MARKET OUTLOOK Q2 2015 – FINANCIALS

Phillip Futures discusses the performance of Financials (Economy, Currencies and Stock Indices) of the US, Eurozone and Japan economies in the Second Quarter of 2015 (Q2 2015)

Financials

Equities Primed To Take Over Dollar’s Mantle As Top Performer Analysing the US, European and Japanese markets based on the country’s economy, stock index futures and currency

Report by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

MARKET OUTLOOK Q2 2015 – FINANCIALS

At A Glance 1) EQUITIES: We expect equities to generally embark on a rally in Q2 as the global monetary environment remains loose. 2) EQUITIES: Among the equities space, we favour India and China’s stocks as our top picks. 3) US DOLLAR: A dovish Fed implies the USD may lose strength next quarter. 4) INTEREST RATES: We now think the US interest rates will be delayed till September from our original forecast of June. 5) EMERGING MARKETS: India looks to overtake China in terms of economic performance this year. 6) EMERGING MARKETS: China liberalizing its financial markets faster than expected; blink and you will miss. 7) SINGAPORE: Singapore’s Straits Times Index remains supported above 3,400 but still lack the catalyst to set new high.

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

2

MARKET OUTLOOK Q2 2015 – FINANCIALS

Developed Markets: 1Q2015 in Review Volatility was the key word for many markets in the first quarter, as multiple event risks resulted in huge swings in asset prices. The SNB’s surprise scrap of the EUR/CHF currency floor in an unscheduled meeting sent the FX market reeling, while the European Central Bank’s Quantitative Easing announcement added further volatility to the currency space. The threat of Greece leaving the European Union single-handedly drove markets in February until a temporary resolution was reached. The implied volatility on options across most asset classes – equities, currencies and commodities – soared as markets entered a period of large swing in daily prices. European equities were the top performed among the developed equities space, while the euro

fared the worst against the dollar among G7 currencies. Quantitative Easing measures by the ECB were responsible for both aforementioned developments. At a glance, these events shaped the investment landscape of 1Q2015:

United States Monetary Policy: The US Federal Reserve now appears dovish, reducing their end-2015 interest rate forecast and playing down economic growth. Rate Hike: Rates are still kept at the Zero Interest Rate Policy upper boundary of 0.25%, a record low. Labour Market: Nonfarm payrolls continue to post exceptional gains every month and are proving to be the biggest justification for a rate hike. Wages, however, remain stagnant while the labour force participation rate is far from ideal. Inflation: The Fed thinks that 2015 inflation in the US would be between 0.6% to 0.8%.

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

3

MARKET OUTLOOK Q2 2015 – FINANCIALS

US Dollar: The dollar index rose as much as 11% at some point this year, breaching the 100 level for the first time since 2003. 2014 Full Year GDP: The US was estimated to have grown about 2.4% in 2014. 2015 Expected GDP Growth: The median estimate by the US Federal Reserve is for the country to

grow 2.5% this year. Oil Prices: Fed Chair Janet Yellen describes falling oil prices as a net positive for the US.

Euro Zone Monetary Policy: Quantitative Easing officially launched on 22 January, with an expected buyback of €60bn a month until September 2016 – a plan that would buy more than €1 trillion in assets. Monetary Policy: The Swiss National Bank shocked markets by conducting an unscheduled meeting to remove the EUR/CHF floor of 1.2000, two days after claiming that said floor was a “pillar” in their currency policy. Monetary Policy: European central banks that conducted monetary easing this year: Romania; Switzerland; Turkey; Russia; Denmark; Sweden; Poland; Serbia; and the European Central Bank. Ukraine: Russia and Ukraine in February agree to an official ceasefire in full view of the media, but separatists along the border continue their armed scuffles. Greece: Greece stole the headlights in Q1 after leftist leader Alexis Tsipras won national elections to lead the beleaguered country. Markets were (and still are) kept on their seats on fears of a Greek default or worse, Greece exiting the European Union. Mario Draghi: ECB President Mario Draghi believes that a cheap euro and lower oil prices will aid the Eurozone’s recovery. Equity Indices: European stocks were one of the best performing in Q1, with the Stoxx 50 rising +19% at its highest and the DAX breaking 12,000 points to gain +24% at its highest.

