Economic Outlook & Investment Strategy 1 YTD Global Stock - - PowerPoint PPT Presentation

Economic Outlook & Investment Strategy

1

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YTD Global Stock Market Performances

2

Source: Bloomberg Data as of 31/8/2013; Fund performance is calculated in the fund’s base currency on NAV-to-NAV basis with gross dividend reinvested.

9.27% 15.02% 16.15% 19.95% 7.13% 12.29% 6.45% 11.20% 30.10% 6.99%

• 3.37%

14.09%

• 1.73%

4.50%

• 4.62%
• 4.37%
• 17.95%
• 2.92%
• 6.09%
• 4.96%

1.95% 14.28% 17.30%

• 4.53%
• 1.33%
• 10.83%

MSCI ACWI DOW JONES INDUS. AVG S&P 500 INDEX NASDAQ COMPOSITE INDEX STXE 50 € Pr FTSE 100 INDEX DAX INDEX CAC 40 INDEX NIKKEI 225 TAIWAN TAIEX INDEX KOSPI INDEX ALL ORDINARIES INDX Straits Times Index STI FTSE Bursa Malaysia KLCI STOCK EXCH OF THAI INDEX MICEX INDEX BRAZIL IBOVESPA INDEX S&P BSE SENSEX INDEX CSI 300 INDEX SHANGHAI SE A SHARE INDX SHANGHAI SE B SHARE INDX SHENZHEN SE A SHARE INDX SHENZHEN SE B SHARE INDX CSI Hong Kong 100 Index HANG SENG INDEX HANG SENG CHINA ENT INDX

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Market Concerns on US, Europe and China Economy

3

Will Euro Debt Crisis Reignite Will China Tighten Policy When Will US Tapering Begin

Market Concerns

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US

4

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2.89%

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 09/2012 10/2012 11/2012 12/2012 01/2013 02/2013 03/2013 04/2013 05/2013 06/2013 07/2013 08/2013 %

美國10年期國債孳息

Bernanke’s First Tapering Talk

• On May 22, Bernanke first expressed his view in the Q&A session at

Congress testimony that the Fed might consider tapering its bond purchase program later this year if the US economy growth is strong and sustainable.

5

US 10-Year Treasury Yield Trend

Source: Bloomberg Data as of 31/8/2013

US 10-Year Treasury Yield

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Volatile Investment Market – Equity

6

Major Stock Market Index Year to Date on May 22

(Before Bernanke’s First Tapering Talk)

May 22 to Present

(After Bernanke’s First Tapering Talk) MSCI World Index

12.63%

• 2.98%

S&P 500 Index

17.05%

• 0.77%

STOXX Europe 50 Index

13.12%

• 5.30%

MSCI Asia ex-Japan Index

4.03%

• 7.93%

Shanghai Shenzhen CSI 300 Index

3.95%

• 9.65%

Hang Seng China Enterprises Index -3.25%

• 7.83%

Hang Seng Index

3.43%

• 4.60%

Nikkei 225 Index

51.60%

• 14.18%

Source: Bloomberg Data as of 31/8/2013; Fund performance is calculated in the fund’s base currency on NAV-to-NAV basis with gross dividend reinvested.

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Volatile Investment Market – Currency

7

Source: Bloomberg Data as of 31/7/2013

Major Currency Performance against USD Year to Date on May 22

(Before Bernanke’s First Tapering Talk)

May 22 to Present

(After Bernanke’s First Tapering Talk)

JPY

• 15.92%

5.38% AUD

• 6.69%
• 7.39%

CHF

• 6.44%

5.62% NZD

• 2.53%
• 1.15%

GBP

• 7.41%

1.04% KON

• 4.93%
• 0.34%

EUR

• 2.54%

3.45% TWD

• 2.97%
• 0.31%

RMB 1.64% 0.04%

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Volatile Investment Market – Bond

8

Major Country Government Bond Yield As of 22 May 2013

(Before Bernanke’s First Tapering Talk)

