favoured regions, corporate earnings are expected to grow in the high-single to low-double-digit range as their currencies remain relatively weak, supporting export earnings, and

their domestic economies recover helped by strengthening consumer spending. Very loose monetary policy settings should help support valuations.

In the US, the picture is more mixed. We expect corporate earnings to grow as the effects of the strong US dollar and weakening oil prices abate over the year. However, consensus expectations for 8% growth may be a little optimistic. Therefore, we expect only modestly positive returns for US equities in 2016.

In Asia ex-Japan, the changing profile of China’s growth is likely to boost earnings of the region’s service industries. For China itself, we see MSCI’s decision to increase its indices exposure to newer, faster-growing industries such as social media companies as a potential positive catalyst. As such, China remains our preferred overweight within Asia.

Which areas of bond markets do you prefer?

We have three key themes for bonds. First, we would look for

opportunities to gradually raise bond exposure as we head closer to the end of the US economic cycle.

Second, we prefer USD bonds as yields are higher than in Europe and Japan and the US dollar is likely to remain firm, especially in the near term.

Third, we prefer corporate bonds over government bonds. Our most favoured area is US high yield bonds. We believe the 8% yield on offer here is attractive given the low yields available generally in bond markets today, notwithstanding the recent negative news flow, especially in the energy sector.

Steve Brice, our Chief Investment Strategist, addresses questions that are likely top of mind for our clients.

Q

Q

Q

A

A

A

Outlook 2016 | 11

What is the outlook for USD in 2016?

We have become more cautious about the outlook for USD strength.

While we see further strength against certain currencies, we believe it will be more modest and less broad-based in 2016.

The Euro and Swiss franc may continue to weaken slightly on continued policy divergence and the Australian dollar is still vulnerable to falling base metal/iron ore prices.

Within Emerging Markets, we prefer Asian currencies for now as their external

fundamentals are superior in most cases, they are cheaper and many are less reliant on commodity prices.

2015 was a challenging year for investors. Do you

see more of the same in 2016?

The simplistic answer is ‘yes’. It is normal for asset markets to get

more volatile towards the end of the bull market.

However, it is important to understand that volatility can be positive as well as negative. This means investors need to balance the risk of significant drawdowns against the

risk that markets could perform well, as they normally do in the first 12-24 months of a Fed rate hiking cycle.

From an income allocation perspective, we have reduced our allocation to high dividend yielding equities and added to bonds, in particular US high yield bonds, and preferred equity in order to try to reduce the size of drawdown risks. These tweaks have helped make us more comfortable with diversified income investing as a core theme for 2016.

Q

QA

A

12 | Outlook 2016

BondsMore constructive, raise allocation| Manpreet Gill | Abhilash Narayan |

Raising allocation to bonds2015 has been an eventful year punctuated with bouts of market volatility. While the Fed hiked interest rates for the first time in almost a decade, the 10-year US Treasury yield is only slightly higher than at the start of the year. In contrast, German Bund yields are also slightly higher despite the onset of European Quantitative Easing (QE). Corporate bonds cheapened as credit spreads widened owing to concerns about credit quality.

As we look forward to 2016, we believe three factors are likely to drive bonds:

• The pace of rate hikes in the US and communication from the Fed.

• A continued low yield environment, where corporate bonds, which offer additional yield over government bonds, are likely to deliver higher total returns.

• Low risk of significant downside to global growth.

Key themes

We expect bonds to outperform commodities and cash, but underperform equities. We would hedge currency risks on Developed Market government bonds.

We prefer US Treasuries over German Bunds and Japanese Government Bonds. Fed communication efforts are likely to contain rises in Treasury yields.

Prefer corporate bonds over sovereigns. US High Yield is our preferred sub-asset class, followed by US Investment Grade.

Across Emerging Markets, we favour USD bonds over local currency bonds. Within local currency bonds, we prefer Asia over other regions. We will closely monitor oil price developments and remain open to re-evaluating this stance in 2016.

We expect the gap between 2-year and 10-year US yields to continue to narrow. This suggests 5-7 year average maturity profiles for USD-denominated bond allocations offers the best risk/reward.