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

4

MARKET OUTLOOK Q1 2015 – FINANCIALS

Japan 2014 Full Year Growth: Japan’s economy contracted -0.5% in 2014 from the previous year, a disappointing result brought by the hike in consumer taxes. Abenomics was not enough to rescue the country from contraction. 2015 Estimated Growth: OECD estimates that Japan will grow at 1% this year. Nikkei 225: The Nikkei 225 index broke 19,000 points in Q1. Tax Breaks: Japan’s Cabinet has approved plans to give tax breaks for companies seeking to relocate their headquarters from Tokyo in its plan to halt concentration in the capital. Ending QE: Bank of Japan Governor Haruhiko Kuroda thinks that it is still too early to debate the timing and means to end the central bank’s Quantitative Easing programme.

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

5

MARKET OUTLOOK Q2 2015 – FINANCIALS

Outlook For Developed Stock Markets & Currencies United States Stoxx 50: Bullish; target: 3,800 DAX: Bullish; target: 12,500 EUR/USD: Bullish; target 1.11 to 1.14

Equities look set for a rally in Q2 as expectations of low interest rates are set to fuel stocks to higher levels. Two key events in March firmed the notion that US interest rates would remain low for the rest of the year. Firstly, the downgrade in the 2015 interest rate path has resulted in a median estimate of 0.5%-0.75%, lower than December’s forecast of 1%-1.25%. By this estimate, this effectively means that the Fed may be looking to conduct one to two 25bp rate hikes for the rest of the year – meaning that the monetary environment will be very accommodative. Secondly, Fed Vice Chairman Stanley Fischer appear to confirm the above analysis by stating in late March that a smooth path in normalizing rates will “almost certainly not be realized”. This means that even if the Fed opts for an early rate hike, there is no guarantee that they will follow up subsequent FOMC meetings with successive rate hikes. The FOMC’s change in tack appeared to come from the strong dollar and falling oil prices, which they believe are weighing down inflationary pressures. The more accommodative monetary environment than previously thought would be the key catalyst in driving equities higher this year; changes in economic fundamentals, in the coming quarter, may cause mild swings in equity index levels but the overall driving force would be that from a loose monetary policy.

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

6

MARKET OUTLOOK Q2 2015 – FINANCIALS

The US dollar was the dominant trend in Q1, racing ahead among asset classes and stamping its authority on most other currencies. With the latest go-slow approach by the Fed, this is expected to change and the baton for outperforming asset may likely be passed to US equities for the rest of Q2. Risk appetite from the markets look stoked by the low interest rate

environment, which mean cyclical sectors and mid-to-large cap stocks could benefit the most this quarter. For that reason, we expect the S&P 500 index to outperform the Dow Jones Industrial Average in Q2. Resistance for the S&P 500 expected at 2,120; target at 2,150. Resistance for the DJIA expected at 18,290; target at 18,425.

Source: Reuters/ Phillip Futures

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

7

MARKET OUTLOOK Q2 2015 – FINANCIALS

Source: Reuters/ Phillip Futures

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

8

MARKET OUTLOOK Q2 2015 – FINANCIALS

Eurozone Stoxx 50: Bullish; target: 3,800 DAX: Bullish; target: 12,500 EUR/USD: Bullish; target 1.11 to 1.14

