Athena Wealth Management

November 2016

Investment Research Report

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Fig. 1 Equity Markets Comparisons

Summary

As Trump won the U.S. president election, the global stock

markets reacted positively during November unexpectedly.

The MSCI World rise 1.25%, but MSCI EM index dropped

4.67% because of strong US dollar. The best performed

market should be Russia, which soared more than 5.7%, and

the worst one was Indonesia. The future market indicated it

had 100% that Fed will raise the interest rate in December

meeting. US 10 year Treasury bond yield reached 2.4%. US

dollar index started the second upside trend since 2014 and

increased over 100. Crude rose to $50 a barrel to hit a

16-month high as rising prospects of a tightening market

after last week’s OPEC landmark deal to cut production has

given speculators impetus to increase bets on higher prices.

The gold price stayed below $1200.

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Fig. 2 US 5 year Breakeven Rate

The ultra-aggressive infrastructures proposed by Trump have triggered the higher inflation expectation

for the investor. The US 5 year breakeven rate have increase from 1.6% to 1.8% after the US election. The

market adjusted the pace of rate hike in the next year. We are negative to the developed sovereign bond

markets. US dollar have reflected the changes in Nov. we believe the USD should consolidate in short run

and wait for the movement of Euro dollar, which depend on the result of Italy referendum. The emerging

markets continue recording the capital outflow because of the strong US dollar. We believe it should

underperform with their developed peers in the short run. The oil price could continue the rally and we

think the main resistance could be put at the level of USD 60.

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The victory of Donald Trump in the presidential election was a big surprise to the market. When the result was

announced, the market did fall during the Asian period, but soon rebound in Europe and the U.S. time period.

Investors’ focus quickly shifted to Trump’s future fiscal policy like increasing government expenditures, tax cuts,

and stimulating inflation, which resulted massive capital flew into the U.S., boosting both their equity market

and currency.

The result of this election can also implicate the soaring global populism. In the past, the easing of monetary

policy in Europe and the U.S. has led to more episodic market liquidity. The result of this election associated to

the soaring global populism. In the past, the easing of monetary policy in Europe and the U.S. has led to more

episodic market liquidity with a result of biggest social problem: the disparity between rich and poor. Social

instability and the rise of populism came afterwards. Considering Brexit referendum, presidential election in the

United States and others countries' election can give market an insight of populism. Italian constitutional

referendum will be held in early December. Once the reform plan is rejected, Prime Minister Matteo Renzi will

resign and populist party "five-star movement" will come to power. It is a political party proposes

anti-immigration, anti-bank, pro-workers, local protection, against alliances with other countries, and therefore

anti-EU and the Europe which has similar political philosophy of Trump’s. The rise of popularity of right-wing

nationalist party candidate Norbert Hofer also makes many people sit up and notice.

The increased political risk in Europe will intense in next year as anti-EU political parties are gearing up to

prepare for upcoming elections, including Germany, France, the Netherlands. In France, for instance, the

economy grew by less than one percent last year, and the unemployment rate among young people is

approaching 25%. People defied status quo and support for the populist party. Marine Le Pen, France's far-right

National Front political party leader is one of marked candidates. In 2017, Europe will be covered by a wave of

populism, swept by political turmoil and faced risk of cracking.

This Month’s Hot Topic:

Political risk surges! (2)

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Fig. 1 Political risk issues

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Fig.1 Political risk on Italy referendum

Fig.2 Italian Banks 5 year credit default swaps

Eurozone Market

The markets concentrate on the

result of Italy referendum. The polls

said that result of the referendum

should be “NO”. We believe it is likely

the result same as the polls. Prime

Minister Matteo Renzi may resign

after referendum loss. It may added

that economic and policy

uncertainties to the Eurozone. The

anti-euro party 5 star movement will

be likely to win the parliament

election in next year if Renzi confirm

to resign. The risk on Italy leave EU

will be rising.

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On the other hand, if Italy says “NO” in the

referendum, it means the reforms of

banking sectors, which have persisting

volume of non-performing loans, have been

limited. In the long run, we hold neutral

view on European equity. However, in the

short run, we expect the ECB will buy large

quantities of government bonds and other

assets for longer than initially planned, an

attempt to protect the Eurozone economy

from an increasingly unpredictable political

landscape. The market should be boost

before year end.