Why we like US High Yield corporate bonds

Factors arguing in favour of and against US HY bonds

Source: Bloomberg, Standard Chartered

POSITIVES

NEGATIVES

Decliningcredit quality

Exposure tocommodities

Attractive carry of c.8%

High yield buffersagainst rate hikes

Cheap valuations

Outlook 2016 | 13

EquityAdaptability will be key in 2016| Clive McDonnell |

Key themesGlobal equities are likely to outperform bonds for the fourth consecutive year, supported by high single-digit to low double-digit earnings growth in 2016. Valuations in Developed Markets are elevated, but not overvalued if we focus on valuation other than price-earnings ratios. Valuations in Emerging Markets are attractive, but catalysts for a broad based re-rating remain elusive. We are positive on equities in the Euro area and Japan, the former on an FX hedged basis. Cautiously optimistic best describes our view on equity markets in the US and Asia ex-Japan. We are still negative on non-Asia Emerging Markets as we head into 2016.

We view adaptability as one of the key themes and attributes investors will require in the year ahead as we move into a late cycle environment. Importantly, late cycle does not mean the end of the cycle. The average length of the US economic cycle is 59 months, with the shortest cycle length beyond this average being 73 months in 2001-07, and the longest 120 months in 1991-01.

These views are based on our market drivers:

• Earnings support modest gains in global equity markets in 2016. Consensus expectation is for 8-10% earnings growth in the US, Euro area and Emerging Markets (EM). Valuations are elevated, but not extreme, providing support to markets once earnings forecasts are met.

• We expect the dollar to remain strong against the euro, but it may peak against the yen and Emerging Market currencies in H1 2016.

• Oil prices to bottom in 2016. This should provide a lift after dragging down US and European earnings in 2015.

• Drawdown risk: we expect an increasing number of greater than 4% equity market drawdowns or peak to trough declines in markets, within what is expected to be a modestly positive trend for global equity markets.

Equities to outperform bonds. We expect equities to outperform bonds for the fourth consecutive year.

Positive on Euro area equities (FX-hedged) and Japanese equities. Within Europe, we prefer European small and mid capitalisation stocks over large capitalisation.

Cautiously positive on US equities and Asia ex-Japan. Within the US, we prefer technology and banks and within Asia, we prefer China.

Negative on non-Asian Emerging Markets, specifically: Brazil, Mexico, Turkey, South Africa and Russia.

14 | Outlook 2016

USD: Not what it used to be...In 2015, the USD rallied strongly against both G10 and Emerging Market currencies as the Euro area, Japan, China and a number of other Asian countries initiated or expanded monetary stimulus, intensifying monetary policy divergence.

We believe broad USD strength is likely to end for two reasons. First, a modest Fed rate hike scenario for 2016 is already priced-in. The Fed is also likely to become more sensitive to USD strength, in our view, this may limit rate hikes should the USD continue to rally strongly. Second, the likelihood of further policy easing in many G10 countries is diminishing, and those that do ease further face the risk of a diminishing impact given how low yields already are.

A case for selective USD outperformance remains in place. We still see room for USD strength via continued monetary policy divergence against the EUR and CHF. In both cases, we believe authorities are likely to undertake further policy easing measures. Consequently, Euro area yields are likely to fall further into negative territory, expanding interest rate differentials with the US, and ultimately driving the EUR and CHF lower. We also see further room for USD strength against the AUD and NZD, where our negative outlook on their respective key export commodities argues for more weakness ahead.

FXFocus on nuances| Tariq Ali, CFA | Manpreet Gill |

Key themes

Selective USD strength in 2016. We expect USD strength against EUR, CHF, AUD and NZD. EUR and CHF are likely to weaken on continued monetary divergence (at least through H1) while AUD and NZD are likely to move lower on further commodity price weakness.

JPY, GBP and CAD to start the year range-bound. A more stable, or improving, outlook for monetary policy, a strengthening economic environment and energy prices are the main factors. For Q1, 2016 we define technical trading ranges as 1.45-1.60 for GBP/USD, 116-126 for USD/JPY and 1.28-1.40 for USD/CAD.

Asia ex-Japan currencies to bottom later in the year. We expect further downside in the short term as the Fed hikes rates. However, we believe Asia ex-Japan currencies will bottom-out in 2016. We are most constructive on the MYR, IDR and INR relative to the regions’ currencies. We also expect the MYR to recover some ground against the SGD.

