Maybank Investment Strategy

Third Quarter 2016 Investment Outlook

Summary
The key event for the quarter came as a negative surprise
to the market. A vote to leave the European Union (EU) by
Britain left the currency and equity markets in turmoil
and the after effects will continue to be felt for a while
as the actual departure of Britain could take up to 2
years.

Asset Class
Equity

Post resignation of Prime Minister David Cameron, the

U.K. government has to engage the European Council for
the separation details including withdrawal plans, as well
as the setting up of new trade agreements, immigration
policies, financial regulations as stipulated in the Article
50 of the Lisbon treaty.

Bonds

The BREXIT has increased the chances of further

intervention from major central banks ahead to stem
further deterioration of the global economy. The U.S. Fed
is unlikely to raise rates until late in the year in view of
the increased uncertainty.

Alternatives

Safe-haven assets will do well in the current environment.

While there is no precedence for BREXIT, the EU Sovereign
debt crisis of 2011-2012 provides the best proxy, USD (DXY
Index), Bonds and Gold had outperformed other asset
class, while U.S. stocks held up the best.

Asset Allocation
We raised Japan back to a neutral from an underweight
position given its recent quarter underperformance. The
likelihood of further monetary easing from the Bank of
Japan has increased, given the potential negative BREXIT
impact on trade and global consumption.
On a regional basis we are neutral in all major regions as
the key driver for their over and under performance will
depend largely on central bank policies which have been
difficult to predict and will continue to be so. A large
determinant of the individual regions performance has
been the currency effect where leadership has shifted
periodically over the last 18 months.
For bonds, we raised the Emerging Market Investment
Grade segment to a neutral weight as it should benefit
from the hunt for yield and stable USD from a delay in the
FOMC rate hike decision.
In the current environment, we have preference for truly
defensive equities with strong cash flow and steady
dividend policies such as Telcos and REITS. While there is
ongoing uncertainties, the recent price correction present
tactical buying opportunities for the nimble.

Cash

Sector
=

US

Europe

Japan

Asia ex-Japan

DM Investment Grade

DM High Yield

EM Investment Grade

EM High Yield

Gold

Oil

Hedge Funds

Source: Maybank Investment Strategy Team

Asset Class

Changes to date
(in local currency)
Month
Quarter
Year

Equity
MSCI USA
MSCI Europe
MSCI Japan
MSCI Asia ex-Japan
China
Hong Kong
Taiwan
Korea
Singapore
Malaysia
Indonesia
Thailand
Philippines

0.8%
-0.1%
-5.7%
1.7%
0.9%
0.3%
1.7%
0.1%
0.1%
0.9%
1.6%
0.9%
4.4%

2.8%
2.7%
-3.6%
-0.9%
-2.4%
0.4%
-0.8%
-0.5%
-1.7%
-4.5%
0.6%
2.0%
6.4%

3.2%
-5.2%
-16.5%
0.6%
-9.1%
-4.8%
4.1%
1.3%
-3.1%
-3.1%
6.1%
11.5%
11.2%

MSCI EM

3.5%

-0.2%

5.2%

0.9%
1.2%

1.3%
5.1%

4.3%
8.6%

4.2%
0.7%

2.7%
28.9%

19.3%
33.5%

Bonds
Barclays US IG
iBoxx US HY
Commodity
Gold
WTI Crude Oil

Source: Bloomberg As at 24 June 2016

Maybank Investment Strategy

Third Quarter 2016 Investment Outlook
The Macro Environment
U.S.

The exposure of S&P500 companies to U.K and Europe are limited, representing about 4% and 17% of
S&P500 earnings respectively. Hence, the near-term impact on U.S equities is unlikely to be significant
versus equities in other regions, as observed in previous episodes of European outlier events such as the
European debt crisis.