As of 31 August 2013

(After Bernanke’s First Tapering Talk)

US 10-Year Govt Bond 2.0395% 2.7839% Spain 10-Year Govt Bond 4.1800% 4.5370% Italy 10-Year Govt Bond 3.9120% 4.4010% Greece 10-Year Govt Bond 8.1320% 10.2990% Japan 10-Year Govt Bond 0.8910% 0.7200% Germany 10-Year Govt Bond 1.4270% 1.8560% UK 10-Year Govt Bond 1.9030% 2.7720%

Source: Bloomberg Data as of 31/8/2013

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Fed hints at tapering

• On 19 June, Bernanke stated, after the FOMC policy meeting, growth in jobs market could lift

consumers’ sentiment, and if the unemployment rate fell to 7%, which signaled a continuous improvement in labour market, a timetable for exiting QE would be laid out.

9

Source: US Fed Note: The thresholds for raising rate are 6.5% unemployment rate and 2.5% inflation.

US economy forecast by Fed (Sep 2013)

2013 2014 2015

Economics growth

2.0%-2.3% 2.9%-3.1% 3.0%-3.5%

Unemployment

7.1%-7.3% 6.5%-6.8% 5.9%-6.2%

Reduce bond purchase later this year End QE in the middle of next year 2015 will be a suitable time for the 1st interest rate hike

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US economy recovery on track, unemployment rate fall

10

Nonfarm payroll net change(‘000) and unemployment rate(%)

Source: Bloomberg Data as of 31/8/2013

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Improvement in housing market

11

Source: Bloomberg Data as of 31/7/2013

US S&P/CS Composite-20home price index(YoY)

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US stock earnings record decent growth

13

Source: Bloomberg Data as of 31/8/2013

Dow Jones Industrial Average Trailing 12M Earning per share Current level: USD 1043.99 2007 level: USD 808.01

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US stocks reaching new high

14

Source : Bloomberg Data as of 31/8/2013

Dow Jones Industrial Average vs. S&P 500

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Coming new chairman for Fed

Janet Yellen Lawrence Summers

It was widely expected Obama will nominate the next Fed chairman within month, taking over Bernanke whose tenure ends at Jan 2014. After Lawrence Summers’ withdrawal from consideration, Yellen has become the front-runner for the quest. Yellen, the Fed’s vice chairman since 2010, has participated in policy formulation, and has a similar stance to Bernanke, implying a continuation of current policy, bringing stability for the market.

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Europe

16

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Euro debt crisis fades

17

Source: Bloomberg Data as of 31/8/2013

10 Years Treasury Bond Yield of European Countries

European countries can trigger Outright Monetary Transaction (OMT) at any time, which significantly reduce the Euro sovereignty risk.

Investment involves risks, please read the important information. 40 45 50 55 60 65 01/2010 04/2010 07/2010 10/2010 01/2011 04/2011 07/2011 10/2011 01/2012 04/2012 07/2012 10/2012 01/2013 04/2013 07/2013

歐元區 德國 法國 意大利 51.4 51.8 49.7 51.3

Manufacturing Back into Expansionary Territory

18

Source: Bloomberg Data as of 31/8/2013

Eurozone Manufacturing PMI Eurozone Germany France Italy

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German election

In the German federal election, the Christian Democratic Union (CDU) led by Chancellor Angela Merkel won with 41.5% of the vote, much higher than 33% in previous election. Being the largest economy in the Eurozone, Germany’s political situation remains crucial in the progress of Euro-debt crisis and shaping the future policy.

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China

20

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Concerns on liquidity risk

21

Number of Products Issued Per Day

Source: Wind, Puyi Wealth Mgmt

In Fitch’s view, wealth management products (WMP) continues to pose a risk to the banking sector in China because it accounts for a sizable amount of funding. The primary risk centers on the cash payout pressure posed by WMPs’ short-term nature, the poor liquidity of underlying assets, the high mobility of WMP investors, and banks’ mismatched assets and liabilities.