In the G10 space, we expect further weakness in currencies with negative yield differentials with the US and expectations of further policy easing

EUR and CHF face the most negative combination

CHF NZD AUD GBP

CAD EUR JPY

Expected Policy Stance

-1.8

1.6 1.1

-0.3

-1.0-0.3 -1.0

Expensive* Cheap

Interest rate differential**

Source: Bloomberg, Standard Chartered* Valuation based on deviation from historical average of the Real Effective Exchange Rate (REER) since 1980** Interest rate differential is 2-year respective government bond yield – US 2-year government bond yield

Outlook 2016 | 15

CommoditiesNot there yet

Key themes

Negative on commodities. Most commodities continue to face a poor demand/supply balance, though oil and gold face the most room for improvement as we go through the year.

Oil prices may rise by the end of 2016 as the demand/supply gap gradually closes through the year. However, we do not expect oil prices (Brent) to exceed a quarterly average of USD65/bbl while risks of further downside remain heightened in the short term.

Gold likely to remain range-bound. A modest pick-up in inflation expectations may provide support, but higher US interest rates create a headwind. We expect gold to trade between USD1000-1200/oz.

Industrial metals to weaken, with specific exceptions. A lack of strong demand catalysts and considerable oversupply is likely to exert continued downward pressure on prices. We prefer consumption-linked metals (zinc, aluminium and nickel) to investment-focused metals (iron-ore and copper).

We remain negative on commodities, but pace of weakness likely to slow compared with 2015 We believe commodities are likely to underperform other major asset classes heading into 2016. 2015 was characterised by sharp weakness in prices accompanied by a rise in inventories, almost across the board. A narrowing demand supply-gap is likely to slow the pace of losses given the magnitude of decline thus far. We also see room for greater divergence, with oil potentially facing the greatest upside risks and industrial metals facing continued downside risks.

| Tariq Ali | Manpreet Gill |

Views at a glance

OIL GOLD BASE METALS

16 | Outlook 2016

Multi-asset incomeFinding balance between yield and volatility| Aditya Monappa, CFA | Arun Kelshiker, CFA | Audrey Goh, CFA |

Over the last few years, a global multi-income approach has delivered the income objective with a moderate level of portfolio risk. Looking ahead to 2016, a conducive monetary policy environment coupled with low government bond yields continues to support the case for global income. However, in addition to diversification, comprehensive risk management (including currency and drawdown risk) is now a crucial element for a successful income strategy.

A question often raised is whether a regional income strategy (European or Asian multi-income) would be a better choice. Achieving attractive income in an ultra low-yield environment might be challenging for European multi-income. Asian multi-income could provide the yield, but at a higher level of risk. Both regional strategies would see a limited range of investments in non-core income where US focused assets play a key role. Against this backdrop, a global multi-income approach with appropriate risk management should deliver a sustainable yield for income-oriented investors.

Multi-income remains a valid strategy for 2016. Despite divergent policy, ample liquidity and low bond yields call for a diversified approach to income investing.

Yield target of 4-5% is achievable. A cross asset approach can help investors achieve their objectives as yields on various income assets remain comparable to last year.

Higher volatility environment means risk management is crucial. We have modestly reduced our allocation to equities, given the risk of more frequent pullbacks, and increased our allocation to a diversified basket of fixed income. Given low yields in fixed income, currency hedging can be important in protecting returns.

Key views

Target yield remains achievable in 2016

Yield to maturity/dividend yield (%)

Aspirational Yield20% of portfolio

Maintenance Yield60% of portfolioPreservation Yield

20% of portfolio 4-5% target yield

1.34 4.48

0.70 1.32 4.16 4.32 3.88 7.144.53 6.09

0.78 4.81 5.10 7.375.92 7.78

Shor

t Mat

(1-5

yea

rs)

4.33

3.11

Conv

ertib

les

2.96

2.92

Long

Mat

(20+

yea

rs)

3.28

3.47

REIT

s (E

urop

e)

4.80

3.97

CNY

bond

s

4.24

4.11

Cove

red

Call

Stra

tegy

Pan-

EU H

Y

Asia

Div

i Equ

ity

5.04

5.42

Euro

pe D

ivid

end

Equi

ty

Asia

HY

Corp

orat

es

7.68

8.24

EM H

igh

Yiel

d

Med

ium

Mat

(5-7

yea

rs)