European stocks were the top performer in Q1, with the Stoxx 600 index rising +18% at its highest. The DAX, in turn, was one of the best indices among the European equity space, adding as much as 24% at one point as it broke past 12,000 points. The broader Stoxx 50 index rose 18%; FTSE 100 added about 7.5% after breaching 7,000 in late March. Yields on European bonds are heavily suppressed with the implementation of QE, with German 10Y yields hovering just 20bps above 0%. With returns on fixed income getting tighter, European investors are turning to equities in search for yield and that would likely continue in Q2, given that the monetary environment in the US is also expected to be accommodative. This would likely fuel European stocks higher in Q2. In comparison with US stocks, however, European equities would appear to face more key event risks than its counterpart across the Atlantic. The proceedings in Greece dominated headlines and debt issues are yet to be resolved – they were merely conveniently kicked down the road to end-June. Market jittery from this issue is expected to resurface as we approach the expiry of Greece’s loan extension. It is also worthwhile to note that several countries in Europe will be conducting national elections, most notably the UK as well as larger countries such as Spain and France. Concerns over a Brexit – Britain’s exit of the Union by choice through referendum – will likely spook markets once election fever nears. Meanwhile, Spain will pose questions similar to Greece, in which fears of an Eurozone breakaway could surface should a leftist leader take charge of the country after winning elections. At present, the timing of a British election is estimated at June, while that of Spain is expected in October.

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

9

MARKET OUTLOOK Q2 2015 – FINANCIALS

We view the risks posed by a Brexit or a Spain breakaway to be low and any market downturn in European markets related to said events present decent chances for investors to enter in dips. Greece’s debt issues and its seemingly uncompromising relation with Germany are expected to generate market volatility but chances of a Grexit are low. White noise will be aplenty in the next quarter but equities are expected to rally ultimately. The FOMC’s dovish slant is expected to aid the euro’s cause at the beginning of the quarter as investors unwind long positions on the dollar. EUR/USD would possibly test 1.1450. As we enter late Q2, we expect the USD to begin gathering steam for a late-year rally and that would possibly push EUR/USD back to 1.1000 levels before July.

Source: Reuters/ Phillip Futures

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

10

MARKET OUTLOOK Q2 2015 – FINANCIALS

Source: Reuters/ Phillip Futures

Source: Reuters/ Phillip Futures

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

11

MARKET OUTLOOK Q2 2015 – FINANCIALS

Source: Reuters/ Phillip Futures

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

12

MARKET OUTLOOK Q2 2015 – FINANCIALS

Japan Nikkei 225: Bullish; target: 20,000 USD/JPY: Neutral; target: 116 to 121

The Nikkei 225 broke 19,000 in mid-march and its rally since early February means at present, the Japanese index is closer to 20,000 points than it is to 19,000. The yen posted gains against the dollar in January, as high volatility in financial markets bolstered demand for the Japanese currency as a safe haven asset. The dollar train, however, took off again in February and then yen’s weakening sent the Nikkei 225 higher. An interesting phenomenon to note was that the Nikkei 225 and the yen exhibited positive correlation on a 30-day rolling correlation basis in February. Traditionally, or at least since the implementation of Abenomics, the Nikkei 225 and the yen has exhibited a fair degree of negative correlation; when the yen weakens, the Nikkei 225 would rise and conversely, when the currency strengthens, the stock index would fall. February was the first time since Abenomics began that the yen and the Nikkei 225 showed a positive correlation on a 30-day rolling basis – the Nikkei 225 would rise even though the yen strengthened. The breakdown in relation is expected to be temporary and while said breakdown is present at time of writing, it remains to be seen if would be a long-term trend. What all this means right now is the positive correlation between the yen and the Nikkei 225 gives us the additional confidence that the Nikkei 225 could continue running higher even if the yen gains strength. The loose monetary environment in the major economies of the US, Eurozone and Japan ought to send the Nikkei 225 higher, even if the yen receives temporary inflows from the dollar’s unwinding of long positions. Q3 may see the Nikkei 225 hit 20,000 points, which at time of writing, is only 1.5% away from current levels. A bullish environment may even lift the Nikkei 225 to 20,300 points in Q2. USD/JPY, meanwhile, would be expected to trade within a broad sideway range of 116 to 121 in Q2 as investors take stock of the Fed’s dovish slant. The Bank of Japan has not expressed any inclination to do further QE at present, but should it happen, then we expect USD/JPY to rally past 121 to possibly 123. The Nikkei 225, under said scenario, could jump to 21,000 points.