0.0% 3.0% 6.0% 9.0% 12.0% 15.0% 07/2012 08/2012 09/2012 10/2012 11/2012 12/2012 01/2013 02/2013 03/2013 04/2013 05/2013 06/2013 07/2013

13.4%

1年平均:2.4%

3.7%

SHIBOR (Overnight)

Source: Bloomberg As of 31/7/2013

1yr average:2.4%

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45 46 47 48 49 50 51 52 53 54 55 12/2011 01/2012 02/2012 03/2012 04/2012 05/2012 06/2012 07/2012 08/2012 09/2012 10/2012 11/2012 12/2012 01/2013 02/2013 03/2013 04/2013 05/2013 06/2013 07/2013 08/2013

中國官方製造業採購經理指數 滙豐中國製造業採購經理指數

51 50.1

Stabilized Manufacturing PMI

22

Source: Bloomberg As of 31/8/2013

China’s Manufacturing PMI China Official Manufacturing PMI HSBC China Manufacturing PMI

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No imminent and large-scale stimulus

23

Source： Report on the Work of the Government, 2013

China Main Economic goals

Item 2013 2012 GDP 7.5% 7.5% CPI 3.5% 4.0% M2 13% 14% Investment in Fixed Assets 18% 16% Retail Sales 14.5% 14.0% Trade Balance 8% 10% Urbanization rate 53.37% 52.07% Domestic Chinese economic growth momentum continued to slow down without imminent signs of a new round of government stimulus policy. Investors sentiment recovered to some extent triggered by Chinese government showing attitude to set up economic growth bottom line.

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In fact, China’s Econ has Bottomed Out in 2012 Q3

24

Source: Bloomberg Data as of 30/6/2013

China GDP (year-on-year) 8.1% 7.6% 7.4% 7.9% 7.7% 7.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 03/2012 06/2012 09/2012 12/2012 03/2013 06/2013

7.5%

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Inflation Under Control

25

Source: National Bureau of Statistics Data as of 31/8/2013 Source: Bloomberg Data as of 31/8/2013

China CPI YoY China CPI Components Growth YoY

• 0.1%

0.2% 1.2% 1.3% 1.4% 2.2% 2.8% 5.0% 0.0% 0.0% 1.2% 1.2% 1.4% 2.2% 2.6% 4.7%

• 2.0%

0.0% 2.0% 4.0% 6.0%

交通及通訊 煙酒 醫藥及保健 娛樂及教育 家居用品 衣履 居住 食品

8月份 7月份

Transportation Tobacco & Liquor Health Care Recreation & Education Household Facilities Clothing Residence Food

August July

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

01/2012 03/2012 05/2012 07/2012 09/2012 11/2012 01/2013 03/2013 05/2013 07/2013

( % )

4.5%

3.5%

2.6%

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2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 0% 5% 10% 15% 20% 25% 30% 35% 12/2007 04/2008 08/2008 12/2008 04/2009 08/2009 12/2009 04/2010 08/2010 12/2010 04/2011 08/2011 12/2011 04/2012 08/2012 12/2012 04/2013 08/2013

M2貨幣供應按年增長 月度新增人民幣貸款(億) 5年平均：6914億 應對金融海嘯的放寬政策 14.7% 7113 億

Monetary policy back to normal

26

Monthly new yuan loans is above five-year average.

Source: Bloomberg Data as of 31/8/2013

China Money Supply M2 and New Yuan Loans

Money Supply M2 YoY New Yuan Loans (billion)

Stimulus amid financial crisis 5-yr average: 691 bil

711.3 bil

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Low rate environment

27 Source: HKET，as of 3/2013

US unlimited QE

• Monthly purchase of USD 45 billion

worth of long term treasury bond

• Interest rate and QE would hinge on

unemployment and inflation. Japan expands scale of quantitative easing

• Aim to achieve 2% inflation target
• Large scale increase of bond purchase, monthly purchase of

7 trillion yen long term bond.