The U.K. vote on BREXIT points to a number of parallels with the current Donald Trump campaign for the
upcoming U.S. elections where there is a clamour for a big change in policy direction. Despite the ongoing
political noise in Europe, recent polls still saw Trump trailing behind his rival Hillary Clinton by 5 to 12
percentage points, reaffirming our base case scenario of a Hillary Clinton Presidential win.

Another area of concern for investors has been the financial contagion impact from BREXIT. But the
recent outcome of the Dodd-Frank Act Stress Test (DFAST) suggests that U.S. banks are able to withstand
severe adverse scenario that assumes a decline of about 50% in equity prices, unemployment rate at 10%,
and a sharp fall in global GDP. This implies further upside to share buyback exercises and sustainable
dividend payout, particular after the U.S Feds Comprehensive Capital Analysis and Review (CCAR).

Europe

On the equities front, the sell down in European markets is largely due to higher risks premium. There is a
remote fear that BREXIT will incite the eventual breakup of the European Union. In the U.K., we think
FTSE250 will be more adversely impacted than FTSE100 as only 28% of the companies in FTSE100 have
revenues that come directly from U.K. compared to 60% in FTSE250.

Within the European equities space, we prefer defensives such as telcos and consumer staples that do not
have extensive revenue exposed to the U.K.. Although the EuroStoxx 50 slumped 8.6% on the day after
the BREXIT vote to a current valuation of 12.9x FY16 PE, a level last seen in Feb 2016, it is still higher
than its 5 year average PE of 12.2x.

Asia

Other than having to contend with negative interest rate policy and muted economic growth
domestically, Japanese equities were dealt with another blow from BREXIT. The consequence was a sharp
appreciation of the Japanese Yen as investors poured money into currencies seen as safe-havens. The
impact on the Japanese financial stocks was severe as investors weighed on the capital markets and
currency volatilities as well as global central banks moves.

Whilst U.K. is the fifth largest economy globally, its weight in Asian exports (including HK/China) is
relatively low and the impact from a direct trade angle is relatively muted. The contagion impact of
BREXIT into EU could potentially translate into weaker euro. Historically, a 1% depreciation in EUR could
reduce Asian exports to the Eurozone (in USD terms) by around 1%.

Impact on ASEAN will be contained as ASEAN countries' exports to U.K. only represents 0.9 to 1.3% of their
total export and thus we think the impact of a BREXIT will be more adverse onto U.K. then to the rest of
ASEAN.

Disclaimer
This report is for information purposes only and under no circumstances is it to be considered or intended as
an offer to sell or a solicitation of an offer to buy the securities or financial instruments referred to herein,
or an offer or solicitation to any person to enter into any transaction or adopt any investment strategy.
Investors should note that income from such securities or financial instruments, if any, may fluctuate and
that each securitys or financial instruments price or value may rise or fall. Accordingly, investors may
receive back less than originally invested. Past performance is not necessarily a guide to future performance.
This report is not intended to provide personal investment advice and does not take into account the specific
investment objectives, the financial situation and the particular needs of persons who may receive or read
this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of
investing in any securities and/or financial instruments or the investment strategies discussed or
recommended in this report.
The information contained herein has been obtained from sources believed to be reliable but such sources
have not been independently verified by Malayan Banking Berhad and/or its affiliates and related
corporations (collectively, Maybank) and consequently no representation is made as to the accuracy or
completeness of this report by Maybank and it should not be relied upon as such. Accordingly, no liability can
be accepted for any direct, indirect or consequential losses or damages that may arise from the use or
reliance of this report. Maybank and its officers, directors, associates, connected parties and/or employees
may from time to time have positions or be materially interested in the securities and/or financial
instruments referred to herein and may further act as market maker or have assumed an underwriting
commitment or deal with such securities and/or financial instruments and may also perform or seek to
perform investment banking, advisory and other services for or relating to those companies whose securities
are mentioned in this report. Any information or opinions or recommendations contained herein are subject
to change at any time, without prior notice.
This report may contain forward looking statements which are often but not always identified by the use of
words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and
project and statements that an event or result may, will, can, should, could or might occur
or be achieved and other similar expressions. Such forward looking statements are based on assumptions
made and information currently available to us and are subject to certain risks and uncertainties that could
cause the actual results to differ materially from those expressed in any forward looking statements. Readers
are cautioned not to place undue relevance on these forward looking statements. Maybank expressly
disclaims any obligation to update or revise any such forward looking statements to reflect new information,
events or circumstances after the date of this publication or to reflect the occurrence of unanticipated
events.
This report is prepared for the use of Maybanks clients and may not be reproduced, altered in any way,
transmitted to, copied or distributed to any other party in whole or in part in any form or manner without
the prior express written consent of Maybank. Maybank accepts no liability whatsoever for the actions of
third parties in this respect.
This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or
resident of or located in any locality, state, country or other jurisdiction where such distribution,
publication, availability or use would be contrary to law or regulation.