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

13

MARKET OUTLOOK Q2 2015 – FINANCIALS

Source: Reuters/ Phillip Futures

Source: Reuters/ Phillip Futures

Written by Howie Lee, Investment Analyst at Phillip Futures

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

14

MARKET OUTLOOK Q2 2015 – FINANCIALS

General Disclaimer / Disclosure This publication is prepared by Phillip Futures Pte Ltd., 250 North Bridge Road, #07-01, Raffles City Tower, Singapore 179101 (Registration Number: 198305695G), which is regulated by the Monetary Authority of Singapore ( “Phillip Futures”). By receiving or reading this publication, you agree to be bound by the terms and limitations set out below. This publication has been provided to you for personal use only and shall not be reproduced distributed or published by you in whole or in part, for any purpose. If you have received this document by mistake, please delete or destroy it, and notify the sender immediately. Phillip Futures shall not be liable for any direct or consequential loss arising from any use of material contained in this publication. The information contained in this publication has been obtained from public sources which Phillip Futures has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this publication are based on such information and are expressions of belief of the individual author or the indicated source (as applicable) only. Phillip Futures has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete, appropriate or verified or should be relied upon as such. Any such information or Research contained in this publication is subject to change, and Phillip Futures shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will Phillip Futures or persons associated with or connected to Phillip Futures, including but not limited its officers, directors, employees or persons involved in the preparation or issuance of this report, (i) be liable in any manner whatsoever for any consequences (including but not limited to any special, direct, indirect, incidental or consequential losses, loss of profits and damages) of any reliance or usage of this publication or (ii) accept any legal responsibility from any person who receives this publication, even if it has been advised of the possibility of such damages. You must make the final investment decision and accept all responsibility for your investment decision including but not limited to your reliance on the information, data and/or other materials presented in this publication. Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this material are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this publication is not indicative of future results. This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This publication should not be relied upon exclusively or as authoritative without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this publication has been made available constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described in this material is suitable or appropriate for the recipient. Recipients should be aware that many of the products which may be described in this publication involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks. Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this research should take into account existing public information, including any registered prospectus in respect of such product. Phillip Futures, or persons associated with or connected to Phillip Futures, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Futures, or persons associated with or connected to Phillip Futures, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this publication, and may have performed services for or solicited business from such issuers. Additionally, Phillip Futures, or persons associated with or connected to Phillip Futures, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may have provided advice or investment services to such companies and investments or related investments as may be mentioned in this publication.

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

15

MARKET OUTLOOK Q2 2015 – FINANCIALS

Phillip Futures or persons associated with or connected to Phillip Futures, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment. To the extent permitted by law, Phillip Futures, or persons associated with or connected to Phillip Futures, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold a interest, whether material or not, in respect of companies and investments or related investments which may be mentioned in this publication. Accordingly, information may be available to Phillip Futures, or persons associated with or connected to Phillip Futures, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, which is not reflected in this material, and Phillip Futures, or persons associated with or connected to Phillip Futures, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Futures, or persons associated with or connected to Phillip Futures, including but not limited its officers, directors, employees or persons involved in the preparation or issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this material. The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Futures to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction. Section 27 of the Financial Advisers Act (Cap. 110) of Singapore and the MAS Notice on Recommendations on Investment Products (FAA-N01) do not apply in respect of this publication. This material is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this material may not be suitable for all investors and a person receiving or reading this material should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products. Please contact Phillip Futures at [65-65338017] in respect of any matters arising from, or in connection with, this document. This report is only for the purpose of distribution in Singapore.

Phillip Futures Pte Ltd 250 North Bridge Road #07-01 Raffles City Tower 1 Singapore 179101 (65) 6538 0500 [email protected]

16 16