• New framework for asset purchase. From overnight interest

rate targeting to monetary base targeting. Outright Monetary Transaction by ECB（OMT）

• Offer to purchase sovereignty bonds of indebted

countries in the secondary market without limit.

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U.S. steady recovery supports China exports

28

Destinations of China exports

Source: Bloomberg, General Administration of Customs of PRC Data as of 31/7/2013

China Exports/Imports Growth YoY

Source: Bloomberg Data as of 31/8/2013

• 20.0
• 10.0

0.0 10.0 20.0 30.0

05/2012 06/2012 07/2012 08/2012 09/2012 10/2012 11/2012 12/2012 01/2013 02/2013 03/2013 04/2013 05/2013 06/2013 07/2013 08/2013

Exports Growth YoY (%) Imports Growth YoY (%)

7.2% 7%

Hong Kong 15% U.S. 17% Japan 7% Korea 3% Europe 20% Others 38%

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China is still expected to have a higher econ growth

29

Source: The World Bank – Global Economic Prospects (Jun 2013)

Major Regions GDP Growth

7.7% 8.0% 7.9% 2.0% 2.8% 3.0%

• 0.6%

0.9% 1.5%

2.2% 3.0% 3.3%

• 5%

0% 5% 10% 15% 2008 2009 2010 2011 2012 2013 2014 2015 China U.S. Eurozone World

Forecast

30

For intermediaries’ reference only, investment involves risks, please read the important information.

On June 26, Premier Li Keqiang chaired a State Council executive meeting stressing the need to adhere to the steady and promising progress, and actively taking measures promoting steady growth, structural adjustment, which effectively facilitate immediate and long-term benefit, focusing on expanding domestic demand. It was noted there is a need to adjust and optimize the investment arrangements, reduce general investment, targeting part of the funds to support these areas, guiding and driving credit and other social capital investment; at the same time continuing to promote institutional innovation, continue to unleash reform bonus to stimulate vitality

• f the market, promoting economic and social development to achieve annual goals.

On July 16, Premier Li set the floor for economic growth to ensure economic growth stay above bottom line while unemployment and CPI do not rise above the limit.

Stabilizing growth, adjusting structure, promoting reform

31

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Urbanization Policy:

• National Development and Reform Commission, for the first time, explicitly put

forward a new round of urbanization roadmap, which includes fully liberalizing registration restrictions in small cities, orderly liberalized registration restrictions in medium-sized city, gradually loosen urban registration restriction; also establish a system to ensure that property prices and purchasing power fundamentally adapt. In

• rder to safeguard the livelihood of farmers moving into the city, the Government will

accelerate the improvement of urban basic public services, including efforts to achieve compulsory education, employment services, basic medical care, affordable housing and

• ther urban resident population coverage.

Focus on structural change and reform

32

For intermediaries’ reference only, investment involves risks, please read the important information.

The Third Plenary Session:

• According to past experience, each session of the important government reform

decisions basically was made a year after the leadership took office, presented at the Third Plenum.

• As it has been nearly one year since “Xi Li” step in, judging from the recent reform

plan, the Third Plenary Session is highly anticipated in terms of economic reform, especially the reform of household registration and deepening of financial reforms.

Awaiting the Third Plenary Session for specific structural reform (in Nov)

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China, HK - two of World’s Cheapest Stock Markets

33

Major Stock Market Index Closing as

• f 31 Aug

2013 Historical High From the Historical High Price Earning Ratio (P/E) As of 31 Aug 2013 5-Year Average Historical High MSCI World Index 363.98 427.63 14.88% 16.77 16.90 38.59 S&P 500 Index 1,632.97 1,685.73 3.13% 15.68 15.29 31.13 STOXX Europe50 Index 2,721.37 5,183.24 47.50% 16.19 15.20 21.65 DAX 30 Index 8,103.15 8,348.84 2.94% 13.89 18.44 21.65 Shanghai Shenzhen CSI 300 Index 2,313.91 5,877.20 60.63% 11.32 16.13 49.56 Hang Seng China Enterprises Index 9,825.21 20,400.07 51.84% 7.80 12.12 29.77 Hang Seng Index 21,731.37 31,638.22 31.31% 10.00 12.68 23.73 Nikkei 225 Index 13,388.86 38,915.87 65.60% 22.20 21.67 39.88