Maybank Investment Strategy

Bonds -

Third Quarter 2016 Outlook

Summary Outlook
U.K.s decision to leave the European Union (E.U.) will have wide implications that cannot be determined
easily. This is because of the multiple outcome permutations arising from possible changes in UK leadership,
direction and the pace of the E.U. exit negotiations.
Borrowing costs for U.K. and related corporates to rise as international rating agencies downgraded U.K.s
credit ratings with a negative outlook. Besides U.S. Treasury (UST), there are few AAA rated sovereigns
remaining: AUD and SGD denominated bonds should benefit from this status.
Aside from U.K. and Europe, there are limited macro impact on other regions in the near term. However,
volatility in the second order disruption via trade and global financial markets could cause a continued flight
to safe haven assets such as Gold, Government Bonds and quality Credits (Fig 1).

Market Review

Bonds

3Q16

2Q16

Macroeconomic trends:

DM Investment Grade

(+)

(+)

The Fed downgraded U.S. economic growth and pace of

rate hike in 2016 and 2017. IMF shaved 20bp off U.S.
2016 GDP growth to 2.2%. Post BREXIT, Euro area
growth expected to shrink by 50bp in 2016.

DM High Yield Debt

(=)

(=)

EM Investment Grade

(=)

(-)

EM High Yield Debt

(-)

(-)

Asia Investment Grade

(=)

(=)

Asia High Yield

(=)

(=)

Meaningful fiscal spending is increasingly less likely

given the level of debt across Developed Markets (DM)
economies. U.K. deficit is now 5%.

Investment Opportunities:
Developed Markets We think DM Investment Grade will
play catch up after its relative under-performance in
2Q. Investors will hunt down quality issuers with yield.
But we would be cautious towards European AT1.

Source: Maybank Private Wealth | June 2016

Fig 1: Total returns of assets classes during European debt
crisis (2011-2012)

Emerging Markets Credit We upgraded the Emerging

Markets (EM) Investment Grade (IG) bonds to a Neutral
position from Underweight due to 1) a range-bound USD
from the delay in U.S. rate hike, 2) stable energy and
commodities prices and 3) global search for return of
safer yield. We prefer EM IG over High Yield (HY) as
fundamentals of HY continues to worsen.
Asia Credit As a region, EM Asia has limited direct
trade exposure to the U.K. While Asia Credit spreads
are tighter compared to other EM regions, it still offers
higher spread over U.S. IG credits (Fig 2). For local
currency investments, IDR bonds look relatively
attractive as there is room for further rate cuts.

Source: CLSA, Factset, Bloomberg I June 2016

Maybank Investment Strategy

Bonds

Third Quarter 2016 Outlook

Monetary Policy:
With the U.K. likely to slip into recession, the Bank of England is expected to cut rates (50bp) and start
Quantitative Easing (QE) as early as July to ensure there is sufficient liquidity in the system.
Central banks around the world stand ready to act when needed, in order to avert a financial crisis arising
from BREXIT. European Central Banks asset purchase programme would likely be front-loaded, Bank of
Japan could ease monetary policies further and Peoples Bank of China could reduce their Reserve Ratio
Requirements for the banks.
Economists and strategists are now adjusting down the number of Fed Fund Rate hikes in 2016 and 2017.
Fed Fund futures are indicating a less than 50% chance of a 25bp rate hike in December 2016.