2.37

2.74

DM IG

Cor

pora

tes

3.12

3.20

US D

ivid

end

Equi

ty

3.92

3.96

Asia

IG C

orpo

rate

s

3.66

4.08

REIT

s (U

S)

3.88

4.22

REIT

s (A

sia)

EM H

C IG

5.95

5.72

Pref

erre

d Eq

uity

Leve

rage

d Lo

ans

DM H

igh

Yiel

d

6.12

8.36

US H

Y

8.55

8.12

INR

bond

s

End 2014

End 2015

Source: Bloomberg, Standard Chartered

*We look to generate our target yield by exploring three distinct buckets, which include the following:· Preservation Yield – Accepts a lower yield but provides downside protection during adverse market events· Maintenance Yield – Forms the bulk of the yield opportunity. A good balance of yield and risk· Aspirational Yield – An attempt to enhance overall yield while taking on higher, but measured risks

Outlook 2016 | 17

Consensus forecasts 2016

Consensus Forecasts

Real GDP (%, y/y) 2015E Our Bias 2016E Our Bias

US 2.5 ➙ 2.5 ➙

Euro area 1.5 ➙ 1.7 ➚

Japan 0.6 ➙ 1.1 ➙

China 6.9 ➙ 6.5 ➙

Inflation (%, y/y) 2015E Our Bias 2016E Our Bias

US 0.2 ➙ 1.8 ➘

Euro area 0.1 ➙ 1.1 ➙

Japan 0.8 ➙ 0.9 ➙

China 1.5 ➙ 2 ➘

Policy rate (%) 1H 2016 Our Bias 2H 2016 Our Bias

US 0.85 ➙ 1.25 ➘

Euro area 0.05 ➙ 0.05 ➘

Japan 0.1 ➙ 0.1 ➙

China 4.05 ➙ 4.05 ➘

FX 1H 2016 Our Bias 2H 2016 Our Bias

EUR/USD 1.05 ➘ 1.05 ➘

GBP/USD 1.51 ➙ 1.52 ➚

USD/CHF 1.1 ➙ 1.11 ➙

AUD/USD 0.68 ➙ 0.69 ➙

NZD/USD 0.62 ➙ 0.62 ➙

USD/CAD 1.35 ➙ 1.34 ➘

USD/JPY 125 ➙ 126 ➙

USD/CNY 6.5 ➙ 6.6 ➙

USD/SGD 1.42 ➚ 1.42 ➙

USD/KRW 1,210 ➚ 1,216 ➙

USD/TWD 33.5 ➚ 33.6 ➙

USD/INR 67 ➙ 67 ➘

USD/IDR 14,475 ➙ 14,750 ➘

USD/MYR 4.25 ➚ 4.3 ➘

USD/THB 37 ➙ 37 ➙

USD/PHP 47.8 ➚ 48.1 ➚

Source: Bloomberg, Standard Chartered

Legend: ➙ No strong bias | ➚ Moderately higher bias | ➘ Moderately lower bias

18 | Outlook 2016

2016 key events

02 ECB meeting

15 Fed meeting

X Italian constitutional referendum

Dec

Oct

Mar

May

Jun

Sep

15-17 IMF/World Bank spring meetings

21 ECB meeting

27 Fed meeting

02 Fed meeting

08 US Presidential elections

30 Australia Parliamentary elections

Apr

16 Fed meeting

17-18 EU Leaders’ Summit

20 Spain general election

31 ASEAN Economic Community launch

Feb

Nov

X Indian federal government budget

Jan

16 Taiwan general election

21 ECB meeting

24 Portugal Presidential election

27 Fed meeting

X Review of EU sanctions on Russia

Jul

18-21 US Republican Party National Convention

21 ECB meeting

25-28 US Democratic Party National Convention

27 Fed meeting

10 ECB meeting

16 Fed meeting

09 Philippine Presidential/Parliamentary Elections

20 ECB meeting

Dec 08 ECB meeting

14 Fed meeting

04-05 G20 Summit in Hangzhou, China

08 ECB meeting

21 Fed meeting

Legend:

X – Date not con�rmed

Fed – US Federal Reserve

ECB – European Central Bank

Outlook 2016 | 19

This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank. Important disclosures can be found in the Disclosures Appendix. This document is provided for general circulation and information purposes

only, it does not take into account the specific investment objectives, needs or financial situation of any particular person or class of persons and it has not been prepared as investment advice for such person(s). ‘Person’ includes a corporation,

co-operative society, trade union, sole proprietorship, partnership, limited liability partnership and any other business entity. Prospective investors should seek advice from a financial adviser on the suitability of an investment, taking into

account these factors before making a commitment to invest in an investment

1

fx strategyThe views expressed in this publication are made on the basis of a 2-4 week outlook and may differ from our longer term views and forecasts from the Global Research function fx | 7 December 2015

The ECB disappoints the market The EUR rose sharply against the USD after the ECB’s

announcement of additional stimulus failed to meet markets expectations. However, the USD pared losses after a better than expected US employment report.

In the week ahead, US retail sales, Euro area GDP and China inflation data are key economic data points. The BOE and RBNZ policy meeting is likely to be key for the GBP and NZD respectively. The Fed meets on December 16th.

Please note this is the last FX Strategy publication this year. We wish our readers a very happy festive season and look forward to resuming this publication in January.

EUR/USD We remain bearish on EUR/USD; a break below key support

reinforces the downtrend.

USD/JPY We remain neutral on USD/JPY as the technical setup appears

mixed.

AUD/USD We turn bearish on AUD/USD (from neutral earlier) as technical

signals favour further downside.

USD/SGD We turn neutral on USD/SGD (from bullish earlier) as momentum

seems to be gradually fading.

GBP/USD We remain neutral on GBP/USD as the pair remains

rangebound.

XAU/USD We turn bearish on XAU/USD (from neutral earlier) as technical

signals are starting to turn negative.

Pairs Outlook (2-4 wk) Secondary Sup Primary Sup Spot Primary Res Secondary ResEUR/USD Bearish 1.020 1.050 1.086 1.110 1.140USD/JPY Neutral 120.00 122.00 123.29 124.50 128.00AUD/USD Bearish 0.680 0.700 0.733 0.735 0.750USD/SGD Bullish 1.366 1.390 1.400 1.435 1.460GBP/USD Neutral 1.480 1.500 1.501 1.532 1.550XAU/USD Bearish 1000 1040 1085 1120 1160USD/CNH* Neutral 6.300 6.350 6.457 6.500 6.600USD/ZAR* Neutral 12.850 13.400 14.370 14.400 15.000NZD/USD* Bearish 0.618 0.645 0.669 0.680 0.700USD/CHF* Bullish 0.940 0.972 0.998 1.020 1.040USD/SEK* Neutral 8.055 8.275 8.496 8.860 8.880USD/CAD* Bullish 1.280 1.300 1.339 1.340 1.365

*SUPPLEMENTARY PAIRS - Going forward, we will maintain the EUR, JPY, AUD, SGD, GBP and XAU outlook while adding just key technical levels for the supplementary pairs

Contents

The ECB disappoints the market 1 EUR/USD 2 USD/JPY 3 AUD/USD 4 USD/SGD 5 GBP/USD 6 XAU/USD (Gold) 7 SUPPLEMENTARY PAIRS 8 Interest Rate Differentials 10 FX Implied Volatility 10 Disclosure Appendix 12

Weekly performance of pairs 27 November 2015 to 4 December 2015

Source: Bloomberg, Standard Chartered

Steve Brice Chief Investment Strategist Clive McDonnell Head, Equity Investment StrategyManpreet Gill Head, FICC Investment Strategy Adi Monappa, CFA Head, Asset Allocation Arun Kelshiker, CFA Exec. Director, Asset Allocation Audrey Goh, CFA Director, Portfolio Solutions Victor Teo, CFA Investment Strategist Tariq Ali, CFA Investment Strategist Abhilash Narayan Investment Strategist

2.74

0.51

-1.09

2.03

0.25

2.72

-1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00

XAU/USD

GBP/USD

USD/SGD

AUD/USD

USD/JPY

EUR/USD

%

This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank. Important disclosures can be found in the Disclosures Appendix.

1

weekly market viewThis reflects the views of the Wealth Management Group macro strategy | 4 December 2015

Editorial

What happens when the Fed lifts rates? Fed Chair Yellen signalled the Fed is seriously considering

raising rates on 16 December. Historically, equities and corporate bonds outperformed 6-12 months after the Fed started a hiking cycle.