Source: Bloomberg

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Corporate earning expected to improve

34

Source Bloomberg As of 31/8/2013 * 2012 EPS is the weighted average of index constituents in financial year 2012；2013 Estimated EPS is the weighted average of index constituents in financial year 2013；2014 Estimated EPS is the weighted average of index constituents in financial year 2014 ；Calculated in RMB Past performance is not indicative of future performance

2012 EPS 201 Est. EPS change% 2014 Est. EPS change % 2012 P/E 2013 Est. P/E 2014 Est. P/E CSI 300 Index 206.93 230.35 11.3% 269.85 17.1% 11.30 10.05 8.57 Energy Index 144.72 164.82 13.9% 190.97 15.9% 13.38 11.75 10.14 Materials Index 53.28 79.16 48.6% 96.53 21.9% 31.30 21.07 17.28 Industrials Index 114.11 150.25 31.7% 176.56 17.5% 13.80 10.48 8.92 Consumer Discretionary Index 232.59 275.34 18.4% 330.01 19.9% 13.75 11.78 9.83 Consumer Staples Index 347.37 377.51 8.7% 463.12 22.7% 15.70 14.46 11.78 Healthcare Index 201.36 226.86 12.7% 277.15 22.2% 28.43 25.04 20.49 Financials Index 481.59 504.46 4.7% 581.62 15.3% 7.41 7.00 6.07 Information Technology Index 45.90 54.79 19.4% 71.79 31.0% 33.01 28.07 21.43 Telecommunication Index 23.56 86.70 268.0% 118.36 36.5% 70.29 23.50 17.21 Utilities Index 131.12 126.09

• 3.8%

135.75 7.7% 9.46 9.83 9.13 CSI 300 Sector Indices EPS* P/E

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Great development potential of urbanization in China

35 Source: United Nations Source: United Nations, 2011 Revision of the World Urbanization Prospects

• Urbanization ratio in China has just past 50%,

(and only about 35% in terms of household population), far lower than the average level of 80% in developed countries

• McKinsey

expected that China's urban population will increase from 570 million in 2005 to 925 million in 2025. In future, there will be 400-500 million people moving into the city, where the 242 cities in China will contribute 1/4 of growth to global GDP

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

0% 20% 40% 60% 80% 100%

Estimated Urbanization Rate

(2010-2015)

Urban Population Ratio Indonesia Vietnam Thailand Developed Countries Philippines India China

Urbanization Ratio and Urban Population Urbanization Ratio 1990-2025

10 20 30 40 50 60 70 80 90 100 1990 1995 2000 2005 2010 2015 2020 2025

US China Japan Germany

FORECAST

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Retail sector

36 Source : National Bureau of Statistics Data as of 31/7/2013

Detailed table for China retail sales (Jan-Jul 2013)

Total Retail Sales and its growth YoY (%)

9.0% 11.9% 12.4% 12.8% 14.1% 15.0% 15.9% 18.9% 20.7% 32.4% 0% 5% 10% 15% 20% 25% 30% 35%

Automobiles Garments/Textiles Cosmetics Retail Sales Daily-use Items Household Electronics Pharmaceuticals Construction Materials Furniture Jewelry

9.1% 13.3% 12.9% 13.7% 16.8% 21.6% 15.5% 18.4% 17.1% 14.3% 12.8% 0% 5% 10% 15% 20% 25%

• 5,000

10,000 15,000 20,000 25,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jan-Jul 2013

RMB billions

Retail Sales (LHS) Retail Sales Growth YoY (RHS)

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Substantial increase in middle-class & upper-class families

37

Disposable Income

0% 5% 10% 15% 20% 4000 8000 12000 16000 20000 24000 28000 2004 2005 2006 2007 2008 2009 2010 2011 2012

城鎮居民人均可支配收入(左軸)(人民幣) 城鎮居民人均可支配收入按年增長 (右軸)

12.6% 24565.1元

Source: Bloomberg As of 31/12/2012

• McKinsey expected that the annual income of urban households in China in 2012 is

RMB39,000, and will reach RMB112,000 by 2030. The middle class and upper class families will account for 87% of urban households (71% at this stage).