Fig. 3 Italy (White) and Germany (Yellow) 10 year government

bond yields

Fig. 3 EUR/USD

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U.S. Market

Donald Trump’s surprise victory in the US

presidential election has fuelled a market

rotation that had already begun earlier

away from defensive income (bonds and

yielding equities), into more cyclical areas

of the market that are expected to benefit

from fiscal stimulus, steepening yield

curves and rising inflation. However, it is far

too early to tell if Trump’s high-level

guidance on policies translates into reality

and whether his proposed stimulus can

meaningfully boost US growth.

Fig. 1 US Treasury yield curve

(Green Current, Yellow 08/11/2016)

Fig. 2 Rate Hike probability

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Fig. 4 US Dollar Index

Fig. 3 MSCI World (Orange) and FTSE world cyclical

stock (white)

We will not hold too optimistic opinion on

the U.S. equities as the price may

overestimate the effect of “trump

economy” in the medium term. But in

short run, the US stock market may

continue the rally because of the

“window dressing”. We still remain

negative on the US Treasury bond, except

the inflation link protected bond (TIPS).

Currently, the market expected the

probability of rate hike in December

meeting is 100%. We did believe the US

dollar index could rise further to bring the

side effect for the US economy in next

year.

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Fig. 1 China's Manufacturing PMI

Fig. 2 China's corporate earnings growth is expected to

accelerate to 5-year high

China Market

The recovery of China economy in

November is well enough to keep pace

of last two months’ improvement. The

November manufacturing PMI

increased to 51.7, the two-year highest,

showing manufacturing industry in

well-balance. It also brings up the PPI in

October from 0.1% in last month to

1.2%. China’s export in November also

turns better, from -10% in October to

-7.3%.

At the same time, Fitch forecasted

China's real GDP growth of 6.4% in 2017

and believed it will maintain the goal of

6.5% economic growth. Overall, despite

China’s economy growth is slowing

down, the stability and profitability

momentum retains improving and

confidence in China’s economy is

picking up.

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The cooling in property market can be shown by the

signs of noticeable slowdown in sales growth. The

property price in first and second-tier cities apparently

has cooled in October, while it remained relatively

stable in third-tier cities. Property control policies

were introduced by 22 local governments to control

financial system risks before and after the National Day.

By contrast, the central government may apply relative

conservative monetary policy, leading contraction of

market capital flows. The strength of the U.S. dollar

and the capital outflows issues will both weight on

housing turnover.

Fig.3 Prices of new residential buildings in key cities performance in October

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The 500- and 1,000-rupee notes in

India were no longer legal tender in

order to control India’s “black money”

problem. However, the outcome is

really out of Prime Minister Narendra

Modi's control. India's economy is in

chaos even Modi believe the

replacement process will only need

around 1-2 months. It may take even

longer.

86% of India’s currency is no longer

valid under new policy, people trek to a

bank branch to change their cash but

the central bank is still struggling to

print replacement denominations and

existing ATMs may not suitable for new

notes' size.

Fig. 1 86% of India’s currency

Fig. 2 USDINR

India Economy

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At present, only 3% of Indian pays tax, a

result of poor government to provide

sufficient public infrastructure to the

lower classes. The government hopes

the move will force people to declare

unaccounted income. Once the reported

deposits unmatched against income

disclosures, those who have avoided taxes

by holding their wealth in currency will

face the penalty of 200% tax payment. It

does not mean it does not work. Some

well-off tax escapers can only redeposit

their hidden wealth to avoid all those turn

into wastepaper. However, this cannot

deny it is a dangerous move. India GDP

rose 7.3% in the third quarter, higher than

the 7.1% in the previous one but lower

than last year’s 7.6%. Under this cash

experiment, it will hurt the last quarter

GDP even badly.

Fig. 3 India GDP

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reliable but no guarantee is given as to their accuracy or completeness. Neither Athena Best Financial Group, nor its subsidiaries, nor its related companies, nor any of

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