The ECB cut rates further and extended QE. The magnitude disappointed markets, but longer-term the trend is supportive for European equities (FX-hedged) and a weaker Euro.

Fed Chair Yellen’s message suggests the Fed may start raising rates in December. In a speech to the Economic Club of Washington and her subsequent testimony to Congress, Yellen appeared to set the stage for what would be the first Fed rate hike since 2006. She noted waiting too long to raise rates may create greater risks for the economy because they may “end up having to tighten policy relatively abruptly to keep the economy from overshooting”. This raises our conviction that the Fed is likely to raise rates on 16 December, although it is likely to be accompanied by fairly strenuous efforts to signal a gradual pace of subsequent hikes. The latest ISM manufacturing number’s tip into contraction has caused some concern. However, we see this simply as a repeat of the mid-1990s when it similarly dropped into contraction mid-cycle because of strong gains in the USD. Today’s US labour market data is key. Historically, equities and corporate credit outperformed after the start of a Fed rate hiking cycle. Yellen’s comments caused us to dust off our analysis of market reactions at the start of the previous Fed hiking cycles and remind ourselves of three key lessons from history: Equities and corporate credit outperformed after the initial rate hike.

On average, most markets appear to be down slightly in the first three months before rebounding strongly within six months.

European equities outperformed other major regions, although most regions still did well on an absolute basis. Asian equities exhibited very divergent returns across cycles, so we would caution against drawing conclusions from the high average, though Indian equities performed well more consistently.

High yield (HY) corporate bonds and Emerging Market (EM) USD sovereign bonds were the top-performing bond asset classes, with senior loans also doing well.

Our current suite of preferred asset classes or strategies fits well into this historical picture. Equities remain our most preferred asset class, with our preferred regions (Euro area and Japan) not facing short-term resistance to the same extent as the S&P 500. On the bonds side, we continue to believe US HY is attractive given the pace of actual defaults and our historical analysis. (See page 3 for more) The magnitude of ECB easing disappointed markets, but the sharp market move has created an entry opportunity for Euro area equities (FX-hedged) and to go short EUR-USD, in our view. The extension of QE purchases to March 2017 notwithstanding, a smaller-than-expected rate cut (10bps vs. expectations of 15bps) likely explains the equity market sell-off and EUR-USD jump. However, we expect this to be temporary. We remain confident that QE purchases, negative interest rates and an even larger divergence with US Treasury yields will support Euro area equities (FX-hedged) and help EUR-USD turn lower once again.

Contents

What happens when the Fed lifts rates? 1 Market performance summary 2 What does this mean for investors? 3 Technical Analysis 4 Economic & Market Calendar 6 Disclosure Appendix 7

Equities and corporate bonds historically did well 3-12 months after the first Fed rate hike Key asset class returns 3-12 months after a Fed rate hike (cumulative, average of last three cycles*)

Source: Bloomberg, Standard Chartered * German DAX used as proxy for MSCI Europe for 1994 cycle

Our preferred asset classes or strategies Diversified income assets Global high-quality equities Euro area equities (currency-hedged) Japan equities (currency-hedged) Chinese and Indian equities Global banks US HY bonds EM IG Sovereign Bonds (USD-denominated) Senior loans Selling equity volatility to generate income

Source: Bloomberg, Standard Chartered Steve Brice Chief Investment Strategist Clive McDonnell Head, Equity Strategy Manpreet Gill Head, FICC Strategy Adi Monappa, CFA Head, Asset Allocation & Portfolio Construction

Arun Kelshiker, CFA Exec. Director, Asset Allocation & Portfolio Construction Audrey Goh, CFA Director, Asset Allocation & Portfolio Construction Victor Teo, CFA Strategist Tariq Ali, CFA Strategist Abhilash Narayan Strategist

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

3M 6M 9M 12MS&P500 MSCI Europe MSCI JapanMSCI Asia ex-Japan Barcap Global HY BarCap Global IG

This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank. Important disclosures can be found in the Disclosures Appendix.

1

global market outlookmacro strategy | 20 November 2015This reflects the views of the Wealth Management Group

Stay invested going into year-end The Fed seems on course to start a very gradual pace of rate

hikes in December, and markets appear to be fine with this. The ECB is prepping for a possible further policy easing in

December, and the BoJ maintained its record stimulus. With oil prices likely to stay low, in our opinion, and

seasonality on our side, we would stay invested in our key themes – equities, diversified income assets and the USD.