Urban Population Disposable Income (LHS) (RMB) YoY Growth (RHS)

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Driving up consumption power significantly

38

Contributions of Countries to Global Economic Growth between 2007-2025

29 5 5 2 3 1 28 10 4 2 1 10 100

China Southeast Asia Latin America Eastern Europe Middle East and North Africa Sub-Saharan Africa Developing Regions US and Canada Western Europe Northeast Asia Australia Developed Regions Total Source: 2012 McKinsey Annual Chinese Consumer Survey

• According to McKinsey, during the current decade, the share of urban households with average

annual disposable incomes high enough to afford family cars and small luxury items is expected to grow by nearly six times, accounting for 57% of all urban households in 2020.

• It is expected that the top 225 Chinese cities will contribute 29% of global GDP growth over 2007-

2025.

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City tiers attributable to different consumption patterns

39

Reasons for Spending More on Personal Care Products and Services

53 55 56 43 48 55 43 36 41 52 50 39 4 9 3 6 2 7 2011 2012 2011 2012 2011 2012

Making first purchases Trading Up Buying more frequently

First Tier Cities Second Tier Cities Third Tier Cities

• According to McKinsey, higher-spending consumers in tier 2 cities were

predominantly trading up. Meanwhile, in tier 3, the higher spending was attributable to consumers buying larger quantities more frequently.

Source: 2012 McKinsey Annual Chinese Consumer Survey

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Favor Automobiles

40

Strong correlations between number of households in the US$3,000 and above income categories and car sales signify that the sales of new cars are driven by the households having annual income over US$3,000.

Extract from Dec 2011, Deloitte ”Driving Through BRIC Markets Lessons for Indian Car Manufacturers”

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Underweight Department Stores

41

The central government strengthened anti-corruption efforts and regulated administrative expenses, dragged department store industry.

Source: Bloomberg As of 31/8/2013

Retail Sales Growth slowdown

YoY Growth

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Market Volatility increased

42

HSI Volatility Index (LHS) and HK stock short selling ratio (RHS)

Source: Bloomberg Data as of 31/8/2013

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• Investors may adjust the ratios investing among different regions and

different asset classes in response to changes in market conditions, so as to choose the appropriate portfolio.

Conservative Portfolio 20%

中國股票 香港股票 債券

70% 10% 40% 30% 30% 20% 35% 45% Balanced Portfolio Aggressive Portfolio

China Equity Hong Kong Equity Bond

Asset Allocation is more important amid volatile market

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Major risk factors

44

 US tapering pace and scale  US Fed chairman successor  US Debt ceiling dispute between the two parties  Impact of European countries’ austerity measures  China credit risk and anti-corruption campaign  Fund flows on Emerging Market  Syria’s affairs

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• Investment involves risk and is subject to market fluctuations and inherent risks. Investment

in emerging markets involves special risks and considerations. Investors could face no returns and / suffer significant loss related to the investments. Past performance is not indicative of future performance.

• The information contained herein is based on sources believed to be reliable. Information,
• pinions and projections in this document reflect a judgment at its original date of

publication and are subject to change without notice.

• The information, opinions and projections contained herein are for reference only. This

document should not be reproduced or further distributed to any person or entities, whether in whole or in part, for any purposes.

• This document does not constitute any distribution, or any recommendation, offer, invitation
• r solicitation to buy or sell any investment.
• This document is issued by BOCI-Prudential Asset Management Limited. It has not been

reviewed by the SFC.

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