Fundamentals
Post BREXIT, 10-year German Bunds, U.K. Gilts, Swiss Government and Australian Government Bonds fell to
historical lows. Current slow global growth, slower U.S. rate hike trajectory and low inflation suggest
global government bond yield curves are likely to remain flat and range bound.
Negative interest rate policies (NIRP) are distorting valuation across asset classes. There is increasing
concern that prolonged NIRP would cause an increasing deterioration of fundamentals.
The transiting Chinese economy saw new loans growing less than expected in the latest figures. With more
than 9.4%/18.6% of HK/Chinas exports going to EU, potential impact arising from this exposure bears
monitoring in light of a weakening RMB (Fig 3).

Risks
Heighted volatility from messy changes in U.K. : Including new Prime Minister/government, Scottish
Referendum, negotiations with Europe.
Sharp slowdown in Chinas economic growth
Fig 2: Asia IG Corporates vs U.S. IG Corporates

Source: JP Morgan. Data as of June 24, 2016

Fig 3: RMB Spot vs Fixing

Source: Bloomberg, CEIC, ANZ Research I June 2016

Disclaimer
This report is for information purposes only and under no circumstances is it to be considered or intended as
an offer to sell or a solicitation of an offer to buy the securities or financial instruments referred to herein,
or an offer or solicitation to any person to enter into any transaction or adopt any investment strategy.
Investors should note that income from such securities or financial instruments, if any, may fluctuate and
that each securitys or financial instruments price or value may rise or fall. Accordingly, investors may
receive back less than originally invested. Past performance is not necessarily a guide to future performance.
This report is not intended to provide personal investment advice and does not take into account the specific
investment objectives, the financial situation and the particular needs of persons who may receive or read
this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of
investing in any securities and/or financial instruments or the investment strategies discussed or
recommended in this report.
The information contained herein has been obtained from sources believed to be reliable but such sources
have not been independently verified by Malayan Banking Berhad and/or its affiliates and related
corporations (collectively, Maybank) and consequently no representation is made as to the accuracy or
completeness of this report by Maybank and it should not be relied upon as such. Accordingly, no liability can
be accepted for any direct, indirect or consequential losses or damages that may arise from the use or
reliance of this report. Maybank and its officers, directors, associates, connected parties and/or employees
may from time to time have positions or be materially interested in the securities and/or financial
instruments referred to herein and may further act as market maker or have assumed an underwriting
commitment or deal with such securities and/or financial instruments and may also perform or seek to
perform investment banking, advisory and other services for or relating to those companies whose securities
are mentioned in this report. Any information or opinions or recommendations contained herein are subject
to change at any time, without prior notice.
This report may contain forward looking statements which are often but not always identified by the use of
words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and
project and statements that an event or result may, will, can, should, could or might occur
or be achieved and other similar expressions. Such forward looking statements are based on assumptions
made and information currently available to us and are subject to certain risks and uncertainties that could
cause the actual results to differ materially from those expressed in any forward looking statements. Readers
are cautioned not to place undue relevance on these forward looking statements. Maybank expressly
disclaims any obligation to update or revise any such forward looking statements to reflect new information,
events or circumstances after the date of this publication or to reflect the occurrence of unanticipated
events.
This report is prepared for the use of Maybanks clients and may not be reproduced, altered in any way,
transmitted to, copied or distributed to any other party in whole or in part in any form or manner without
the prior express written consent of Maybank. Maybank accepts no liability whatsoever for the actions of
third parties in this respect.
This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or
resident of or located in any locality, state, country or other jurisdiction where such distribution,
publication, availability or use would be contrary to law or regulation.