Key takeaways from the markets. As the year draws to a close, we take away five cues from the markets – a. the importance of staying invested; b. central banks are still investor’s ‘friends’; c. markets are unperturbed by a potential Fed hike in December; d. oil is likely to stay low for longer; and e. seasonality remains a tailwind for equities.

Staying the course. The first takeaway is the importance of staying invested. Panicking and selling during the volatility in August-September would have made it difficult to re-enter on time and benefit from the strong equity rally in October-November (see chart below). History has shown timing the markets can be unprofitable.

The Fed, ECB and BoJ are investors’ ‘friends’. The Fed’s messaging has become more clear and consistent – it is getting ready to raise rates in December, and only because the economy has substantially healed. Moreover, further rate hikes will depend on the data, with the base scenario of a gradual pace of hikes next year. The ECB, meanwhile, is preparing to cut rates deeper into negative territory, as it supports the ongoing recovery. The BoJ and PBoC both remain supportive. Central banks are, thus, very supportive of growth.

Markets appear relaxed about a potential Fed hike. Unlike the mid-summer volatility, or the ‘taper-tantrum’ in 2013, the Fed’s latest communication about a possible rate hike in December has been received well by the markets. US stock, bond and currency volatilities are at or below their five-year averages. Markets appear fine with a hike, most likely because the economy supports it.

Oil and commodities likely to stay low for longer. OPEC is likely to continue defending its market share, keeping oil prices in recent range. The metals markets remain oversupplied. Both factors are likely to subdue commodity prices, supporting global growth and equities.

Seasonality tailwind. Q4 and Q1 are historically the best quarters for equities, with December the best month on average. Combined with supportive factors highlighted above, this gives us added confidence to stay invested in our key themes (see table on the right).

The rebound in equity markets is following a pattern seen in 2014MSCI World Index (Developed Markets); 2014 shifted forward by 1 mth

Volatility in equities, bonds and currencies remain below average VIX (equities), CVIX (FX) and MOVE (bond) volatility indices

Source: Bloomberg, Standard Chartered Source: Bloomberg, Standard Chartered

8588919497

100103106109

MXWO in 2014 MXWO in 2015

MSCI World in 2014MSCI World in 2015

Indexed =100

0

50

100

150

200

250

300

0

20

40

60

80

100

Oct-05 May-08 Nov-10 May-13 Nov-15

Inde

x

Inde

x

VIX Index CVIX Index MOVE Index (RHS)

Contents

Stay invested going into year-end 1

Market Performance Summary 2

Investment Strategy 3Asset Allocation Summary 5

Economic & Market Calendar 6Disclosure Appendix 7

Our preferred asset classes or strategies

Diversified income assets

Global high-quality equities

Euro area equities (currency-hedged)

Japan equities (currency-hedged)

Chinese and Indian equities

Global banks

US High Yield bonds

Emerging Market Investment Grade Sovereign Bonds (USD-denominated)

Senior loans

Selling equity volatility to generate income Steve Brice Chief Investment Strategist Clive McDonnell Head, Equity Investment StrategyManpreet Gill Head, FICC Investment Strategy Adi Monappa, CFA Head, Asset Allocation & Portfolio

Solutions Arun Kelshiker, CFA Exec. Director, Portfolio SolutionsAudrey Goh, CFA Director, Portfolio Solutions Victor Teo, CFA Investment Strategist Tariq Ali, CFA Investment Strategist Abhilash Narayan Investment Strategist

Suite of key WMA publications

Weekly update on the

currency market outlook,

predominantly from a

technical point of view.

Wee

kly

FX Strategy

Outlook 2016A year to A.D.A.P.T. to a changing landscape

| Wealth Management Advisory |

Our annual publication

highlights what we believe

will be the key investment

drivers, which asset classes

we expect to outperform

and how our views might

change as we move

through the year.

Annu

ally

Outlook 2016

Publication that captures

the house view of key

asset classes issued by the

Global Investment Council.

Mon

thly

Global Market Outlook

Update on recent

developments and the key

things to look out for in the

coming week.

Wee

kly

Weekly Market View

Dec

201

5

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